Not many (if any) in the mainstream predicted the 2008 financial meltdown.
Those who predicted the event (if not the timing) were from outside the mainstream. They were on the fringe of financial and economic analysis.
That’s why few heeded their message.
Some of the few to predict the financial meltdown were our pals over at The Daily Reckoning. They warned that the financial system was over-leveraged and heading for a collapse.
That happened in 2008. It was the worst financial collapse in living memory. Banks went bust and even national governments went close to the brink.
It was the end of the world. Or was it? Since then the unthinkable has happened. The US market has broken through to a new high. And the talk is of an economic recovery. Yet, as a percentage of GDP, the US national debt has almost doubled since 2008 and unemployment is still high.
What’s going on?
In a moment we’ll show you two key charts.
They highlight the mistake that many made following the 2008 collapse.
At the time many believed it would take years for stock markets to recover. The most common comparison was with the Great Depression. Following the Great Depression it took 25 years for the market to recover to the 1929 high.
This time it took the Dow Jones Industrial Average just five years to recover.
An Important Lesson for Investors
It’s important you see and understand the following chart:
Source: Federal Reserve Bank of St Louis
It’s a chart of the Dow Jones Industrial Average from 1895 to the current date.
The grey shaded bars indicate official US recessions.
Now we’ll show you another chart. This one is of the US federal debt as a percentage of GDP:
Source: Federal Reserve Bank of St Louis
This chart is from 1966 to the current date.
Since 1980, US federal debt has climbed from around 30% of GDP to the current level of more than 100% of GDP. During the same time the US economy has gone through four official recessions.
That’s bad news right? You’d think so, but at the same time, the Dow Jones has climbed from 820 points to 15,761 points. That’s a gain of 1,688%.
These charts provide investors with an important lesson. They show why although we understand and take note of macro-economic events and data, we don’t let it rule our investment decisions.
This Doesn’t Look Like a Bubble to Us
If you had followed the macro data you would probably have run a mile from the stock market. That was understandable, because the macro data looked – and still looks – awful.
Debt up. Unemployment up. Economic growth almost stagnant. China faltering.
What is there to cheer about?
Well, there’s plenty to cheer about. But you wouldn’t know that if you spent all your day wading through largely meaningless macro-economic data. That’s why we call it ‘paralysis by macro analysis’.
Yes, governments are in debt. But that’s not news. More important is the fact that businesses continue to innovate and grow.
We see innovation all the time. It’s why technology stocks in particular have done so well over the past few years. In the mainstream look at Google [NASDAQ: GOOG] and Apple [NASDAQ: AAPL]. These stocks are up 229% and 510% respectively since the March 2009 low.
Elsewhere in technology is one of the innovations we’ve followed closely – 3D printing. It’s within touching distance of hitting the mainstream. And the stock we’ve followed has gained 53% in just five months.
That’s not to say investors are suddenly revelling in optimism. In fact, that’s the biggest surprise. The US market has hit record highs without the level of irrational exuberance you tend to see leading up to the top of the market.
That’s another reason why, for all the talk of a price bubble, we say stock prices still have much further to go…
A Recession is Good News for Speculators
The old theory is that you know when the market has hit the top because that’s when most ordinary investors start buying stocks.
It’s a sad fact that many investors do the opposite of what they’re supposed to do. Instead of buying low and selling high they tend to panic buy at the top of the market and then panic sell at the bottom of the market.
That kind of indiscipline then has them whinging for the next few years that the stock market is a losers’ game. They maintain that view until they see stocks rising all the way to a new top.
Finally, they decide they were wrong about stocks, so they buy…just as the market is about to crash again. Those types of investors will never make money from stocks because they don’t understand investing.
Don’t get us wrong. As you know from reading Money Morning, we know the market and the global economy is far from perfect. But that doesn’t mean you can’t make money as an investor.
Look at those charts again. Recessions are a fact of life in this manipulated economy. They happen. But what you can also see from those charts is that it’s still possible to make money from stocks, whatever the macro-economic picture.
In fact, as we’ve long argued, fortunes are made in recessions.
Look, folks can feel free to sit on the sidelines and moralise about the perils of excessive debt. We’ll nod and agree with them. But while they’re sitting there doing that, we’ll make the most of our time by looking for and investing in quality, innovative and growing companies that can help investors grow their wealth.
To our mind that’s a much more productive way for you and us to spend our time.
Cheers,
Kris+
From the Port Phillip Publishing Library
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