As the parents of the Baby Boomers were coming of age during the Great Depression, their perceptions of value were shaped by stark economic cause and effect. Given that there were few existing social safety nets, the results of personal economic choices stood out in stark relief to the impressionable minds that witnessed the roaring twenties, the panic and crash of 1929, and the ensuing depression.
The hard lessons of the depression gave rise to a generational culture that respected economic value and personal responsibility. As prices of assets and commodities sank, deflation became the Greatest Generation's reality. Dollars became more valuable and it seemed that the longer they saved their money the more purchasing power it had.
World War II had the effect of uniting the country and healing the divisions between the classes that the depression had aggravated. As the young men returned from the war ready to start families, the government made housing more easily obtainable through a variety of programs and the baby boom got under way.
The Greatest Generation's belief in the purchasing power of their currency combined with the hardships witnessed during the depression gave rise to high savings rates and a culture of financial responsibility. They equated having a growing savings account with security and prosperity.
After WWII, US Debt to GDP was about 160%. The economic outlook was still grim after the war and depression but the people as a whole were ready to do whatever it took to succeed and have a good life. Sweeping government programs came into favor in an attempt to engineer a "great society". Through the 1940s and '50s the Federal Reserve practiced an easy monetary policy in an attempt to revive the economy. The economy came back to life and by the time the Baby Boomers were in their early adulthood, inflation was the name of the game.
The difference between being raised in a deflationary environment vs. an inflationary one caused a significant difference in the perceptions of and attitudes toward the relationship between money and buying power. The argument could also be made that materialism was perceived very differently by the two generations. The parents saw materialism as the profligate spending of money on stuff, while the Boomers saw materialism as the hoarding of money.
The parents of the Boomers, having experienced deflation (seeing that their dollars increased in purchasing power), were comfortable saving their money and being conservative in their consumer spending.
This differs dramatically from the Boomers who experienced the inflation (seeing their dollars decrease in purchasing power) of the '70s and developed an attitude of "spend it now, before it's worthless".
Add the leverage of increasingly easy access to credit through the 80's and 90s' and you have a recipe for out-of-control spending--which is what happened.
Most of us are well aware that the financial/credit crisis of 2008-2009 was a massive, world-wide shock that forced individuals, corporations and governments to completely reexamine their frameworks of financial thought.
It would be reasonable to say that we are currently in a relatively deflationary environment, compared with past decades. This is evidenced by all of the central bank action attempting to provide economic stimulus and the anemic results.
The current time period is in may ways analogous with the Great Depression. There are, of course, the differences of advanced technology, extensive social programs, digital currency and advanced economic theory being combined to reduce the negative effects of this deflationary cycle as much as possible.
Since the 2008-2009 financial crisis we are in a period of a generally defensive and conservative financial mindset among investors. If history is a guide, this more conservative mental construct is unlikely to change much over the next couple of decades as a generation that has been shaped by the current deflationary environment comes on the scene. This relatively conservative financial mindset is evidenced by the persistently low bond yields of perceived safe-havens and on-going strength of the US dollar.
Using this broad-based framework as a foundation of understanding market behavior, it is not unreasonable to say that a core mindset of speculation is generally out of favor. This is not to say that speculation does not currently exist--it does and likely always will. Speculative bubbles however, are much more likely to be limited in size and scope than in a less defensive financial environment.
As this core base-line of a financially conservative investor outlook is expressed in the bond yields of perceived safe havens, by monitoring these yields, we can see changes rather easily and examine them. This goes without saying, that those looking for large gains in a short time by trying to short-sell safe-haven bonds are likely to be disappointed unless there is some catastrophic event.
The better spots to look for significant returns in this type of environment, are those places where bubbles form in fear of financial disaster or in frustration with the slow-growth environment. Below are some ideas that appear to meet these qualifications. I have classified them as "fear bubbles" and "frustration bubbles".
Fear Bubble: Gold (NYSEARCA:GLD), (NYSEARCA:GLL) prices are largely a reaction to broad-market uncertainty. Gold is likely overvalued due to the fear of financial/market collapse. See my article: Gold And The Super-Bubble. As systemic financial fears fade, gold prices will likely decline and shorting gold could offer good returns (my long-term gold target is $600-$800 per oz).
Frustration Bubble: US Stock Market Indexes have reached levels where it appears that future gains in the near-term, without a significant correction, would likely come from speculation and multiple expansion, rather than solid value growth. Over the next few months, I would look for the S&P 500 Index (NYSEARCA:SPY), (NYSEARCA:SDS) to roll over and move to the downside with a target of 1200. Shorting this move could be profitable, however I would look for relatively steady gains in US stocks after a major correction of this type.
Fear Bubble: With sales and prices moving upward at a parabolic rate, due to fears of gun-control legislation, gun stocks are likely in a bubble. For more information see: The Great American Gun Bubble. Shorting Sturm Ruger (NYSE:RGR) and Smith and Wesson Holding Company (NASDAQ:SWHC) after they roll over could be a profitable trade.
Frustration Bubble: High yield or "junk" bonds (NYSEARCA:JNK) have been an increasingly crowded space as yield-hungry investors have pursued investment returns in places they normally would not.
Earlier this month Fed Governor Jeremy Stein said:
"We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit."
My view is that the bubble in junk bonds should be played to the long side in the near term until the bubble further matures. As with most bubbles, there will likely come a point where the profits will be to the short side. Rising interest rates could trigger a sell-off in junk bonds.
While "fear bubbles" and "frustration bubbles" share many characteristics, there are significant differences, in my view. The former are obviously motivated primarily by fear, whereas the latter are primarily driven by greed. During periods of higher market uncertainty and fear I would look to the short side of the frustration bubbles over the fear bubbles for profits.
Disclosure: I am short GLD, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.