Market analysts and pundits, like politicians, have never been so polarized. And much like politicians and their more vocal followers, the different factions -- bulls versus bears-- are not always so nice to each other. Rather than "go there," let's look at the potential misconceptions as to why so many are so dissatisfied in the face of such a strong uptrend in U. S. blue chip stocks.
When we compare the potential for growth in the economy now to previous decades, it is clear that to expect 1980s growth now would be unreasonable. Credit cards alone makes this so. In the early 80s, the growth of consumer credit was just getting started. By the beginning of the new century, it was fair to say consumer credit had become saturated. The '80s and '90s saw explosive growth for many reasons, and what is obvious now is that it would be unreasonable to expect that type of economic growth to have continued.
"I need another warm body Jimmy... and make sure this one has most of her teeth." It was 1986, and I was waiting for the manager who had just hired me at a prestigious Wall Street brokerage firm to take me down to the trading floor, where I would start my new position. My manager had just shouted his request to the hiring manager while balancing an unlit cigar expertly between his teeth. "Come on kid," The Cigar nodded as I followed him out the large beveled glass doors, "We only have one rule around here," he continued. "If you want a bonus, ya gotta show up on time. I don't care if you're hung over or still drunk, just show up on time."
I was starting a job where I worked 6 hours per day and made more money than my father, who was an accountant, or any other father on the block where I had grown up. Life was good. When I look back at that experience compared to how kids have it today, there is obviously no comparing that economy to now. Back then, companies enjoyed the American mark-up. Goods were bought overseas in local currencies -- dimes on the dollar -- shipped to America -- energy prices were laughably low -- and marked up 200%, and this was even before the retail mark-up. American companies had a thick layer of middle managers, many of whom did little in the way of work, yet all had nice suburban houses with big backyards and two cars in the garage, and nobody worried about how they would put their kids through college.
The brokerage firm where I worked routinely charged clients $100 commission, per contract, plus consulting fees -- a far cry from today's $2.99 rates. And for as long as I worked there, I never figured out exactly what The Cigar did, other than walk around shaking people' s hands and slapping them on the back, but I knew he was paid well.
I understand why so many market observers don't buy into the current bull market in stocks on the grounds this economy is a far cry from decades past. This particularly makes sense if you think the 1980s and '90s were normal. If you believe economic growth under Reagan and Clinton was normal, then you would most definitely be disappointed with today's economy. In today's economy, profit margins are thinner, and overseas competition much tougher, and you darn well better have more going on than a pulse and most of your teeth to get a good job. If you think that the economy in the 1980s and 1990s was the norm, no wonder you are in the bear camp now. If you happened to work for a company in the right place at the right time back then and confused that with being good, you are more than likely out of sorts in today's economic climate.
"I actually thought I was a great salesperson when I was in my twenties," is how one old friend put it. "The sales skirt and high heels were inconsequential."
Premise #1: The "new normal" in economic growth is far different than the "old normal," i.e., you cannot compare now to then.
But Premise #1 still begs the question of how or why we are seeing comparable stock market growth today to earlier decades? Regardless of thinner profit margins and overseas competition, people still consume, and those people with jobs still save and invest, which means money going into the economy on a regular basis and money going into stocks on a regular basis. And let's not forget the cumulative amount of savings and investments from those previous decades that is now faced with the choice of no interest income because rates are so low. Regardless of age or risk tolerance, you either take zero interest or diversify a portion into growth or blue-chip stocks. And there is another sizable factor. Those executives and managers that still hold good jobs work a lot harder and a lot smarter than their predecessors. All this means a bid in the stock market.
Much of the divisiveness today among market analysts and pundits on a base level is aimed at central bankers. The Republican presidential nominee in 2012, Mitt Romney, who enjoyed great success as a businessman in previous decades, went so far as to say he would replace Ben Bernanke as Fed Chairman if elected, leaving the impression that he believed the country's economic doldrums were the fault of the Federal Reserve and other government policies. The logic of saying a Fed Chairman is not doing a good job in hard times only holds up if one believes that the Fed is/was responsible for fostering the good times. The former central banker and President of the Peterson Institute for International Economics Adam Posen, made an apropos observation in comparing previous good times to current not so good times: "…we ended up in a world where things went very well, and a large part of it was due to luck… and central bankers took credit for things going very well, and insisted that this was due to their marvelous monetary policy."
Posen's comment hint at what a lot of people do not realize, and the few that do are too polite to say. That the Fed chief before Bernanke, the legendary Alan Greenspan, for all his reputation, and measured, thoughtful cadence did us all a disservice by letting us believe that the incredible growth the U.S. saw throughout the 1990s and into the 2000s had a good bit to do with the Fed's tutelage. What if central bankers were no different than so many others during the previous expansions, just people in the right place at the right time? And if they were, and are not due so much of the credit for good times, then it stands to reason we should not hold them as responsible for tough times.
Posen's observation leads to premise #2: We cannot hold central bankers solely responsible for the performance of the economy.
At some point, private businesses must make money the old-fashioned way, which means borrowing money and taking the risk of investing it in viable businesses that can produce modest near-term returns. The Fed does not grow the economy -- business owners and managers taking risks grow the economy -- and not the type of risks that cost JPMorgan Chase (JPM) $8 billion dollars in trading losses.
We all might have been better off had we realized sooner that it's up to businesses to play more of a leadership role, and that central bankers had no choice but to buy their Treasury's debt to keep rates on lock down so that individuals and businesses could refinance debt to free up cash flow. Had that been the case, we may also have realized that there are companies out there, that even in hard times -- or should I say particularly during hard times -- are deserving of investment. Wait a second… maybe that's why the stock price of so many blue-chip companies has increased so much over the last couple of years?