7 Salient Economic Trends of the Last Decade

 |  Includes: EEM, GLD, MSFT
by: Balaji Viswanathan
What are the most important trends in the last decade? Which ones will continue and which ones will turn? I have examined 7 major trends – gold, US stocks, emerging markets, debt, interest rates, housing and tech.
1. Spectacular rise of Gold.
From the early 80s till the end of 90s, gold was a laggard. As inflation fears receded (thanks to China’s low cost exports) and growth fears subdued (due to the “unreal” 90s – when growth skyrocketed due to open markets worldwide), gold’s role was really questioned. Most mainstream commentators thought gold bulls were dinosaurs and gold investing was anachronistic. However, gold would prove its detractors wrong.
As the decade swung between two recessions (dot-com crash followed by jobless recovery in the US and Great financial crash of 2007-09) and harsh inflation in mid noughties, investors flocked to gold. While investors of real estate, bonds and stocks saw mixed fortunes, gold didn't fail. In general, gold goes up in uncertainties as investors are more comfortable with gold than anything else. The impacts of the financial crash might continue into this decade and inflation might oscillate when the monetary expansion is cut off. Also, as more Indians and Chinese become wealthy they might buy more gold ornaments and investment bars. So, the gold trend has greater chances of continuing its current bullish trend.
2. Worst decade for US stocks since great depression – Dow stuck around 10000
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Shown here is the performance of Dow (top 30 stocks in the US). For most of the decade the index circled around the magic number of 10000 and, except for 2006-07, investors have nothing much to cheer about. It looks likely that the market might continue this dance around 10000 for another 1-2 years before breaking out.
The Federal Reserve is most likely to start increasing its interest rates starting this year and it remains to be seen how the market is going to handle that. The recession shows signs of ending with bottoming out job loss numbers, but a lot of recovery is already priced into the stocks. It is time to show greater attention to building a balanced portfolio – with more weight for bonds and emerging market stocks than people had in the past 20 years.
3. Rise of emerging markets
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Click to enlargeWhile developed country markets failed, emerging markets had a great run. Notwithstanding the cash post-September 2008, emerging markets gave 400% returns in the past 7 years. As India and China continue their economic growth, the stock markets should see further growth. Though there is worry about overheating –particularly in Chinese markets – in the long run, India and China's markets are a far better bet than developed country markets.
4. Change at the top of the helm in Tech
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Click to enlargeAfter 2 decades of breakneck growth, Microsoft (NASDAQ:MSFT) stock had a poor decade. It followed the overall tech index and for most of the decade the index and MSFT went nowhere. On the other hand, Google (NASDAQ:GOOG) (which was in their garage at the start of the decade and Apple (NASDAQ:AAPL) which was close to dying, were the top tech companies of the decade. Microsoft is making valiant attempts to break Google’s hegemony in search and iPhone supremacy in smartphones, but so far it is on the losing end. Barring a major new product release, the trend would continue and Google / Apple could overtake Microsoft in marketcap in 2-3 years.
5. Historically low interest rates
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Click to enlargeIn the US the interest rates hovered at or below 2% most of this decade, except for the 2004-07 period, as the US federal reserve fought hard against the 2 recessions. There was a brutal side-effect to this low-interest policy – people borrowed a lot to buy homes, stocks and bonds in the 2002-07 period. Even now there is a trend of borrowing in dollars and investing in promising markets abroad (called the carry trade). This low interest trend cannot continue and within the year interest rates should start climbing again. By the middle of the decade, interest rates could be 5+% as the effects of stimulus plan cause a drag on the economy and reduction in credit.
6. Skyrocketing US debt
While US debt has been growing ever since the 1980s, the growth rate substantially increased since 2000. US debt is at its highest among non-wartime periods. This will have significant impact on future interest rates and spending. This trend might continue, though there might be a push to slow the rate this decade.
7. Most spectacular housing market rise & bust in US history
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Since the late 90s, US housing markets have been on a tear. Partly due to fear (of stock markets), partly financial innovation (new ways of repaying loans came about) and partly as a result of the interest rate drop, Americans flocked to the housing markets. The bubble started to burst in 2006 and after effects are still showing. The market is still close to the inflated prices at the top of the decade, but is likely to come closer to the historical levels. The graph is adjusted for inflation. This decade is unlikely to repeat the performance of early noughties and growth could be low throughout the decade.

Disclosure: No positions