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Is it time for a new investment approach?

I wanted to go back in time today and look at the S&P since 1960:


My Take:

I just wanted to highlight the insanity of the markets since 1982. There are a few things to take notice of here.

First of all, investing in stocks since 1999 has been a disastrous investment strategy. The S&P sat at 1500 back then. It sits at 1042 today.

If you had simply placed your money in a CD you would have killed Wall St's bubble machine in terms of ROI.

I find the US's obsession with the stock market to be very fascinating. I mean for the last 10 years this country has gotten it's butt kicked by the thieves on Wall St and yet we keep coming back for more.

The bounce since March proves that we have not learned out lesson. I can't help but ask why we haven't? What has Wall St really done for you and your nest egg over the past 10 years other than send you to the poor house?

The 25 year bull run has hypnotized this nation into thinking the stock market will lead to riches when you retire. Historically, this simply hasn't been the case. Take a look above at the 20 years preceding 1982 bull run. Stocks went nowhere!

It's time for this nation to wake up and realize that bubble making machine on Wall St does not lead to riches. After such an enourmous rise, it's easy to see how this nation was mesmerized by the bull run since 1982.

However, history has shown us that secular bull markets are almost always followed by secular bear markets. These bear markets are needed in order to wipout the excesses of the previous bull. What the government is doing right now is preventing the bear from doing its work of "cleansing" the markets.

Once this cleansing is completed, the recovery can begin. The government's approach of "bailing out America" is doing nothing but preventing this process from occuring.

There will be no recovery as long as the Feds take this approach. The only only growth we will see as a result of this stupity will be in the form of taxpayer debt.

The reality here is this bull run was fueled by nothing other than cheap money. The easy money game is now over because we have borrowed as much cheap dollars as humanly possible. It's now time to pay the piper and pay off the massive debts that we have run up over the past 30 years.

Take a serious look at the chart above. The S&P rose 15 fold until the collapse in 2008. The meteoric rise looks almost ridiculous.

I mean come on folks! Fundamentally did the economy really grow that much from 1982-2008? Consumption is what drives 70% of our economy. Did incomes rise 15 fold since 1982? Hell no! I can remember union steel workers in Pittsburgh making 70k a year back in the 1970's and the S&P was only at 100 back then! Remember, without rising wages in a consumption economy, its pretty tough to have continued economic growth and wages have been flat for over a decade. 

Let me also note that a lot of the growth that was seen in the economy over the past couple decades was in the financial markets where debt was traded back and forth. This game is now gone too. The securitization markets have been essentially shut down except for government backed paper.

Now to be fair:  Should we see some economic growth as the population of this country increases? Of course, but stocks have more than priced this in.

How did we get here?  It's pretty simple:

This countries increased consumption via easy access to cheap money, greed, and an obsession with stocks are what pushed the stock market to such insane values. We have basically borrowed ourselves into oblivion and consumed as much as humanly possible. Stocks rose to unsustainable values as a result.

The Bottom Line

The days of easy money are gone. Banks are reducing the availability to credit. The word RISK actually means something on Wall St these days.

As a result, money will get much more expensive and I predict interest rates will rise as the world begins to walk away from our treasuries. Like Bill Gross from PIMCO explained: This is a new world and we need to adjust to this new reality.

Now am I saying you should avoid the stock market over the long term? Of course not. However, I think stocks should be a much smaller piece of your portfolio moving forward.

Diversification is a must as we all adjust to this new world.