What if the last 40 years was all just a big bubble?

Wednesday, Mar 24 2010 by

One of the things that many people go through their entire lives without ever realizing is that conditions haven't always been the way they remember them to be. Due to the length what if the last 40 years was all just a big bubble news story imageof a typical lifetime and the number of those years that individuals are productive and have an impact on society, it's reasonable to think that someone in their mid-60s could retire today and look back at the last 40 years only to conclude that what they just experienced was normal. But, what if the last 40 years were anything but normal? What if, in the world of finance and economics, it was all just a big bubble? 

One look at the chart below from this recent Wall Street Journal story and it becomes instantly clear that stock market valuations over the last twenty years have been nowhere near normal. In fact, what were deemed "generational lows" for valuations at the peak of the financial market crisis a year ago look like nothing of the sort over the broad sweep of time.

And when you consider what happened in the natural resource sector in the 1970s and then what followed in Japan in the 1980s, it's quite easy to come to the conclusion that, since the world left those last vestiges of sound money when Nixon closed the gold window in 1971, we live in a radically different world.

While some quickly dismiss ideas like this, reminding anyone who will listen that "correlation is not causation" while citing technological advances made during this time as just cause for the changes we've seen in financial markets, breakthroughs such as railroads and electricity a hundred or more years ago likely had a bigger impact on the world than computers, communication, and medical technology more recently.

The sad possibility that so few consider is that, what has happened in the last 40 years probably has much more to do with the financial system, credit, and debt than the technological advances themselves. A brief stroll through recent history might be helpful in seeing just how accustomed we've become to bubbles and, as if we don't know it already, how dangerous the financial world has become.

The Era of Disco and Inflation

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Do you like this Post?
11 thumbs up
1 thumb down
Share this post with friends

4 Comments on this Article show/hide all

emptyend 25th Mar '10 1 of 4

In the fullness of time, the last forty years will likely be seen as an aberration - just one big bubble - as theories are abandoned and a more enlightened approach ultimately prevails. Unfortunately, between now and then, things are likely to be worse before they get better.

Sadly these are also thoughts that trouble me a great deal - and have done for several years (eg comments here from 2008). I suspect that the "cult of the equity" started by Ross Goobey in the 1950s might end up running into the buffers due to a combination of economies trying hard to work off their massive increases in debt taken on in the last decade or so ......and the march of demographics as baby-boomers continue to draw on their equity in order to finance their retirements.

What is also worrisome is that the equity markets are behaving as if nothing much has changed....and the whole financial sector is attempting to convince us all that they are resuming "business as usual!  Perhaps we may need a couple of new sovereign debt crises before the markets start taking the issue seriously!!


| Link | Share
freddythefish 26th Mar '10 2 of 4

I've been worrying about this too - up until reading this I thought it was maybe just age related paranoia. I can't help but wonder if most of the future's economic momentum will come from Asia (no surprise there) but that the relevant cultures won't necessarily always support western ideas of sharing the fruits of capitalism.

Under these circumstances one wonders about the best home for one's capital - or does one simply put it into government debt and rely on the next generation to take the hit.


| Link | Share
siestainvestor 27th Mar '10 3 of 4

Certainly it has been a worrying time. But:

I have cash deposits maturing that had been earning 3.5% and I am now offered 1.1% for 60 day money.
You trawl around and find (say) AZN (Astrazeneca) trading on 5.9 times cash flow and paying a dividend of 4.8%. It has net cash. Even if the company is ex growth and has nothing exciting in the IP pipeline (which they would dispute), there is value there on a twelve month view. There are other stock picks that are similar.

This is why the market is trending up in the medium term. In the long run we are all dead but between now and then other opportunities will turn up.

| Link | Share
marben100 28th Mar '10 4 of 4

Firstly, I observe that the so-called cyclicall adjusted P/E (CAPE), is a very useful tool for pushing a bear case...

Simply using a multiple of the average of the last 10 years earnings, is likely to result in an artificially low figure and hence an artificially high P/E - because it takes no account of growth that may have occurred over the period. It is also noteworthy that the latest 10 year period begins at the year 2000 peak and ends just as we appear to be recovering from the latest crash - again leading to lower than typical average earnings

Now, I certainly wouldn't want to suggest that all in the garden is rosy. The current level of sovereign debt and fiscal deficits in developed markets is certainly a worry. There are also major geopolitical problems to overcome. But let's just consider some of the developments over the 40 year period mentioned:

  • Mass adoption of the PC
  • Emergence of the Internet
  • 300m Chinese now living a lifestyle hard to distinguish from that of westerners
  • Disintegration of the USSR and emergence of CEE economies such as Poland
  • Revolutionary advances in the medical sciences

The list goes on... All of this is just a bubble? I don't think so.

It is just as well that not everyone adopts such a negative stance: because it's CONFIDENCE that lies at the heart of economic growth, investment and human development.




| Link | Share

What's your view on this article? Log In to Comment Now

You can track all @StockoChat comments via Twitter

About Tim Iacono

Tim Iacono

An engineer by profession, with a keen understanding of human nature, my study of economics and financial markets began in earnest in the late 1990s - this is where it has led. I am self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. In addition to writing the blog entitled The Mess that Greenspan Made, I am also the founder of the investment website Iacono Research and the author of a weekly newsletter that focuses on investing in natural resources. See here for more details: http://www.iaconoresearch.com/About/bio.html more »

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis