Juggling Dynamite

John Hussman’s August letter The Folly of Ruling Out a Collapse is historically illuminating, as always, and includes some timeless quotes on the distinction between investing and speculation from the father of value investing, Ben Graham.  Here’s one excerpted from December 17, 1959:

Speculators often prosper through ignorance; it is a cliché that in a roaring bull market, knowledge is superfluous and experience a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss. Optimism and confidence have always accompanied bull markets; they have grown as the bull market advanced, and they had to grow, otherwise the bull markets could not have continued to their dizzy levels – and they have been replaced by distrust and pessimism when the bull markets of the past have collapsed. All my experience goes to show that most investment advisers take their opinions and measures of stock values from stock prices. In the stock market, value standards don’t determine prices; prices determine value standards.

The more it changes, the more it’s the same thing. The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. Would that fact assure the investor against a costly and discouraging bear market experience? It seems to me that this is most improbable. The central level of values will be raised, but the fluctuations around these levels may well be just as wide as in the past, in fact, one might expect even wider fluctuations – the stock market will continue to be a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow.

Typical of a rising market cycle, many participants today believe, or have been told, that they aren’t worried about extreme valuations or downmarket ‘fluctuations’ because asset prices always go up over time.  The relevant questions are over what time?; and how long can the owner wait for their savings to recover?

When prices don’t bounce back within weeks and months, it is common for loss tolerance to evaporate and for holders to sell long before any recovery.

For all those who think they are investing today at the worst asset valuations in a century, Hussman offers some smelling salts:

Don’t kid yourself…If your exposure to stocks doesn’t meaningfully take account of valuations here, you’re a speculator…If your speculation is based primarily on the fact that prices have gone up in the past, it’s very likely that you’re speculating recklessly.

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets.  You can listen to an audio clip here.

As mentioned in the segment, the chart below shows the real price change in the S&P 500 since 1870 (in blue) along with the 151-year trend in red.  With the latest monthly close 175% above the long-term mean, a down cycle that takes prices well below the red line would be in keeping with what followed past secular tops (1901, 1929, 1966, and 2000). Unlike the quick 2009 rebound, however, time below the mean in past cycles has been measured in years as this is needed to correct for the prior period of speculative fervour.

The U.S. government is working toward a bipartisan plan for $550 billion in infrastructure spending over the next five years (you can see the details and how it will be financed here.) It’s a tiny start on the trillions in this type of investment needed.

Today’s test for all developed economies is how to transition the private and public sectors from a 40-year fixation on excessive consumption and short-term financial targets (that ignore full-cost accounting) toward longer-term thinking and productive investments that lower costs/waste and increase resources/sustainability.

Sustaining health and prosperity requires doing things today that our future selves and generations will benefit from.

If you have not yet seen it, the 3-part documentary Myth & Mogul: John DeLorean on Netflix is worth watching and reminds us of how the obsession with status and consumption works to defeat innovation and longer-term viability.  You can see the trailer here.

As shown in the charts below, private and public investment as a share of  US GDP has declined since the 1980s, as spending on personal consumption has risen. Similar trends have persisted in most developed economies.  See America squandered decades living for the moment:

Every society faces a fundamental tradeoff between consuming now and consuming later.

There’s a finite amount of labor, materials and other resources in the economy, which can be used either to produce goods and services for consumption — fancy meals, nice vacations, and so on — or to produce capital goods like machine tools, roads, and business software. The more a society invests in the latter,  the more it increases its productive power — and therefore its wealth — in the future.

Fortunately, disruptive technologies are here to enable us in this process now more than ever before.  Plans and blueprints are already in place.  What we spend and allocate now must serve the larger plan or we are working at cross purposes.  See details in the latest ReThinkx Report: Disruption, Implications and Choices:

By supporting the clean disruption of energy, transportation, and food, societies can choose to accelerate global greenhouse gas mitigation to reach net zero emissions before 2040 and lay the groundwork for a complete solution to climate change, simultaneously saving trillions of dollars and improving prosperity and quality of life worldwide.