There are a few investment consultants and money managers who recall the almost-ancient past. Of course, when that past casts such a long, long shadow, it’s hard to forget it. Remember 1964 to 1982? U.S. stocks went nowhere – except on a rollercoaster. Of course, commodities did quite well. So did fixed income. Alternatives became a watchword. See below (click image to enlarge).
Then just before the bust was over, BusinessWeek published its famous Death of Equities cover story, in 1979. Magazine covers are often a leading indicator. Michael Shedlock (better known as the blogger Mish) has a old roundup on Seeking Alpha, noting that a Time magazine cover in 2005 presaged the housing bubble collapse. The cover” Why we are gaga about real estate.”
So is it that time again?
Blogger Paul Kedrosky seems to have started collecting recent media stories about Death of Equities II – well, sort of. Not quite cover stories, yet. And there have been more than a few similar articles since the Great Recession, including recent ones in the New York Times. Even before that, Pimco’s Bill Gross hazarded the same opinion in 2009. They are part of an eternal struggle between bears and bulls, chartists and fundamentalists, each trying, if not to guess the inflection point, than to find value in the dross.
Kredrosky refers to the original death of equities article, wherein it is stated:
“At least 7 million shareholders have defected from the stock market since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks—and bonds—into other investments. If the institutions, who control the bulk of the nation’s wealth, now withdraw billions from both the stock and bond markets, the implications for the U.S. economy could not be worse. Says Robert S. Salomon Jr., a general partner in Salomon Bros.: ‘We are running the risk of immobilizing a substantial portion of the world’s wealth in someone’s stamp collection.’”
It’s amusing to reread the article. Maybe a look in the rearview mirror is reassuring: been there, done that, the car’s still on the road.
But the original BusinessWeek article does have some eerie parallels. The first is the collapse of the equity risk premium. “Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds—infinitely safer—rarely paid more than 4%. Today the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade.”
In a recent interview, Roger Ibbotson, of Stocks Bonds and Bills fame says yes, there is an equity risk premium, but you don’t get it every year – or even every decade.
The second parallel is the rise of alternative investments in the institutional portfolio.
“As a result, even institutions that have so far remained in the financial markets are pouring money into short-term investments and such ‘alternate equity’ investments as mortgage-backed paper, foreign securities, venture capital, leases, guaranteed insurance contracts, indexed bonds, stock options, and futures. … On Wall Street, the flight from stocks has forced firms to push alternative investments hard—thereby drawing still more money from the stock market.”
Many of those alternative investments were in hard assets, or at least inflation-sensitive ones. Hence “The Minneapolis Teachers Retirement Fund Assn., for one, has bought fast-food stores such as Pizza Hut, Burger King, Kentucky Fried Chicken, and Wendy’s, which it leases to franchisees. The program has been so successful that the fund, which puts 10% of its portfolio into such deals, may boost its commitment to 33%. ‘Our assumption is that we should make at least the rate of inflation plus 5%,’ says Newell O. Gaasedelen, executive secretary of the fund. ‘These investments have helped us reach that goal.’”
Of course it all sounds familiar. As pension plans move to de-risk, they are in fact pulling money out of public equities and looking for reliable sources of returns, just as retail investors are flocking to yield products. Apart from that, more than a few prescient souls, such as James O’Shaughnessy, remarked in the early 2000s that on the basis of price/earnings ratios, the stock market bottom was a long way, perhaps a decade away.
So just because investors have been through a swoon once – as glimpsed through the prism of the BusinessWeek article — doesn’t make it any less painful. Or, as Jeremy Grantham recently put it: This is “no market for young men.”