The bull always runs harder than the bear swipes

Friday, 7 December 2018
London, UK
By Sam Volkering

  • Nixon’s stain on the US economy
  • Parallels to the 70s today?
  • The facts you need to remember in times like these

The Watergate complex is a series of buildings in the Foggy Bottom neighbourhood of Washington DC, the capital city of the US.

It was here in 1972 that burglars were arrested in the offices of the Democratic National Committee. The burglars were caught wiretapping phones and stealing documents.

It finally surfaced later in 1974 that these ‘burgs’ were connected to the re-election campaign for President Nixon. But in 1972, with rumours flowing, the President denied any connection to the scandal.

His lies paid off. He was re-elected in November 1972 in a landslide.

The following two years would see an investigative report put together by Bob Woodward and Carl Bernstein. Their report on ‘the Watergate Scandal’ would go on to become one of the most important pieces of journalism in history.

This was a scandal that took down a sitting president. Eventually Nixon admitted his role. He had even paid the burglars hush money to keep them quiet. But the really serious issue was a plot to have the CIA obfuscate the FBI’s investigation.

It was that particular ‘abuse of power’ that really did Nixon in.

As the evidence became irrefutable and audio tapes began to emerge Nixon had two options. Sit tight and deal with impeachment, or resign. It was a near certainty he would be thrown out of office anyway. So on 8 August, 1974 he resigned.

Nixon was out. Gerald Ford was quickly sworn in and the US went on about its business.

Except Nixon had already left his stain on the country and the economy, almost irretrievably. Or at least, in 1974 there’s a good chance that all news and information at the time certainly pointed to this dire, bearish, desperate outcome.

You see during 1973 and 1974 the US market took a nosedive off a large cliff. As reported by Jason Zweig in Money Magazine in 1997,

‘…the 1973-to-1974 slump seemed endless. The Dow Jones Industrial Average…began 1973 at 1020. But then, in a crescendo of calamity, war broke out in the Mideast, oil prices quadrupled, Richard Nixon resigned over the Watergate scandal, and inflation hit an annual rate of 12.2%. By December 1974, the Dow had plunged to 616, a 27.6% drop for the year.

He goes on to quote some money managers from that era,

“It was so painful,” says William M.B. Berger, chairman emeritus of the Berger Funds, “that I don’t even want my memory to bring it back.”

“In that kind of scary market,” recalls Bill Grimsley of Investment Company of America, “there’s really no place to hide.”

“For me, it was like the Great Depression,” recalls Royce with a shudder. “Everything we owned went down. It seemed as if the world was coming to an end.”

Zweig goes on to note that 313 of the 318 growth funds then in existence lost money. Of course, this wasn’t the first instance of a market rout off the back of a Nixon Presidency.

When he took office in 1969, he stepped into the beginning of a bear market that would last through all of 1969 and into May 1970.

Bear markets, or as I like to call them, ‘temporary market slides’ plagued Nixon’s presidency. It was a presidency of scandal, conflict and division

…Sound familiar?

Well the current investment environment might have you believing that we’re now in a period that is set to rival the 70s. A period of scandal, conflict and division that could be as bad as, if not worse than the market crashes then. Maybe even worse that 2008.

But we’re here to tell you that’s simply not the case at all.

Markets

Overnight the Dow Jones Industrial Average closed down 79.40 points, or 0.32%.

The S&P 500 lost 4.11 points, or 0.15%.

In Europe, the Euro Stoxx 50 index finished down 104.33 points, or 3.31%.

Meanwhile, the FTSE 100 fell 3.15%, and Germany’s DAX lost 389.26 points, or 3.48%.

In Asian markets, Japan’s Nikkei 225 is up 123.34 points, or 0.57%. China’s CSI 300 is up 0.12%.

In Australia, the S&P/ASX 200 is up 20.40 points, or 0.36%.

On the commodities markets, West Texas Intermediate crude oil is US$51.24 per barrel. Brent crude is US$59.67 per barrel.

Turning to gold, the yellow metal is trading for US$1,239.88 (AU$1,714.04) per troy ounce. Silver is US$14.28 (AU$19.74) per troy ounce.

One bitcoin is worth US$3,331.93.

The Aussie dollar is worth 72.24 US cents.

What they want you to believe

During the early 70s Australia certainly wasn’t immune to any of this market terror either. The Poseidon Bubble, a speculative bubble in nickel mining stocks, had blown up and then blown off.

This particular event lead to increased regulation and monitoring of the Australian market. That has interesting parallels with another major speculative mania we’ve just recently seen… More on that another time, or in another publication.

Anyway, back to the Aussie market. As we know, by 1974 the Australian economy had entered into its own recession. Things had become so serious that according to the Irish Times,

In the late 1970s, Singapore’s prime minister Lee Kuan Yew said Australia was about to become the “poor white trash of Asia”

Back then there was no national stock exchange, either. There were a number of different exchanges in the various states. The Aussie market was significantly less sophisticated, less regulated and less understood than it is today.

You might even remember that period. While we were alive at that point, we can only imagine that it was a pretty destitute time all over the world.

In fact, if you were around during the 70s and lived through that period of economic and market uncertainty, I’d love to hear about your experiences and thoughts of the time. Send in your response to us at letters@portphillipinsider.com.au and hopefully we’ll get a chance to republish your thoughts in the coming weeks.

The reason we say this is that we’re starting to see parallels between the 70s and the way markets are behaving at the moment. Interestingly it was the early 70s when the UK entered the European Communities, and then in 1975 when they held a successful referendum to stay in the EC.

Today the UK is on the way out, causing turmoil and havoc over in Europe. There’s scandal, fear and uncertainty plaguing the US thanks to the most controversial President since Nixon. Australia’s market is following the moves of the major international markets, with seemingly no independent thought. Now there’s even suggestion that we could be about to enter into a multi-year-long bear market that’s set to wipe investors out.

According to an article in Bloomberg I was reading today,

Ned Davis Research puts markets into eight big asset classes — everything from bonds to U.S. and international stocks to commodities. And not a single one of them is on track to post a return this year of more than 5 percent, a phenomenon last observed in 1972, according to Ed Clissold, a strategist at the firm.

[Today,] nothing’s working, not large or small-cap stocks in the U.S., not international or emerging equities, not Treasuries, investment-grade bonds, commodities or real estate.’

Perhaps their analysis is right. And perhaps the ‘permabears’ are onto something. Maybe we’ll have another year of this crazy market behaviour. Maybe the US markets will continue lower. Maybe the Aussie market will follow suit.

Maybe we’re repeating the 70s all over.

What you should believe

Let’s err on the side of fear for a moment. Even if that’s the case there’s a 100% true fact about every bear market we’ve had in history. There’s a 100% fact about every market ‘bubble’ we’ve had in history.

Every time, without fail, the markets have gone on in the period since to higher highs. Sometimes within a year or two, sometimes longer, like the recovery from the bottom of 2008.

But every time, the markets have delivered incredible bull markets that far exceeded the slide down. And that’s why I call them ‘temporary’. No bear market is ever forever. Neither is every bull market. But the bull markets always run harder and longer and exceed the previous falls.

Every time.

That’s why I always advocate long term investing. It’s why one of our most successful advisory services, Revolutionary Tech Investor has an average holding period of stocks in excess of three years.

Time and the right strategy is always your friend when you’re an investor. Occasionally I’ll be wrong, and the pessimists will be right…for a little while. And if the fear permeated through the market and we have another crash, it’s not going to wipe out everything.

Even when it’s felt like the world was ending in the 70s, it didn’t. When it felt like the world was ending in 1987, it didn’t. When it felt like the world was ending in 2008, it didn’t.

The world doesn’t end. It suffers a little bit, but the smart money continues to invest. It continues to seek opportunity. It deals with the current situation, and then looks to the longer game.

That’s how to invest through times like this. You don’t go all in. But you never should. You should plan it out, continue to feed the market, diversify, have a long strategy, and smooth out your risk.

If we have another 70s moment, be ready for the following surge.

Regards,
Sam

PS: Due to a company wide event, there will be no market data in today’s Port Phillip Insider.