STOCKS AND WAR
by Doug Casey
Back in the April 2001, I remember commenting that since
everyone, including myself, was getting pretty bearish,
we were likely due for a nice strong rally - which we
got. Then the events of 9/11 occurred.
After the initial plunge that resulted when the market
reopened, stocks have been up strongly. In fact, the
majority of commentators are calling for a resumption of
the late, great bull market. It's not an entirely
irrational sentiment. If you trace the history of
America's wars relative to its stock market, what stands
out is that betting against America has always been a
losing proposition. Since at least WWI, the market
usually gets quite weak at the start of a conflict, due
to a natural uncertainty about both the government's
response and the eventual outcome. But history tells us
that it's smart to buy stocks after the initial sell-
off.
For example, the Dow Jones Industrial Average fell 2.9%
on the first trading day after the Pearl Harbor attack,
and another 11% over the next four months. That's
surprisingly little, in view of the beating that
Americans - and all the allies - were taking on
virtually every front. But, despite a bad start, the Dow
not only went on to return 20% in 1942, but doubled over
the next three years as the war drew to a close.
War, at least in the past, has always seemed good for
the economy and the market for at least three reasons:
First, "winning" is Pyrrhic if you're left in the state
of Britain or France after either World War. However,
America has not only always triumphed, but it has done
so without taking serious damage. Second, war has helped
America to spread its culture around the globe, and
aided its businesses in gaining market share. I have
real reservations on how wise that methodology will
prove to be in the long run, but that's another subject.
Three, since the creation of the Fed in 1913, wars have
been financed largely through inflation. And,
notwithstanding all the damage inflation does, that new
purchasing media do find their way into shares, driving
them higher. So it's understandable that people are used
to thinking that not only is war "the health of the
State" (correct), but that it's the health of the
economy and the market as well (incorrect).
Another factor behind the post-9/11 strength lies in the
fact that we've had the biggest bull market in history
since the bottom in 1982. If there's one thing people
have learned over at least the last decade, it's to buy
on dips. And, although the stealth bear market of the
last three years (prominently including the wipeout of
high tech issues) has shaken that faith, the true
believers haven't yet been turned into agnostics, much
less apostates.
It's going to take years before the psychological
expectations that were built up over the last decade to
wash away. We're not likely to get the final bottom
until everyone is so utterly fed-up with the stock
market that nobody is looking for a bottom - and nobody
will care when it arrives.
The big difference between the market now and that of
1941, however, is simply value. After Pearl Harbor it
dropped so little because it was still at depression-era
levels. That's totally the opposite of today's
situation. And, after a while, it was fairly clear how
and when the Axis would be defeated. Whereas now it's
completely unclear not only how and when the enemy will
be defeated (notwithstanding the surprisingly quick
collapse of al Qaida in Afghanistan), but even exactly
who the enemy really is. I believe, therefore, that
we're still in the early stages of what is likely to
prove one of the worst bear markets of all time.
How long and deep will this bear market be? Nobody has a
crystal ball. But the stock market fluctuates around a
mean established by fundamental values, alternately
going above and below the trend line. Based on how high
it's run in recent years, I suspect we'll see something
a lot more ugly and traumatic than just a bear market in
stocks before it's over. Stocks, bonds, the dollar and
the economy itself are likely to get whacked in a way
you see only once in a lifetime. If you're lucky.
There's every chance we're looking at the Greater
Depression, and I suspect it's going to be worse than
even I think.
It occurs to me that the next few years may present a
true test of the Austrian school of economic thought, of
which I'm a proponent. One of its tenets is that a
credit-driven boom must, inevitably, be followed by a
roughly proportionate downturn. And we've certainly had
a gigantic, credit-driven boom.
One other thought that's occurred to me recently is the
utter intangibility of stocks. Unless you're getting
dividends (which are sparse today), all you've really
got is a piece of paper, for which there may not even be
a market.
That thought will cross the minds of millions over the
next few years.
Doug Casey,
for the Daily Reckoning |
