"Well, I suppose rising carrying costs will slow consumer spending, especially if rates rise, and possibly precipitate more defaults, which would cause credit to tighten up and rates to rise more. Not pretty," I added unnecessarily. The waitress was just placing the broiled crab cake special in front of us. "Not pretty? What are you thinking, hon? That's a bea-utiful crab cake." I tried to explain that I didn't mean the crab cake, and I poured two more glasses of Kanu and asked if they still served that delicious raspberry iced tea; I had to drive home later.
Those Were The Days
"Bob, do you remember seeing 'Endless Summer'?" "Sure. Bunch of young surfers circling the globe in search of the perfect wave or something like that?" "Yeah, that's the one," I said. "I've been thinking about it, and I believe there's an investment lesson in it."
"Something in your iced tea?" Bob wisecracked.
"No, really. It's made me think that there are always waves; the trick is to wait for them, stand up and ride them while they last, then get off and watch for the next one. Like the oceans, markets are always moving; there are always waves you can ride. Or you can sit on your board and let them pass you by because they're not good enough, and wait for that elusive perfect wave, the next 20-year bull market."
"Mike," Bob licked the last crumb of backfin from the corner of his mouth and drained his glass, "You and I are old enough to know that 1982-2000 was the perfect wave, probably a once-in-a-generation thing of beauty. Ignore the dips, hang on and never look back! We may not see that again in our careers, even if we work as long as John Templeton and Roy Neuberger."
"I'm sure you're right, Bob. It was the longest, most powerful wave in modern financial history. Almost 20 years of rising P/Es and falling interest rates. Do you remember when the Dow sold at less than seven times earnings in 1979?" "Sure I do. And those were peak earnings, too; corporate profits didn't get that high again for about ten years!"
"And a couple years later, long Treasuries sold at a 15% yield and nobody wanted them, remember?" "Sure I remember. But now look what we've got, 30 times earnings and 4% on the ten-year bond. Is this a wave we can ride?"
Everything's Expensive
"Well, I don't know. Maybe it is," I suggested to Bob's amazement. "Yeah," he rolled his eyes, "P/Es will go to 60? Or maybe we'll squeeze 15% earnings growth out of a 3% GDP trend? Or maybe the 2013s will trade at 2%? Where's the wave?"