Different From What?
Evan Simonoff, Editor-in-Chief
There are few more hackneyed homilies about investing and economics than "It‚s different this time." In reality, it‚s always a lot more complicated than it looks. With every economic cycle, the beginning and the end may be very similar, but the path of the cycle itself often diverges from past history.
In many ways, the last few years look very much like the early ‚90s. A shallow recession has been followed by a soft recovery that feels more like a recession. The mood among consumers has been subdued but not petrified. And all the anxiety has infused millions of Americans with a desire for financial independence.
Most importantly, economic cycles in the United States appear to be growing much longer as business activity evolves from manufacturing to an information- and service-based economy. Americans under 50 years old have experienced only two recessions in their working careers, which helps explain why even mild recessions are so psychologically traumatic.
But the departures from the early ‚90s are equally glaring. A decade ago there was a nationwide real estate bust; today, we are verging on a real estate bubble. Ten years ago, the United States was in the process of reducing its federal budget deficit; this time, it‚s expanding.
When the Cold War ended with the collapse of the Soviet Union, pundits proclaimed a new conflict-free era and celebrated the peace dividend. Today, the war on terrorism looms over our lives like a hundred-year plague. We may live longer than any previous generation, but the message most people took from September 11 was that life is short and one should focus on what‚s really important.
Moving to the equity market, it‚s hard not to notice, as Nick Murray did last month, that since the stock market began to rally one year ago, it has been led by garbage (whoops, the Nasdaq) not quality, a phenomenon rarely observed at the start of a new bull market. Sure, 70% or 80% of all technology companies beat analysts‚ estimates in the fourth quarter last year, but how sustainable is the tech boomlet once it gets past the current replacement cycle? At the very least, this would imply that some kind of consolidation is inevitable.
It‚s also impossible to escape noticing that the three asset classes in which Americans invest the lion‚s share of their money–equities, bonds and real estate–are all pricey if not overvalued. All that‚s cheap is commodity prices, and they are catching up fast.
At a New York luncheon in early March, Loomis Sayles legendary bond fund manager Dan Fuss said he wasn‚t so worried about what will happen to long-term bonds in the next rising interest-rate cycle. What did cause Fuss some consternation was the prospect of what might happen to bonds in the two cycles after that. When asked about financial advisors‚ favorite antidote to the current bond market bubble, Treasury Inflation Protected Securities (TIPS), he responded that they were currently overvalued and questioned if they would really provide the hedge against inflation that many advisors hope they will.
All this explains why there is so much confusion and why more people are seeking financial advice than ever before. There simply aren‚t any easy answers, but there are a lot of big questions.