Is the greatest bull market of all time over?
In the spring of 1982, we were glued to the TV. Not to reruns of Hogan’s Heroes or MASH, but to a real, live war. General Galtieri believed Argentinians needed a little patriotic diversion from the grim stories of murder, mayhem and mismanagement that had dominated the press during the 1970s. The Falklands, undefended and perhaps not worth defending, had been claimed by Argentina for years. On 20 April, 1982 he sent troops to reclaim them, beginning the Guerra del Atlántico Sur.
The world watched. At the time, we believed the US would intervene and broker a settlement between the Thatcher government and the Argentinians. The Malvinas, as they were now called, were not worth bloodshed.
But instead of negotiating, Thatcher decided to fight. Britain prepared its fleet and sailed with the tide for the southern seas.
American investors watched the news and sold stocks. The outbreak of war raises doubts and lowers stock prices. The Dow sold off and continued to fall, even after the last shots were fired in June. Finally, in August, it dropped to 776.
That was the bottom of a bear market that had begun 16 years earlier. In inflation-adjusted terms, a whole generation of capital gains had vanished.
But it was in this unhappy and barren ground that the greatest bull market of all time was planted. Including yesterday’s 189 point loss, the Dow is still ahead by about 15,000 points.
That, however, is a nominal gain, not a real one. And it comes to us in a gust of other facts and figures, all of them similarly swept aloft in a great blinding blizzard of misinformation. Each measure – from inflation to unemployment – is a snowflake of detailed and intricate workmanship, but each one melts away as soon as you put a lamp on it to have a good look.
How much is the Dow really worth, properly adjusted for inflation? How much of the GDP is real, useful output? How many of those 15,000 points of Dow gain will be left when the big meltdown finally comes?
Answers to these questions were easier to give when Maggie’s warships were under full steam in 1982. Compared to today, the figures were simpler. And they told a story that made more sense. GDP showed a sure and steady increase since the end of WWII. Wages, too, showed substantial gains. Household net worth confirmed the trends: real output, wages, and wealth were all going the right way. Debt remained steady, at about 150% of GDP.
The typical American was probably far more worried about the rise in consumer prices than in the Falklands War. He had made gains for the last three decades. But now, things were getting more complicated.
We baby boomers are especially fond of those years. We found jobs easily. Houses were cheap. Even after the ‘oil shocks’ of the ’70s, gasoline was still inexpensive. Stocks were bargains too. At the ’82 bottom, you could buy almost any company in the country for five to eight times earnings. The entire group of Dow stocks could have been bought for a single ounce of gold. (Which, in retrospect, would have been the trade of the century.)
But something important happened in the early ’80s. The simple, healthy economy of the post-war period split in two – one real; one unreal.
In one, people got rich. No special knowledge or skills were required. You just had to buy US stocks and wait. If you put in $100,000 in 1982, you’d have about $1.5m today.
Or, you could have made about the same amount from the bond market. Again, no sweat.
But better even than buying stocks and bonds, much better, was selling them. A new class of rich people was created. A financial elite who got MBAs or degrees in math and finance and then went to work for Goldman Sachs. Soon, these people were earning salaries and bonuses that made your jaw drop.
“Bankers’ stock awards jet higher”, declared a Wall Street Journal headline from last week. “Goldman Sachs employees are sitting on more than $600m in extra bonus money, for the past year alone.”
We did not feel the need to underline the word “extra”.
Today, you can go to Aspen or the Hamptons and see the results. Bankers, stockbrokers and hedge fund managers now live in the mansions that used to be owned by families who made things.
Most people, however, did not make it into this unreal economy. Most stayed in the old economy, the real economy of real things and real wages.
… and it sucked.