ON THE MONEY: Learning from history when it comes to investments

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By John Grace

Contributing Columnist

As I am fond of saying on national news interviews, “Too many Americans don’t learn from history because we are too busy repeating history.”

I do believe if you sleep with dogs you will get fleas and when you surround yourself with those who are among the best and the brightest, you can’t help but learn something that can help you make better, if not more informed decisions.

I will always remember attending a September 2006 workshop where one of the smartest securities professionals I know made the point that opinions are like belly buttons; everybody has one, but he only offered his opinion when he believed he could present an informed point of view. The speaker went on to say that it might be a good idea to forecast an occurrence that at the time had never happened before.

He reminded the audience that at the start of the decade many investors experienced a 50% loss on their portfolios and moved on to ask, “Suppose there were two 50% losses in the same decade?”

On the way back to our office, I looked at my colleagues and said, “That was a great question. How might we prepare our clients in the event of an event he suggested that no one has yet to forecast?”

Lo and behold by 2009 we fully participated in another 50% loss. And investors who moved funds from being passively managed to active management in early 2008 know what it means to win by losing less.

Fed Chairman Ben Bernanke studied the Great Depression. In fact, his Ph.D. thesis was on the decade that began with a boom and ended in a bust. He was determined such an event would not happen on his watch.

In early 2009, the Fed fired up the printing press as the recession got uglier and ended up printing about $1 trillion. The consensus was that should have been sufficient to clear out the debt and detox the economy so that we could move forward. But that was wishful thinking. That may have been the start of the next Great Depression.

As Dent Research showed members and investors, “It was remarkably similar to the downturn in stocks from late 1929 to late 1932, when the economy bottomed first in early 1933 and again, finally, in mid-1942 after a major generational peak in spending.”

There are many pundits who consistently preach stocks for the long haul, no matter what. Few experts help investors see the forest from the trees by studying the buying and selling behavior of consumers based on age.

As Deutsche Bank revealed in March 2019, “There are now more people on Earth older than 65 than younger than 5 for the first time.” This is unprecedented. We have never been here before.

That $1 trillion in Fed money was not going to be enough to offset the longer-term and deep demographic weakness resulting from the 2007 peak spending of Baby Boomers. The Fed surmised that the 2017 economic weakness was over and began tapering by selling some of the $4.6 trillion bond hoard that caused economic weakness.

So the Fed began to print again. Of course, COVID shut down the economy, which caused a brief, depression-like environment to set in.

“With so much stimulus preventing a natural and necessary debt detox (as happened in the 1930s), the economy will now likely take longer to shake out,” Harry Dent at Dent Research said. Dent estimates that it “could take until at least the end of 2023 or early 2024” for things to improve.

Dent raises a great question. “When does the stock market realize that this Great Depression is not over and the debt detox is about to begin?

“When it does, likely starting about now, we will see the crash of our lifetimes, which should closely rival that 1929-1932 crash.” In summary, now is the time for investors to prepare their exit strategies in preparation for the good, the bad, and the unforeseen. Just conceptualize there’s another 50% loss baked into the cake.

John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


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