Wednesday, February 16, 2011

Economy Today: The 70s Redux?

When I was doing research for my Coca-Cola post, I came by an article written by Muthar Kent, CEO of Coca-Cola.  It's somewhat a sales pitch for Coca-Cola, but there are some truths in it that I found interesting.  He starts off by talking about the 1970s, when he first started working at Coca-Cola, and I quote:
When I first went to work for Coca-Cola in the late 70s, the mood in America was pretty somber and anxious. Fuel prices were spiking. A recession was draining our confidence. There was widespread fear that we were losing our global political and economic leadership. Many people feared that a surging Japan would cripple American industry, jobs and the U.S. economy. Even greater numbers of people were worried about their jobs being replaced by technology.
There were many striking parallels to the situation we find ourselves in today. But the system didn't collapse, did it? In fact, America got stronger ... much stronger ... and that's because this great nation did what it has always done best -- America innovated and reinvented itself. And we can learn from history -- the past is indeed prologue.
Kent described well the sentiment of the 70s.  This sentiment was either part of the cause or the result of the stock market's performance.  In Figure 1, we see the performance of the S&P 500 index in the 1970s.  It started off in the 90s and by the end of the decade, had only risen to 110 pts.  That is a 22% gain over 10 years, or around 2% growth per year!  Wow, that's worse than bond yields!

Figure 1: S&P500 in the 1970s

Then, what happened?  The market exploded in the 80s and by the end of that decade, the S&P 500 had risen to 350 pts, a 218% growth in 10 years or 12.2% growth annually.  That's more like it!  You think you've seen market explosion?  Check the 90s!  The S&P 500 grew from 350 pts in 1990 to 1400 pts in 2000.  If you had invested in an S&P 500 index fund in 1990, you would have had annual returns of 14.8% in the 10 years following!

Figure 2: S&P500 in the 1970s-80s

Figure 3: S&P500 in the 1980s-2000

What am I trying to say?  The 2000s could very well be the 1970s redux.  It's now being called the Lost Decade.  The stock market has essentially stood still for 10 years.  What Kent and I are saying is that the (North) American economy cannot stand still for a very long time.  There's tremendous potential waiting to be unleashed.

The West is still leading the world in many fronts.  The newest technology front, the smartphones and mobile computers (tablets), are led by two of the greatest American companies, Apple and Google (Android).  RIM, the maker of Blackberries and still the king of the corporate smartphone world, is a Canadian company.  Nokia may be the market share leader of the world, but it is a follower.  Apple and Google are the true leaders.  In any case, the West is not going anywhere any time soon.  We are still the innovators of the world!

Yes, China is on the rise, but we are living in a global economy now.  If China does well, America will do well.  In fact, we should welcome the emergence of countries like China and India.  Kent has proof that demand in China results in jobs in the US.  He says he is optimistic about America, and I don't doubt him.

The pessimists talk about the risk of a double dip.  Don't worry about's already happened.  The first dip occurred in 2003 and the double dip was the 2009 crash.  I'm not lying, just look at Figure 4 and you'll see!  The signs are pointing to a better tomorrow.  How do you take advantage?  As always, find great companies selling at a discount.  Are you ready for it?  If not, you better start getting yourself ready.  For starters, see where I have my money.  But don't trust me, trust the numbers.  Check out my Rule #1 analyses.  Lastly, continue reading this blog, or better yet, subscribe to it!

Figure 4: S&P500 in the 2000s