In just over a month Mission will celebrate the twentieth anniversary of opening its doors in Tucson. On April 24 of this year, Mission’s staff had the pleasure of joining with clients, business associates and retired staff in a rollicking celebration of Mission’s first two decades. The highlight of the evening was an encore performance by the Motown group True Devotion, who had helped us celebrate our first decade at a client conference earlier in the century. A few of Mission’s officers offered reflections on the firm’s history and its outlook for the future. The following is a reprise of my comments that evening.
Let me add my thanks and appreciation to all of you who have made our first two decades so successful and fulfilling. It has been my privilege and pleasure to work with you through the last 17 of Mission’s 20 years. All of Mission’s current and retired staff are extremely pleased that we have been able to provide a positive return for clients in all but one of those years. (In 2008 our client portfolios declined by less than 1% while the S&P 500 plummeted by 37%.)
Those of you who have been regulars at our conferences and seminars over the years know that we profile stocks’ progress through history over a repeating series of long strong and weak cycles. Most of you here this evening are of an age that allows you to view the last 20 years in a longer term context, as do I.
I started in the investment industry in the late-1960s and have observed a great many cyclical bull and bear markets. We view these relatively frequent rising and falling markets in the context of much longer secular strong and weak cycles. My introduction to the investment industry came during the long weak cycle that began in the mid-1960s and extended into the early 1980s. The Dow Jones Industrial Average peaked at 995 in February 1966. It rested at 777 more than 16 years later in August 1982. While a difficult period in which to produce profits, that long weak cycle provided valuable lessons about how long markets can stagnate while erasing the excesses of the prior long strong cycle.
From the depressed prices in 1982, the major stock market averages exploded upward by 15 times into the early months of the 21st century. Although Mission opened its doors late in that long strong cycle, most of its existence has taken place in the long weak cycle that began in 2000.
The S&P 500 reached 1550 in early 2000. The average was still below that level 13 years later in early 2013. The Nasdaq Composite is still below its 2000 peak. Investors have experienced two massive declines (50% and 57%) and two powerful rallies so far this century. Even with massive government support over most of the last decade, equity investors have earned only about 3.5% per year so far century-to-date. Mission’s clients who have been with us since the beginning of the long weak cycle have had a better return with a far more risk-averse portfolio structure.
For two centuries, long weak cycles in the United States have served to eliminate the excesses built up in the preceding long strong cycles. Excessive debt in this long weak cycle has not only not been reduced but rather multiplied into grossly excessive debt. Consequently, we anticipate at least one more major stock market decline to eliminate the debt excesses before the long weak cycle runs its course.
Most of Mission’s existence has taken place in an era of monumental government interference in the economy and securities markets. Beginning at least with the rescue of Long Term Capital Management in 1998, government committed itself to the bailout business with all the moral hazard that produces. Failed businesses have been rescued; debtors have been rewarded, savers penalized; and free markets have been dramatically distorted.
The unwillingness of the Fed and Treasury to allow giant firms to fail has effectively painted these government institutions into a corner. They have produced unprecedented levels of debt to conduct their bailout activities and now can’t afford to allow a recession that could topple the debt edifice. There will inevitably be future recessions, and the Fed may well be out of tools to assist in promoting stability.
The precarious debt picture is best illustrated by looking at the Federal Reserve’s balance sheet. In its first 95 years of existence, the Fed developed debt on its balance sheet of about $800 billion. In just six years, the Fed has multiplied that amount five times to more than $4 trillion, and that amount is still growing rapidly. Total debt in the U.S. economy puts us uncomfortably in the range at which excessive debt has led to severe economic slowdowns over the centuries in countries throughout the world. (This time Is Different, Reinhart & Rogoff).
There are a great many similarities today (excessive debt, valuations, sentiment and speculation) to the conditions near the peaks in 2000 and 2007, which produced stock market declines of 50% and 57% respectively. Current excesses place our securities markets in a very high risk environment. At the same time, so long as investors trust that the Fed and other central bankers will keep us from serious market declines, prices can continue to rise. Should that confidence fade, however, we could experience the third significant market collapse of this still young century.
Having begun my investment career in the late-1960s during the then prevailing long weak cycle, and now having lived through the 21st century weak cycle, I’m eager to experience again the kind of long strong cycle that covered almost all of the 1980s and 1990s. I hope you’ll enjoy it with us. As explained earlier, I expect we’ll first have to endure at least one more serious decline to wipe out persistent valuation and debt excesses. I believe, however, that Mission is well prepared to protect today’s asset values and leave them primed to participate fully in the safer long strong cycle ahead.