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We took the 10-year total return performance of the S&P 500 back to 1900 (non-inflation adjusted) and charted the results below. When the line is highlighted in red, 10-year returns were lower than they are now.
As shown, periods where returns were lower occurred in 1914, 1921, 1932, 1938, 1974 and 1977. We also highlight years where returns peaked -- 1929, 1959, 1992 and 2000. While the returns could easily get worse, periods that have been this bad have not lasted longer than 4 years (1937-1941) before they've started to get better. The red arrows indicate the periods of decline in S&P500 returns. The green dotted lines and balloons indicate the periods necessary to equal levels of total return. The crash symbol at the right end of the graph indicates the 2008 crisis time. At the bottom it is reported a selected time line of the key geopolitics events correlated to the specific section-periods of the graph.
We have chosen to highlight that since 1959 the performance of S&P 500 has kept to date a downturn tendency: about 30 years to recover the 1959-1977 slide; about 6 years to recover the 1992 slide. Signs of reversal of the 1959 sliding and the 1970s recession became visible in the 1980s but did not last long: 1987 and 1992 recessions; 2000 financial bubble blast and stock market crash; 2008 worst recession since 1929.
The US economic growth and the US$-world-based-economy traditionally leveraged on the enormous geopolitical weight of the United States. As a matter of fact, the crisis and escalation of the Cold War (1953-1962) served the US interests. More specifically, following the Berlin crisis (1961), the Cuban missiles crisis (1962) and the assassination of President Kennedy (1963) - a man truly guided by the desire for greater internationalism - the already declining US economy was locked into an ideological Western dynamics. With the support of the "ideology of freedom" - the West and NATO - the Cold War permitted the continuing US supremacy in the industrialized countries of Europe and Asia as well as in half of the developing countries throughout 1989.
However, the Cold War statu quo was challenged by a stronger USSR that was also expanding its influence in the Middle East - from Egypt to Iraq - and to critical countries in Africa, Latin America and in the Gulf region. Since 1955 the Non Aligned Movement (NAM) continued growing its influence and prestige across most developing countries, transversally crossing the four continents. The NAM convened a World Summit in Belgrade, Yugoslavia, under the presidency of Tito in 1961. Since 1965 the OPEC headquarters in Vienna, Austria, counted 13 oil producing members. Several members of OPEC alarmed the world and triggered high inflation across both the developing and developed world when they used oil embargoes in the 1973 oil crisis.
In 1981, both the US and the UK governments were confronted with stagflation: overstretched economies haunted by high inflation (27% in UK) and massive unemployment.
The stagflation was temporarily reverted implementing a common set of policies in the US and the UK:
a) The monetarist approach, effectively using IMF and WB tools to externalize US/UK budget debts (Alain Greenspan was appointed Chairman of FED in 1987 and served in office until January 2006);
b) Income tax reforms, effectively broadening the tax basis but favouring tax cuts on high returns.
The US government raised deficit spending at the highest levels since WWII. In order to cover newly-spawned federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion.
The combination of these policies produced some positive effects on the growth of the US and UK economies. In particular, these policies artificially supported the US and UK valuation of assets that was necessary to maintain attractive returns on capital investments in US dollars. These policies guaranteed the inflow of fresh capitals invested in the US and UK financial systems and stock markets, effectively draining capital resources from most of the planet. It also contributed in accelerating the collapse of the USSR economy.
The 1987 stock collapse of unprecedented size lopped 22.6% off the Dow Jones Industrial Average. The collapse, larger than that of 1929, was handled well by the economy and the stock market began to quickly recover. However, it soon turned out that the quick recovery was illusory. By 1990 the economic malaise had returned with the beginning of the Gulf War and the resulting 1990 spike in the price of oil that lasted until mid 1990s.
During the Clinton's terms in office (1993-2001) the Reagan's policies based on a laissez-faire philosophy endured. Clinton added a decisive de-regulatory policy to global trade (WTO, 1995) and to the financial markets (Relief Act of 1997). Significantly, at the beginning of 2000 the Internet financial bubble blasted and at the end 2001 two large corporations, Enron and Arthur Andersen, filed for bankruptcy.
Albeit the positive effects of Clinton's policies lasted until the blast of the financial "new economy" bubble in 2000, the Western productivity indicators were worrisome.
On the geopolitics the Clinton administration pushed for a decisive break of sovereignty rules that had been governing international relations ever since 1945 (1993 "humanitarian" war in Somalia; 1998 Operation Desert Fox bombing Iraq on alleged detention of arms of mass destruction; 1999 Operation Allied Force "humanitarian" bombing Serbia on alleged genocide against Albanians of Kosovo).
Since the 2000 Internet bubble blast, the S&P 500 downturn has never been reversed.
Under President George W. Bush the US deficit has sky-rocketed to about $9 trillion in 2008 (+70% since 2000). However, a closer look at President Bush policies indicate that he reacted with extreme capacity in both handling the first large scale terrorist attack on US domestic ground (September 11, 2001), and even more responsibly to the challenge that China WTO membership (December 11, 2001) would mean for the already shaky US dominated international financial system.
President Bush strongly supported five years of intense negotiations US-China (and Japan) on finding common ground for what was called the "Pacific Bretton Woods". Talks collapsed in July 2007. This failure was immediately followed by a significant financial crash.
The last one-year leg of these negotiations was conducted by the newly appointed "Goldman Sachs star" Henry Paulson as US Treasury. Critics hint that it is doubtful the reason for his stubbornness in pretext sidelining the EU while China was stepping up its reserves in Euro. In 2008, Paulson's stark political standing in refusing government loan to the troubled investment bank Lehman Brothers has also been very much criticized. "For the equilibrium of the world financial system, this was a genuine error," said Christine Lagarde, France's finance minister. Frederic Oudea, chief executive of Société Générale, one of France's biggest banks, called the failure of Lehman "a trigger" for events leading to the global crash. Willem Sels, a credit strategist with Dresdner Kleinwort, said that "it is clear that when Lehman defaulted, that is the date your money markets freaked out. It is difficult to not find a causal relationship".
Among Paulson's most notable steps we can recall the following:
In Spring 2007, Secretary Paulson told an audience at the Shanghai Futures Exchange that "An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention."
In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades.
On July 20, 2008, after the failure of Indymac Bank, Paulson reassured the public by saying, "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."
On August 10, 2008, Secretary Paulson told NBC's Meet the Press that he had no plans to inject any capital into Fannie Mae or Freddie Mac.
On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.
On September 13, 2008, Lehman Brothers filed for bankruptcy following the refusal of Treasury and FED to bailout Lehman with a loan.
The geopolitics policies under the G.W. Bush presidency (2001-2008) were mostly designed to reassert US world hegemony and to defend at any cost the US$ supremacy in the world.
A snapshot of the key geopolitics events in this period may help understanding some of the economics and financial data to which we are now confronted: Twin Towers Attack ('01); Wars in Afghanistan and Iraq ('01; '02); Patriot Act ('01); War on Terror ('01); Anti-Missile Shield placed in the EU (2007); EU enlargement ('04; '07); Financial crash (July '07); Independence of Kosovo ('08); War in Georgia (August '08); Russia deploys missile batteries in Kaliningrad (Nov. '08); Obama (a Democrat) is elected 44th President of the United States of America (Nov. '08).
However impressively powerful, the US geopolitics weight has been counter-balanced and made relative to others by a very fast and steady growing of China (WTO membership in December 2001) and the fast recovering of Russia under the Putin presidency (1999-2008). Moreover, in the same period other raising geopolitical powers, from Brazil to India, from Indonesia to Nigeria, have made the predominance of the US$ even more relative. Last but not least, the European Union implemented the common currency, the Euro, under the authority of a Central Bank (ECB) since December 2002.
This brief account hints that the current 2008 crisis is different from any other before it: it is the final stage of a system that started declining already after 1959.
As a consequence of the policies reported above, the length of the 2008 recession may last several years (some analysts foresee between 5 to 15 years to recover).
Notably, the newly elected US President Obama has warned his supporters celebrating victory in Chicago: "The road ahead will be long. Our climb will be steep. We may not get there in one year or even one term".
Finally, the data below gives an idea of the historical Dow Jones performance correlated with the US presidency, Congress and senate.
by Dr. Paolo Raffone , The CIPI Foundation
Published on November 14, 2008
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