"A Retrospective"

Sydney M. Williams

Thought of the Day

“A Retrospective”

August 11, 2010

Forty-eight years ago on this date I boarded a bus in Boston, which deposited me at Fort Dix, New Jersey for two months of Army basic training. Looking back on those days, they seem simple in comparison to the complexities we now face. Even Vietnam was in the future. Of course there were concerns. Russia placed missiles in Cuba while I was in basic training, prompting President Kennedy to order a blockade of the Island and to put the Army on alert. As it turned out I remained at Fort Dix, but for a day or two the future looked uncertain.

Other events of that year serve to show how long ago that time was: “Lawrence of Arabia” won best movie; Robert Frost published In the Clearing; U.S. Marshalls accompanied James Meredith, as he registered at the University of Mississippi; Richard Nixon was defeated by Pat Brown in the California gubernatorial GOP primary; a U.S. stamp cost $0.04; Marilyn Monroe died of a drug overdose and Johnny Carson took over the “Tonight Show”. Federal outlays in 1962 were 18.8% of GDP. In terms of interest rates, the Ten-Year yielded 4%, the prime rate was 4.5% and 30-Year mortgages were about 5%. Rates were headed substantially higher over the next two decades, with the Ten-Year reaching 16% in the very early 1980s.

In contrast, “Avatar” won this year’s Oscar at the Academy Awards and Steig Larson’s, The Girl with the Dragon Tattoo continues to be a best seller. The governor of Arizona signed a law designed to enforce immigration laws, later deemed illegal by the courts. Republican Scott Brown won the Senate seat in Massachusetts occupied for 47 years by Democrat, Ted Kennedy. A U.S. stamp now costs $0.44; Gary Coleman died at the age of 42 and Jay Leno returned to the “Tonight Show” replacing Conan O’Brien after six months. The federal budget, this year, will approximate 28% of GDP. Today, the Ten-Year yields 2.78%, the prime rate is 3.25% and a 30-year mortgage can be had for 4.5%. With a whiff of deflation in the air, the general expectation today is that rates will decline further.

In the early 1960s, we were still four or five years from what would prove to be the end of the post-War bull market and it would be two decades before the start of another. That one began with inflation and interest rates coming off very high levels and with the tax cuts implemented by the Reagan administration. Green-mailers forced needed efficiencies in board rooms and the end of the Cold War brought cuts in Defense spending in the 1990s.

Today we find ourselves ten years into a secular bear market that began when the hyper-extended internet-tech bubble collapsed in March 2000. While inflation was the demon of the 1970s, deflation is the scare today. I agree with Jim Grant when he notes that “life is interesting because every cycle is different.”

Nevertheless, the intervening years did see progress. The population increased 68%. Today, women comprise 44% of the workforce. Civil rights greatly evened the playing field for minorities. Per capita GDP has risen from $14,099 to $46,300. The S&P 500 has risen from 63.1 to 1121, a compounded return of 6%. Earnings for the same index have risen from $3.67 in 1962 to an estimated $75.00 for 2010, a compounded return of 6.4%. If one has the ability to look out several years, it is hard not to imagine that the returns to stocks should do better than the 2.8% return one can get on a Ten-Year or a little less than 4% for thirty years.

There is a great deal of uncertainty in the market and about the economy. Many are convinced that America’s best days are behind her. Fifty years ago the threat of nuclear holocaust hovered over the world, as Hiroshima and Nagasaki were fresh in everyone’s mind, but a balance of power between the Soviets and the West led to tenuous peace. America, the saviour of Europe from Nazism, was considered the “good guy”. The Soviets wore the “black hats”. In space and in arms the Soviet Union competed with the United States, but at the sufferance of her people and the enslavement of her satellite states. Europe was still recovering from the War and Japan had yet to achieve the prominence she would in the next couple of decades. However, the ensuing years saw the U.S. mired in Vietnam, a war eventually lost. OPEC flexed their muscles, removing controls on oil, humbling the mighty United States. The victory of the Cold War brought with it the elimination of the balance that had kept the world safe for four and a half decades and had the effect of removing the “white hat” worn by America for so many years.

In 1962, the U.S. economy was thirteen times larger than that of China; today it is less than three times. The world is different. While we remain the largest economy in the world and still have the greatest military, it is necessary that we view the rest of the world as partners, not ones over which we have dominion.

As we all know the future is unpredictable, but we can be certain that disruptions will occur. Growth is never even. It won’t be for us and neither will it be for those emerging countries we most admire today. Perhaps the greatest asset we have today is the fact that we seem to look to the future more skeptically and not with the blind faith we exuded in those distant days when I boarded the bus in Boston on August 11th, 1962.