The Daily Reckoning PRESENTS: The market is still crazy in many respects,
but Chris Mayer assures us that opportunities remain...
INVESTING IN THE BUBBLES OF TOMORROW- TODAY
Christopher Mayer"Mass delusions are not rare. They salt the human story."
- Garet Garrett, A Bubble That Broke the World (1932)
Every generation has its "New Age" or "New Era." They are catchphrases that liberally salt financial history. Even in the 1930s, during the Great Depression, one can make a case that a New Era of innovation was afoot. Social historian Frederick Lewis Allen, in his retrospective book on the 1930s, Since Yesterday (originally published in 1939), gives us ample evidence of exactly that.
"There were visible promises," Allen writes, "if one looked about one, of what might prove to be a new industrial age." He writes about sleek new trains made of duralumin and stainless steel. By 1936, there were some 358 cars in operation or in construction, and they attracted crowds that marveled at this "symbol of the new America" wherever they went. Moreover, these cars were air conditioned - as were an increasing number of restaurants, shops and movie theatres.
The automobile manufacturers were turning out cars with sweeping curves and stunning bulges. They were streamlined, more efficient, more comfortable and faster than any cars before them. They drove on new highways with cloverleaf intersections and overpasses, zipping about to different towns, when before it would have taken far longer.
Ocean liners were setting new speed records and also topping previous marks for size. And what about airplanes? "The great silvery Douglas DC-3 of June 1936," Allen tells us, "had a cruising speed of 200 mph [compared with] the 100 mph transport planes of 1932."
People would take tours of Rockefeller Center in New York, one of the impressive skyscrapers to rise in the United States during the 1930s, and wonder at the gleaming new materials and dreamily imagine the skyline of a new metropolis.
The innovators then were not software developers or computer manufacturers. They were chemists and metallurgists producing new and lighter materials, including steels; mixing nickel, chromium, tungsten and other metals; and creating plastics and new fibers.
People fell in love with technology and the world of tomorrow, as they had in years past and as they still do today. The hunt for the next big thing and the never-quenchable thirst to get rich quick propelled investors to spin out great theories of what the future would look like. But unlike armchair philosophers and hobby futurologists, they backed these visions with their money.
"Was there, perhaps, some new machine, some new gadget, the furious demand for which would set in motion the boom," Allen wondered, "something like the automobile or the radio?" In the 1930s, investors thought they had found it in, of all things, prefabricated housing.
According to Allen, a bacteriologist named Arthur Sherman built a house on wheels that could be pulled behind his car when his family went on vacations. It attracted a lot of attention, and he built more and displayed them at the Detroit Auto Show in 1930. Before long, he was making them on a larger scale, and hundreds of other manufacturers jumped in. People started living in them year round.
By 1936, the number of these trailers surged to 160,000 by some estimates. Perhaps the peak was reached when, on New Year's Day, Florida observers counted them entering the state at the rate of 25 per hour. Economist Roger Babson declared that half of the population would be living in trailers within the next 20 years.
What a vision, Allen notes, "provided one did not focus one's attention on real estate values, taxes, steady jobs, schooling for the children, sanitation problems and other such prosy details."
By 1937, the boom collapsed under the weight of a saturated market and misplaced optimism. It was caught, too, in the context of a larger economic crisis. There was also a big break in the stock market, cutting the Dow Jones Industrial Average in half, from a high of 195 in March 1937 to sickening low of 97.46 by March 1938 - so much for the Next New Thing.
"The history of the stock market is the history of forgetting," wrote that market sage F.J. Chu in his book, The Mind of the Market. Anecdotal evidence is seen in how soon the 1937-38 collapse followed on the heels of its more famous cousin, the 1929-32 debacle. How quickly investors forget; how wicked is the bear market at work.
Financial survivors of the 1937-38 meltdown were like the survivors of other panics - they had cash; were not overburdened with debts; were patient; and stuck with the tried-and-true, having shunned the latest investment fads.
Many of the investments in the new technology of the 1930s failed to deliver profits to investors, at least immediately, just as the billions poured into technology in the late 1990s never saw much of a return, if any.
One would think that the slash-and-burn market of 2000-02 would have quenched the speculative fires of the investing public a bit. Not so, says Fred Hickey, editor of the Hi-Tech Strategist and recently featured in Barron's annual roundtable. "I've been following tech stocks since the late 1970s," Hickey began. "I've seen valuations this high only one other time, 1999 and 2000." Well, we know how that party ended.
Valuations! Here Hickey introduces the nub of it all. Technology is not always a poor investment, of course. It is poor at a price - today's prices, specifically. But it's not just tech stocks that are expensive. Much of the market is pricey. After all, for the last 20 years, the total return on stocks, as measured by the S&P 500, has averaged 18.5%. The longer-term historical average is about half that. With valuations on the high end compared to historical levels, it is not unreasonable to expect lower-than-average returns going forward.
In this environment, those verities of investing become even more important - cash, low debt levels, patience and the tried-and-true - because they will see you through any meltdown and sow the seeds of the next successes. In the ashes of past prosperity, the future's fortunes tend to grow.
for The Daily Reckoning
26 February 2005
Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is also the editor of the Fleet Street Letter.
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