John Templeton, one of the great investors, said of secular bull markets, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Secular bull markets continue for decades: 1941 to 1966 and 1978 to 2000, for example. I believe it is important to know the “mile high” view and not to get lost in the short term swings. There is no shortage of pundits who predict coming crashes. Andrew Roberts of the Royal Bank of Scotland stated, “Think the unthinkable – the market is going off a cliff”. That was in 2010. That is not unlike James Dale Davidson, who predicted there would be “blood in the streets” – another Great Depression. He claimed that would happen before 1990. Of course, he was writing in 1987.
Standard Charter Bank, a large bank based in London, released a paper in November 2011 that states that we are in the midst of a “worldwide economic super cycle.” In my opinion, it is the mile high view which is still valid today and probably valid for the next decade. A super cycle is “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.”[1]
They identified two previous super cycles. The first super cycle took place from 1870 to 1913. The second ran from 1945-1973. The next super cycle has begun, and it may run for another 30+ years.
The first super cycle, from 1870-1913, was driven by the industrialization of the United States. World GDP grew at over 1% annually on average compared to the rate in the 50 years preceding the super cycle. Nevertheless, it was not an easy period. From 1874 to 1907 there were six financial crises like 2008. Think about it! Half the years from 1874 to 1907 were similar to what we experienced in 2008. It was a difficult time. There had been financial crises before 1874, in 1792, 1819, 1837, and 1848. Each time either the US government, the Bank of England, or the Bank of France bailed out the US banking system. But in 1874, the decision was made not to bail out the banking system again. The arguments against a government bailout of the banks were similar to the ones we heard in 2008 – to let businesses fail and allow the free market to operate. It did not work. It was finally in 1907 that the US government created the Federal Reserve to be the central bank and lender of last resort. On the other hand, in 1870 approximately half the US working population was employed by agriculture. As the financial crises wiped out the farmers and unemployment soared, those workers moved to the cities and the industrial age followed as new businesses were created. The steam engine, gas lighting, and textile machinery, along with other technology, accelerated economic growth in the United States. In 1870, the United States was the fourth largest economy in the world (9% of world GDP). By 1913, the United States was the largest economy accounting for 19% of world GDP.
The second super cycle, lasting from 1945 to 1973, was driven by the post-war reconstruction of Europe. Like the first super cycle, this one was also driven by wide-spread adoption of new technology. This time, cars, aviation, electronics, and plastics. The Japanese economy grew from 3% of worldwide GDP to 10%, and surpassed Germany to become the second largest economy in the world for a time. The Asian Tigers, Korea, Taiwan, Hong Kong, and Singapore, experienced high growth as well.
The new super cycle, according to Standard Chartered, will last through 2030 and is driven by the emerging economies. Global trade, urbanization, high investment rates, rapid adoption of new technologies, and urbanization will accelerate world growth and underpin this super cycle. Perhaps most importantly, a middle class is emerging in these nations, taking many from subsistence to consumption and benefiting world GDP with their purchasing power. Estimates are that by 2030 93% of the world’s middle class will live in those emerging nations.
I had a client in the late 1980s and early 1990s who was a plant manager for American Standard in Tianjin, China. As I recall, the plant employed over 1,000 workers making ceramic toilets, bathtubs, and shower stalls. When the workforce was employed, not one of them had ever seen, let alone used, a ceramic toilet or bathtub. Today, the people of China are buying and using smart phones, cars, and lattes. Today they own houses with those toilets and bathtubs and showers.
In both of the first
two super cycles, there were companies and industries that were big winners and
big losers. There were smaller cycles within the super cycles. There were
recessions and difficult times along with the good times. I believe that as we
go forward over the next 10 to 15 years, we will experience not only the super cycle
but greater swings in the economy and in the stock markets. I have mentioned in
previous emails that I believe we will see a significant increase in the DOW
Jones and S&P 500 indexes over the next decade. It will not be an easy
time, but it should be, in my opinion, a good time for creating and preserving
wealth. It will be important to be in those companies that will benefit from
the super cycle and avoid those which will become obsolete.
Notice in the chart above how there is a general pattern from 1896 to 1929 (encompassing the first super cycle), and the general pattern of 1941 to 1966 (similar to the 1945 to 1970 super cycle). The patterns of the market and GDP are not exact. But similar for long periods of time.
There is reason to believe this secular bull market still has 10 to 15 years to run. Don’t miss it. I remember soon after I licensed in June 1986 that I talked several times to a prospect, The Dow was over 1,700 but he insisted he was waiting for the DOW to drop to 1,373. After a couple fruitless calls I quit calling him. The DOW continued to rise to over 2,400 and then on October 19, 1987 dropped 508 points to 1,738. It never got to 1,373. It continued from 1,738 to over 10,000.
Don’t miss this secular bull.
[1] Lyons, Gerard. “The Super-Cycle Report.” Standard Chartered Bank. 2010. Pg. 1, Website. https://www.sc.com/id/_documents/press-releases/en/The%20Super-cycle%20Report-12112010-final.pdf
