If Something Cannot Go On Forever, It Will Stop.

The US Economy is in uncharted territory. All non-essential businesses have shut down to curtail the spread of virus, the Federal Reserve is flooding the market with cash by buying just about anything it can get its hands on, the government is passing trillion dollar stimulus packages to support the populous, unemployment is rising rapidly, bond default rates are increasing, there is political unrest as to when the economy can be restarted, social distancing is here to stay until we have a vaccine for coronavirus, consumer sentiment is shifting from spending to saving, many sectors such as oil and gas, retail, hospitality, and airlines are in a slump, recession is here, and yet the US stock market keeps rising.

It astonishes me when I see the stock market act irrationally by weighing a glimmer of hope more heavily than the concrete data on hand. At the same time, billionaire investors like Warren Buffett and Ray Dalio have warned us multiple times in the past that such mania can go on for a long time; All we can do is think objectively. Herbert Stein, an American economist, expressed Stein’s law in 1976 as, “If something cannot go on forever, it will stop.” Said differently, trends that can’t continue, won’t.

I recently re-watched Warren Buffett’s 2001 lecture to University of Georgia’s Terry School of Business, where Buffett talked a great deal about the nature of the stock market. In this week’s blog post, I will briefly go over the historical moves in the stock market that Buffett outlined in his lecture, and try to connect it to what we are seeing today. Let’s dive in.

  • 1900-1921
    Dow Jones Industrial Average (DJIA) went from 68 to 80. In these two decades, the stock market barely moved. Less than 20% increase in 20 years.
  • 1921-1929
    DJIA went from 80 to 381. This was the roaring 20s. The stock market was up close to 500% in less than 10 years.
  • 1929-1948
    DJIA went from 381 to 177. In this 19 year period, the stock market prices were essentially cut in half.
  • 1948-1965
    DJIA went from 177 to 970. In this 17 year period, the stock market went up about 450%.
  • 1965-1981
    DJIA went from 970 to 972. In this 16 year period, the stock market was stagnant. It barely moved.
  • 1981-2000
    DJIA went from 972 to 10,788. In these 2 decades, the stock market went up more than 1000%.
  • 2000-2010
    DJIA went from 10,788 to 10,741. I would say in these 10 years, the stock market stayed pretty stagnant for most of the time.
  • 2010-April 17, 2020 (Present)
    DJIA went from 10,741 to 24,242. In these 10 years, the market went up more than 225%, which was primarily fueled by the Fed’s Quantitative Easing and cheap access to credit.

In this past 120 years, we had about 66 years of stagnation and 54 years of big bull market runs. While one can never time the market, he can certainly be objective about his analysis. The underlying economy and the stock market do not necessarily have to be correlated all the time. It is important to understand that a bubble is created when investors are overconfident about companies, which actually have no prospects of making money.

We are at a junction where a lot is changing, and where there is change, there is opportunity. We have the Fed on one hand that has rigged the game by buying corporate debt, there is the government on the other hand taking on tremendous amount of debt to provide fiscal stimulus. I believe that holding onto US Dollar might be a safe investment for the time being, but I suspect dollar to lose value once the USD “hoarding” has stopped. The Fed has propped up asset prices to achieve its mandate of “stable prices” with credit creation. I align my thinking with Ray Dalio, who believes that there is going to be a big shift in wealth when we start this new economy, after the balance sheet and income sheet damage is done. You can listen to his interview here.

Now, Mr. Market might look at the future and think that we will have a cure and a vaccine for coronavirus soon, so the stock market is bound to go up from the current levels. Everyday he comes to you and gives you higher stock prices than what he quoted you the day before. Human beings have the tendency to look at the rear view mirror and thinking, well, the stock prices have been going up for the past 12 years, so they are bound to keep going up. You might think that every time you pass up on Mr. Market’s quotations, you are losing valuable buying opportunities. It is at this point, as value investors, we have to think objectively and not give way to our emotions. As Warren Buffett said in his 2001 lecture, “If you can stay objective throughout the waves, if you can detach yourself temperamentally from the crowd, you get very rich. Things can go on for a long time that don’t make sense but they do come to an end.

In conclusion, in Stein’s own words, “If something cannot go on forever, it will stop.


Hope you learned a little and found this blog post helpful. We talked about the current economic and stock market conditions. We also looked at the stock market fluctuations over the past 120 years. As always, you can sign up for our free mailing list here.  You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!

Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.

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