Where is the market going? A huge number of our brilliant strategist bearing sheep skins from prestigious graduate schools relate to us that we are on the verge of a major crash. The Dow Jones 30 Industrials are paying the lowest dividends as a percent of the price of stock in history. Price earnings ratios of the same stock are the highest in history. The stock market is 7 times the level it was 15 years ago but the Gross Domestic Product has only doubled.
An equal number of these pundits tell us the market must continue to go up; however, “exercise caution”. “There will be dips and turmoil, and setbacks from the unstable markets in the Pacific Basin, from the displacement in the Soviet Empire, from the problems in the Middle East, and from the uncertainty surrounding the European Economic Community. But while the market may slide sideways temporarily, the long term outlook is bright”. They go on to point out the enormous amount of money going into mutual funds. This country is relatively isolated geographically from problems around the rest of the world, and when problems occur around the rest of the world, money finds its way to America. American stock markets are the most stable, so foreign money has always and will always be invested here, etc, etc, etc. All of those things are correct, but nobody has definitely told us what is going to happen and why it will happen based upon history.
Here goes.
At the turn of the century the Dow Jones Industrial Average will be between 10,000-12,000. Here are the reasons why. First of all, the readers of this paper should pat themselves upon the back. Primarily they are experienced, successfully retired grandparents who insured that the baby boomers would be well educated. The baby boomers are the best-educated, most enlightened generation in history. They are intelligent, competitive and very clever. They are also enormously successful in passing on to the next generations the need for solid education, and they have been successful in creating jobs and generating cash in our economy. They are now becoming the world’s leaders, and except for some indiscretions at the big house on Pennsylvania Avenue, they have an excellent sense of values. Thank you, successfully retired citizens, for leaving that legacy.
Second, the power of our ideas around the world has never been more influential. Communications have brought to the rest of the world the fact that freedom and capitalism work. Freedom and capitalism are now recognized as ways to extract one’s family from poverty and ignorance. America is looked up to and admired today like never before, and the free world is by and large at peace.
Third, in spite of the cut back of our military, our military power is awesome, and there is no close second in the world. The projection of military power has been and always will be good for business regardless of whether or not the society is free or not free. Fortunately we are free, which means that our goodness can spread to the rest of the world. No other country is going to challenge sea-lanes shipping the world’s goods where American ships are involved. Since we trade all over the world, that includes sea-lanes around the globe. No country is going to kidnap Americans, or hold us hostage any other way, without consequences so severe that it will not be worth their trouble. If we do not project upon them our military might, the old fashion way of American embargoes can be brutal.
Fourth, American corporations function all over the world and provide product and production leadership all over the world. The American dollar is the only universally accepted currency, which is why the European Economic Community is so anxious to come out with their own currency. They want that currency to compete with the dollar. It never will.
Fifth, more than 50% of the graduate students in this country are not Americans. People come to the United States to be educated because they believe in our system and they want to learn more about how America works. They take what they learn back to their own countries. With knowledge gained at American universities, the social structures, educational systems and economies around the world all benefit from the great American culture based upon free choice and a free economy. And English is further solidified as the world’s educated and commercial language.
That’s leadership!
While the last point has nothing to do with leadership, there is another solid reason why the stock market must march upwards and interest rates must stay down. Federal government spending accounts for between 20%-25% of our Gross Domestic Product. One of the biggest expenditures in the budget is the interest expense upon $5,500,000,000,000.00 of debt. That interest cost presently comes to about $250 billion dollars of federal expenditures each year. In spite of what we heard during the “State of the Union Speech”, our national debts are going up more than $100 billion dollars every year. The budget is only “balanced” as a result of an approximate $100 billion dollar surplus paid into social security each year. The government borrows that surplus for current account spending not associated with social security instead of investing the excess funds in an effort to help “fund” the future costs of social security. So, financing debt at the turn of the century of approximately $6 trillion dollars at 5% will result in interest expenses of $300 billion dollars a year. That is figuring an interest cost of 5% (it has actually varied between 4.5 and 5.5% the last few years). Washington and Wall Street (does anybody believe they are not in bed with each other?) must maintain low interest expenses simply in order to keep the federal budget from exploding. A dramatic increase in government spending would result in the stock market going down rapidly which in turn would result in many failures on Wall Street. Such failures on Wall Street would have a ripple effect throughout our economy, and throughout the world, that could create a depression so severe it likely could result in the upheaval of many governments. Washington and Wall Street, therefore, will manipulate the economy through the Federal Reserve System so that interest costs will remain low. While that’s not leadership, it is reality. Furthermore, that may be the single greatest reason that interest rates will remain low and the market will remain up.
So don’t worry. Be happy and enjoy this huge bull run.
George W. Rauch
March 1998
