(This is Part 1 of a series.)
I believe that there is an historic shift going on in the financial world that will affect everyone reading this. In particular, I believe that it will affect your ability to take care of yourself in the coming years.
In the times that I believe that we'll be going through, it is probable that people will be panicking at certain points. If you can take care of yourself you'll be able to be an oasis of emotional and financial stability in the midst of turmoil.
In general, during these times, people will not understand what is going on. They'll just know that they're hurting.
If you can understand what is happening, and use that understanding wisely, you'll be able to be a source of emotional and financial support to those around you—family, friends, neighbors, associates. This will be quite crucial during these times.
There are three basic markets that I often refer to as the
interest-rate markets, because they are highly dependent on interest rates. Those three markets are stocks, bonds and real estate.
During the period of time from 1966 to 1980 the interest rate markets did not fare very well. In 1966, for instance, the Dow Jones Industrial Average was at about 1000. Yet in March of 1980, 14 years later, it was 730.
And of course, that's before the effects of inflation. In real terms, adjusted for inflation, the DJIA did much worse.
During this same time the price of physical commodities —gold, silver, copper, crude, heating oil, gasoline, corn, wheat, soybeans and so on—rose strongly.
The price of corn, for instance, quadrupled during this period. The price of oil tripled. Gold went from $35 an ounce in 1966 to $875 an ounce in January of 1980. Silver went from about $1.50 an ounce to almost $50.
It was a time of inflation. The Consumer Price Index (CPI) eventually went over 15%. And since interest rates are highly dependent on the rate of inflation, they too—both long-term and short-term interest rates—eventually went over 15%.
In contrast, the period from 1980 to the new century was a good time for the interest rate markets—stocks, bonds, real estate. Both the inflation rate and interest rates were falling all during this time, and the interest-rate markets benefitted enormously.
For instance, the DJIA went from 730 in 1980 to 11,750 in early 2000. The Nasdaq went from less than 100 to over 5000 during this period. Both real estate and bonds rose steadily during the '80s and '90s decades.
Meanwhile, during this time of declining inflation and interest rates, physical commodities also declined. For instance, gold dropped from $875 an ounce in 1980 to $255 an ounce in 2001. And silver dropped from $50 an ounce in 1980 to $4 in 2001. Crude oil had declined to less than $12 a barrel by 1998. And so on.
Because of the stock market drop from early 2000, the Federal Reserve Board steadily lowered short-term interest rates until they reached a 45-year low of 1% in 2004. Naturally, bonds and real estate soared and the stock market partially recovered.
As detailed elsewhere in these pages, a gigantic money and credit bubble which had expressed itself in the stock market in the run-up to 2000 now expressed itself in the bond and real estate markets.
But the writing is on the wall for the interest-rate markets because short-term interest rates have been rising since June of 2004. And long-term rates appear to have reached a bottom in early February, less than a month ago, and have been rising since.
Thus the bond market has probably peaked in the past month (it's now March 4, 2005). Real estate's peak is probably not far behind, if it has not already occurred, since mortgage rates—which are heavily dependent on rates in the bond market—have also begun to rise.
Thus the interest-rate markets—stocks, bonds and real estate—are probably all peaking this year. From there, I believe that they will go into relentless declines for 10 to 15 years, and perhaps longer.
These relentless declines will of course be punctuated periodically by sharp rallies, since markets tend to move in a zigzag fashion, but those rallies will almost certainly be only temporary respites in the larger decline.
(This is the end of Part 1. Go to Part 2.)
—jim sloman, 03.03.05
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