Long Term Market Performance
of the
Dow Jones Industrial Average
and where do we go from here?
Can America deal with it's financial crisis and burdening debt load, and will we end up like Japan, and experience 20 years of contraction?
80 Years of Performance
In December 1928 the Dow Industrial Average was at 300, after 50 years the market reached just over 900 in December 1980, or up 215%, an average of 4.31% per year. Then in the early 1980's America discovered financial leverage, which began with the LBO's (Leverage Buyouts) of the 80's. Due to the LBO's and concentration on short term profits, the market then exploded in the 80's to reach nearly 3,000 by the end of the decade, returning another 200% profit over that 10 year period. As if we didn't learn our lessons of the danger of leverage, the 1990's returned an even greater 250% due to a continued mindset of greater leverage. America leveraged itself, with our National Debt growing to record levels, our Corporate Debt levels growing at a similiar pace, and our Household Debt growing even faster. America was learning to live off borrowed time and money, which clearly was unsustainable. There is a clear correlation between our market returns, and our borrowings. The only problem is that formula is unsustainable, and 2007 became the end of the line for living off of borrowed money.
The big problem America has now is we still have all of this debt outstanding, with a significantly declining market environment, and a deminished ability to repay our financial obligations. The National Debt now stands at nearly $11.0 trillion, with expectations of growing nearly $2.0 trillion 2009-2010, and no real prospects of the United States ability to reduce our debt in the next decade.
In addition, Households continue to be overleveraged. One of the charts that I find interesting is a graph of Household Debt to Gross Domestic Product (GDP) for the past 80 years. In this graph, we see that American Consumers and Households have clearly overleveraged their personal wealth. Just after the Market Crash of 1929, Household Debt to GDP was around 37%, and due to the crash, Americans were forced to use their equity, leveraging their homes and other assets to borrow and sustain their normal living expenses and as a result the percentage of Household Debt to GDP grew to just over 55% by 1933.
Over the next decade, American's focused on reducing their leverage (borrowings), began saving, and reduced their leverage to nearly 10% in the mid 40's. Then the great generation of borrowers began!! From 1945 for nearly 20 years, Americans grew their debt as the Economy grew and the WWII ended. We again reached nearly 50% by 1965 and sustained that level for another 20 years, but rather than realize that the level of debt being carried by American's was unsustainable, Congress, Wall Street, and Banks, found a way to create credit for the Consumer. With Credit Cards, Auto Loans, Mortgages, and Second Mortgages, American's proceeded to borrow to 100% of GDP by 2008!!! Clearly, a level that is unsustainable!! Although that level has declined slighly since reaching that 100% level, if GDP continues to decline, as most Economist Project, the percentage could easily rise above that level again soon. We may be facing decades of deleveraging, which may be the best medicine for American's after enjoying a spectacular growth in their standard of living over the past 50 years.
I believe our greatest challenge is balancing the need to extend credit with the need of households, companies, and the United States of America to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, as seen in the graph above, the prospect of household, corporate, and national deleveraging is sobering. I believe the answer is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems, as well as a well managed Congressional vision that stops unnecessary spending and a real focus on our strategy to pay down our National obligations, including Debt, Social Security, and other social programs.
