2002-6: Back to Normal, a “Normal” We Haven’t Seen Since 1965

During this period, inflation is stable at about 2%-3%, and has averaged 2% for the past ten years. Most industries have ample capacity. This is “normal”-a normal we haven’t seen since 1965. In a “normal” economy, how well a company does (and therefore, how well its stock does) depends on how well it is run.

Short-term variations in the market will always be driven by hype, hope, and fear, but the long-term investor can go back to choosing stocks based on company performance, price, and value.

When some people read the above, they are concerned that history is going to repeat itself and we will have the same rising inflation and poor stock performance that we saw in 1965-80. But that is like expecting a depression after WWII because we had one after WWI. The situation after WWII was not the same as after WWI, primarily because after WWII the public (and therefore the government) feared another depression and took actions to prevent it. Likewise, because we have experienced the inflation of 1965-80, we are sensitive to the problems of inflation. Today, we are not going to inflate the money supply because we still fear inflation. In 1999, Alan Greenspan all but said that he would take a recession rather than inflate the money supply. And he did! In 2004-06, the Fed again raised interest rates for the express purpose of slowing the economy and keeping inflation under control. When people are worried about something, they, and their governments, take actions to avoid it.

When we look at the past, we must remember that history seldom repeats itself exactly. We cannot extrapolate the past in its simplest terms and expect to predict the future. Elements of history are relevant today, but we must understand the past in context to understand its implications for the present.

2002
President George W. Bush singles out Iran, Iraq, and North Korea as an “axis of evil;” the Bush administration announces a five-color code system to alert Americans on the danger level posed by terrorists.

Kmart, the third largest U.S. discount retailer, files for bankruptcy protection.

Arthur Andersen is convicted of obstructing justice by shredding Enron-related documents in a verdict that boosted prosecutors’ efforts to get to the bottom of the Enron scandal.

With $107 billion in assets, WorldCom files for Chapter 11 bankruptcy, the largest U.S. bankruptcy ever. (The number-two U.S. long-distance phone company said it discovered $3.8 billion in improperly booked expenses.)

The U.S. trade deficit climbs to $35.9 billion, the highest on record.

John Allen Muhammad, an army veteran, and John Lee Malvo are arrested near Frederick, Maryland, in connection with the sniper shootings that left 10 dead and three wounded.

The U.S. Congress gives President Bush authorization to use armed forces against Iraq.

After shutting down, West Coast dockworkers and shipping lines reach a tentative six-year contract.

World AIDS Day marks 42 million HIV-positive people around the world, with 75% in sub-Saharan Africa.

First-class postage rates increase from 34 cents an ounce to 37 cents an ounce.

2003
Inflation is stable, averaging 2% for seven years; long-term Treasury bonds yield 5%; and average P/Es (price-to-earnings ratios) for equities are at 17.

The U.S. Labor Department reports that unemployment is at 8.6 million (6%), an eight-year high; President Bush signs an emergency extension of federal unemployment benefits.

Space shuttle Columbia breaks apart in flames over Texas, killing all seven astronauts just 16 minutes before they were supposed to glide to ground in Florida.

On March 20, the U.S.-led ground war in Iraq begins; a “shock and awe” strategy is planned. On May 1, President Bush announces, “Major combat operations in Iraq have ended.”

The U.S. Congress gives its final approval to $330 billion in new tax cuts for families, investors, and businesses, accelerating income-tax-rate cuts, reducing federal taxes on stock dividends, and boosting the child tax credit by $400 per child.

California’s first statewide recall election ousts Gray Davis and lands actor Arnold Schwarzenegger in the governor’s office.

The U.S. Federal Reserve cuts short-term interest rates by 1/4%; the new 1% rate is the lowest since 1958.

The last Concorde flight takes off from London’s Heathrow Airport on November 26.

2004
A national monument to the 16 million U.S. men and women who served during World War II opens to the public in Washington D.C.

In Madrid, al-Qaeda claims responsibility for a series of bombs, blowing apart four commuter trains and killing 190 people and wounding over 1,450.

The United States hands over power to Iraqi interim government; Iyad Allawi becomes prime minister.

Pilot Mike Melvill steers the SpaceShipOne rocket plane skyward, soaring 62.5 miles above Mojave, California to become the first private-sector astronaut.

Chechen terrorists take almost 1,000 schoolchildren hostage at an elementary school in the Russian province of North Ossetia. Attackers force hostages into a gym rigged with explosives. Over 300 people die; more than half are children.

Hamid Karzai is elected president of Afghanistan during the country’s first presidential election; millions of Afghans cast votes despite the threat of Taliban violence.

President George W. Bush is re-elected for a second term in the White House.

A massive earthquake near the Indian Ocean island of Sumatra sparks a wave of deadly tsunamis, causing one of the worst natural disasters in living memory.

2005
In January, millions of Iraqis vote in their country’s first free election in 50 years.

Pope John Paul II, whose papacy was marked by his efforts to end communism, dies on April 4; German Cardinal Radzinger emerges as Pope Benedict XVI.

On July 7, terrorists detonate bombs in London’s crowded subways and one double-decker bus, killing 56 people and injuring another 700, the largest attack on Great Britain since World War II.

Hurricane Katrina slams into the Gulf Coast on August 29, causing massive damage to New Orleans and the coasts of Mississippi and Alabama. An estimated 1,300 people die; damages total $150 billion.

Riots break out across the suburbs of Paris, triggered by teens, frustrated by years of high unemployment.  One person is killed and 126 police and fire personnel are injured; nearly 9,000 cars and at least two buildings are set ablaze.

Muslims in India’s Kashmir region go on strike, closing schools, shops and businesses, in protest of newspaper cartoons published in far-away Denmark depicting the Prophet Mohammed. 

The continuing threat of avian or “bird” flu requires China and other nations to impose more rigorous measures to contain the lethal virus.  Nations around the world scramble to assemble viable containment plans and amass stockpiles of antiviral drugs.
2006
The conflict in Iraq gets bloodier and more entrenched. A vicious skirmish erupts between Israel and Lebanon. A war drags on in Sudan. A tin-pot dictator in North Korea gets the Bomb, and the President of Iran wants to go nuclear too.

The compendium of information known as “Wikipedia,” the people’s video network “YouTube,” and the online metropolis “MySpace” emerge as seminal forces in the ever-evolving World Wide Web.

Leading astronomers declare that Pluto is no longer a planet under historic new guidelines that downsize the solar system from nine planets to eight.

Bosnians vote in historic general elections that will choose the first government to run the country without international supervision since the end of the 1992-95 war.

Democrats sweep elections in both the U.S. House of Representatives and the Senate.