Recently, I revisited J. Anthony Boeckh’s book The Great Reflation, which was written in 2010 and is a thorough, well-written analysis of the long-run cycles experienced by the U.S. economy and the affects of financial crises and monetary policy on the stock market.
Back in June, I presented a summary of Boeckh’s conclusions in this column. Many of his points, based on a non-political historical analysis of business and stock market cycles, have come to fruition. (See “Breakdown: U.S. Economy and Its Cycles in 18 Brief Points.”)
Here are Boeckh’s key top-10 conclusions:
1. The global financial system will always remain flawed and subject to price inflation and bubbles, so long as it is based on fiat paper money. All anchorless fiat money systems are destined to suffer inflation and instability.
2. Stock market investors will be playing a cat-and-mouse game with the Federal Reserve for years to come, a problem caused by excessive private and public debt.
3. Deleveraging of the private sector bodes well for the transition process to the next long-wave cycle (2015 or later).
4. In the short term, deficits and extreme monetary expansion help the private sector repair balance sheets, but they cannot raise the standard of living for the average person.
5. Gold is a crowded trade (in the context of 2010), but is useful as an insurance/inflation hedge in portfolios. Gold is an emotional purchase. Financial/investment demand for gold differs greatly from consumption.
6. Long-term returns from commodities as an asset class are unreliable, and they trade in manias.
7. Any effective reform of the global monetary system anytime soon is unlikely. Greater price inflation is coming.
8. The stock market has proven to do well after long-wave troughs following major financial crises.
9. The long run in this investment world no longer exists. Wealth preservation and portfolio safety are critical.
10. Tactical asset allocation is the key to wealth creation and preservation.
Boeckh’s research concluded that the long-run inflation-adjusted return of the stock market since 1929 (including dividends) averaged just less than seven percent annually.
In my opinion, point number four in the list above perfectly describes what’s transpired in this stock market over the last few years. Extreme monetary stimulus works in providing liquidity and price inflation to financial assets like equities. The stock market appreciated substantially since 2009, but the wealth effect from it has yet to raise the standard of living for the average person.
And if decisive asset allocation is the key to wealth creation and preservation, the time must be getting very close for taking some money off the table. Or at the very least, with interest rates unfavorable for cash or bonds, risk exposure should be reviewed. The speculative fervor that exists in the stock market today will dry up when monetary policy changes.