The stock market is well on its way to potentially repeating the market from 1965 to 1983 – 18 years of an indexed 0% market return. We have all the ingredients. Here was the situation by the early 70’s:
- We were ending an expensive war
- We were spending massive federal money to create a ‘great society’
- We were massively intervening in financial markets
- The stock market was flat after the end of a long bull market
- Inflation was on the way
These things have a big effect on stock prices. When the American people forget that the government has no money, we vote for federal government to solve all sorts of problems. The problem we create when we do that is the problem of finding the money. The money has to come from somewhere. There are only two choices of where to get the money: 1) higher taxes and/or 2) print the money. Both choices are bad for stocks.
Higher taxes take the money from upper middle class and rich citizens. These are the people who have enough extra cash after personal expenses to have big bank accounts, big bond accounts and big investing accounts. Higher taxes mean the money in those accounts goes down to pay the higher taxes. That means some stocks get sold, bonds get sold and cash is withdrawn from banks.
In addition, cash for starting new businesses and investing in growing businesses has to come from the upper middle and rich classes of investors because those investments are riskier than investing in businesses that are established. Many startups and early stage businesses fail and all of the investor capital is lost. The cash to invest in those businesses is only available from investors who have plenty of money to burn. As taxes go up on those citizens, this is the first money that dries up. Since these are the businesses that can create new jobs, job creation stalls and consumer spending shrinks. And stock prices go down.
And then what happens? Well, the politicians react predictably and make it worse. I’ll tell you about that in the next post.
Now go play
