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Chapter 1: The Investment Opportunity of a Lifetime
Uncanny Parallels with the "Tech Wreck" of 1919-1922 and the Roaring Twenties "Bubble Boom" That Followed
The initial rebound in the stock market in 2003-2004 after the crash in October 2002 is a harbinger of the next great bull market in stocks and the last stage of the greatest boom in history. This should not be a surprising forecast to our past readers, given our long-standing forecasts that the massive baby-boom generation would drive an unprecedented boom into 2008 or 2009 with their predictable spending and productivity trends. But it is crucial to understand that this is your last chance to profit from this extraordinary bull market that has raised more people than ever into the status of millionaire and affluent households. And the extreme crash of 2000-2002 makes the next stage of investment opportunities even more compelling! We are predicting that from the lows in late 2002 into around late 2009, you as an investor are likely to achieve as high or higher average annual compound returns than you did in the unprecedented bull market of the 1990s. How many experts, economists, and investment strategists are predicting that?
This may sound astounding in light of the incredible crash in technology stocks and the terrorist attacks on September 11, 2001. You might ask, "After this incredible bubble and crash, how could we even think of seeing such returns in the coming decade?" Even Warren Buffett and Sir John Templeton, two of the most successful long-term investment gurus, are predicting much slower growth in the economy and in stock returns for many years to come! Buffett claims that you will, at best, see low-single-digit returns for this decade, and Templeton claims you would be lucky to break even in stocks during this time period.
But first remember that we stood almost alone in predicting the incredible boom of the 1990s in The Great Boom Ahead, published in late 1992 -- when most people were nearly as pessimistic as now. After all, Bankruptcy 1995 was at the top of the best-seller lists at the time. We had just seen the extreme 1987 crash, collapsing housing prices, the S&L crisis, the Persian Gulf War, the collapse of Japan's economic, stock, and real estate bubble, the greatest government deficit ever, and a similar recession from late 1990 into mid-1991. Who would have thought that the 1990s could have seen greater stock returns and economic growth than in the 1980s? The truth is that every decade of this unprecedented boom has started out weak. Remember the early 1980s? The early 1990s? Most decades start by consolidating the strong gains from the previous decade before moving on again, due to a recurring corporate planning cycle that we will cover in Chapter 3.
We forecasted then that the decline in Japan, of which we were warning in the late 1980s, would continue and that America would see the greatest boom in history. We forecasted that inflation would fall to near zero and that we would balance the government deficit by 1998 to 2000. We said to "get ready"! But most people didn't realize the significance of the 1990s boom until the latter 1990s, just as that incredible expansion was increasingly due for a necessary consolidation to prepare for the next and greatest decade to come, just as occurred in the early 1990s, after the great 1980s expansion. The good news is that the fundamental trends we track and forecast have not changed despite the crash of 2000-2002.
We didn't title our early 1998 book The Roaring 2000s for nothing. We have been and are continuing to predict that this coming decade will be the greatest in history and will closely parallel the Roaring Twenties -- the last time a major technology revolution moved fully mainstream while a new generation hit the peak of its spending and productivity cycle. That decade determined the leaders in most industries and technologies for many decades, into the 1970s and beyond! This time the generation is much larger and the technologies are even more powerful. So we are saying "get ready" again, as we did in late 1992 in The Great Boom Ahead, and we have much more evidence for why the economy and the technology revolution will continue to boom, including why we saw such a dramatic technology crash in 2000-2002. That was just the end of the first phase of the acceleration of new technologies into the mainstream of our economy. And the 1990s boom created the second bubble in stocks, concentrating largely in Internet and technology stocks, to follow the first bubble, which peaked in 1987.
The second stage of the technology revolution is coming. The same "tech wreck" scenario occurred eighty years ago, between late 1919 and early 1922, when automobiles and many other new technologies were growing rapidly and hit the same 50% penetration point of adoption by consumers. The incredible boom that followed that extreme and extended crash were indeed the infamous Roaring Twenties! In fact, we have identified a four-year cycle and a decade pattern of stock movements that have recurred regularly for more than fifty years. After another key four-year cycle hit in late 2002, there is only one more cycle due in mid- to late 2006. Otherwise, the coast appears to be clear for another strong decade of expansion.
Did you realize that almost every decade sees recessions, consolidations, and stock declines in its first few years and that most of the gains are made in the second half of the decade? In the next chapter we will look at why we are still predicting a Dow as high as 38,000 to 40,000. We will give you a more detailed road map for how the bull market will unfold over the rest of this decade, in large-cap stocks, small-cap stocks, bonds, real estate, and international markets. We will look at the sectors of the stock market that are being driven by the demographic trends and technology revolution. But expect the technology sectors to accelerate strongly again and lead the stock markets from late 2004 or 2005 into 2009 or early 2010, just as they did from 1995 through 1999 and early 2000. Hence, even if you missed the great buying opportunity in late 2002, the best of the bull market is still ahead!
If you had bought stocks, and in particular auto and new technology stocks, at the bottom of the "tech wreck" in late 1921-early 1922, you would have seen gains of six times in the Dow, twelve times in the auto index, and twenty-two times in General Motors in just eight years. That was after a 45% crash in the Dow, a 70% crash in the auto index, and a 75% crash in General Motors that closely paralleled the crash of early 2000-late 2002. In fact, we will show that Intel's stock chart from 1992 to 2000 looked almost identical to General Motors' from 1912 to 1919. In late 1921-early 1922 it looked just like the beginning of the Great Depression. Unemployment hit 12% in the United States and 18% in Great Britain. There was deflation in prices for the first time in decades. Germany was about to collapse even further from hyperinflation in 1922 and 1923.
There was even the first modern terrorist strike: a bomb exploded on Wall Street in late 1920. There was an incredible reaction to new immigrant and ethnic groups, including the explosion of the Ku Klux Klan's membership to 5 million, or almost 23% of households, by 1924. The 1920s became the anti-immigration decade. But despite such extreme economic, political, international, and social conflicts, the Roaring Twenties saw the greatest bull market and decade of economic productivity and progress in U.S. history -- that is, prior to the 1990s and until now!
Economists now say, despite the initial rebound of the markets in 2003, that we have seen a bubble in the stock market and that the markets, especially technology stocks, won't see new highs for perhaps decades. We couldn't disagree more. This boom has been a bubble boom due to the extreme demographic, globalization, and technological advances driving it. The first bubble occurred from 1985 to 1987, but that was not a technology bubble. The recent one was even greater, from 1995 to 1999, and concentrated largely in the Internet and technology sectors. We see the next and final bubble accelerating from 2005 into 2009 or early 2010. And it is likely to become the greatest intermediate bull market and technology bubble in the last two centuries. This final bubble will likely be followed by the greatest depression in history -- at a minimum, the greatest downturn since the Great Depression.
We've been the most bullish forecasters and investment strategists since the late 1980s when we discovered some very simple, but potent new tools for predicting economic trends -- tools that economists largely reject because they are too simple and everyday people can understand them. We deal in the basic fundamentals of when we earn and spend money, are most productive as workers, borrow the most, invest the most, and even create inflation due to the expense of raising and educating our youth until their entry into the workforce. These are new statistics that have emerged from the Information Revolution which are highly quantifiable and widely used in consumer marketing -- but not in economics. What could be more fundamental to our economy than these basic, easy to understand, highly projectable trends? We find consistently that people readily understand this human, demographic approach to forecasting. Why? Because we all experience similar life cycles as we age!
We're not bullish just because we are optimists by nature. My mother would never tell you that I am an optimistic person! In 1989, we forecasted that the United States would enter a two-year slowdown in 1990 and 1991. We forecasted Japan would then decline versus the United States and Europe for more than a decade. In fact, we thought the stock crash of late 1990 would be worse than what actually occurred. We were also initially forecasting a Dow of 10,000 by the early 2000s, and that was an understatement -- although everyone thought we were crazy at the time! In The Roaring 2000s, released in April 1998 with final edits in late 1997, we forecasted that the Dow would correct to 7200-7600 by mid- to late 1998 (page 292). The intraday bottom was right in the middle, at 7400. And that's the area we gave for our strongest buy signal again in late September-early October 2002.
In The Roaring 2000s Investor, released in October 1999, we forecasted that the Dow was about to hit the top end of our valuation channel by late 1999 to early 2000 and that a sharp correction was due (page 26). On February 1, 2000, we warned in our newsletter that the Internet stocks were approaching a major top. In the April 1, 2000, edition of our newsletter we advised subscribers to start allocating portfolios out of technology and Asia (ex-Japan), more into health care and financial services. Despite the extreme correction that followed, the Dow on September 21, 2001, tested the bottom of our valuation channel and rallied modestly into mid-2002. We gave our first strong buy signal there at 8000-8200 on the Dow. But the Dow Channel was later broken in early July 2002, which gave us targets back to the 1998 lows of around 7400. The Dow finally bottomed at 7286 on October 9. Similarly, we forecasted in late 2000 that the Nasdaq could test its long-term trend line around 2100, and if that broke the next target was the 1998 lows of 1350-1400. That level was also finally broken and we were similarly projecting lows in the 1100 to 1150 range, which occurred at 1114 on October 9, 2002. Hence, we aren't averse to being bearish when called for.
But in our October 1, 2002, newsletter we gave our strongest buy signal ever! The reason we are projecting continued economic and stock advances into 2009 or early 2010 is that our forecasts are based on highly quantifiable demographic and technology trends and they are still pointing very strongly upward. Given the extreme stock crash and political events of 2000-2002, it is amazing that the economy stayed as strong as it did. That was due to continued strong consumer spending while businesses cut back sharply, which only proves how strong demographic trends affect our economy. As Warren Buffett has said, "Markets go up, and they go down." We agree in the short term, and the recent bubble and crash prove that. But we have found that the markets move in very predictable ways over the long term because of these fundamental trends.
Since the beginning we have been forecasting that this great boom would be followed by an extended decline from around 2009 or 2010 into 2022 to 2023, like past bear markets following the peaks in past-generation spending cycles. This occurred from 1930 to 1942 and from 1969 to 1982 in the United States. In the short term, we fully recognize that the stock markets and economy can take strong swings, even in bull markets. Hence, we clearly aren't always bullish! In fact, in Chapter 3 we will demonstrate some cycles that have explained every substantial stock correction over the last four to five decades. And three cycles converged between 2000 and 2002.
The good news again is that the path is clear for stronger advances until mid- to late 2006 before the next minor cycle hits. We then will very likely see a peak in this bull market between late 2009 and early 2010. By 2010, all of our critical analysis suggests that we will almost certainly see the beginning of a serious, long-term economic and stock decline that will be worse than the 1970s in the United States or the 1990s in Japan and could rival or exceed the Great Depression in the 1930s. That is the bad news. It is perhaps the most important insight we can give you in this book. There are investing and living strategies that will allow you not only to largely avoid this inevitable calamity, but also to profit from it.
Today we have a very different forecast from Warren Buffett and most experts, as we have since the late 1980s. By the end of this decade we still see the Dow hitting 35,000 to 40,000 and the Nasdaq advancing to around 13,000, and potentially as high as 20,000. Despite the initial strong recovery in late 2003 and early 2004, we see the strongest gains coming between late 2004 and 2009, especially from late 2004 into mid-2006 and from late 2006 into late 2009. It's clearly not too late to fully participate in the next and greatest bull market in history!
Why do we call this time the investment opportunity of a lifetime? Because the crash and slowdown of 2000-2002 represented an extreme correction and a natural stage in the rapid emergence of new technologies during an ongoing economic boom, much like the extreme 1987 crash and the aftershock in 1990. But this most recent correction was much more like the crash of late 1919 to early 1922 that led into the Roaring Twenties boom and bull market. And that was the greatest investment opportunity of the last century.
Here is an important point we have always stressed for investors. Not every major crash in the stock market is a great buying opportunity, and holding stocks for the long run doesn't always work out in real life. If you had bought the most prominent blue-chip stocks in late 1929, you would have suffered an 87% loss in just three years, still been down 80% thirteen years later, and have just broken even in 1953 -- twenty-four years later! Even if, much more intelligently, you had bought the Dow right at the bottom of the greatest crash in U.S. history in 1932, you would have seen lower than average returns of about 8% annually into 1942. Only then did the next great bull market start.
If in the next great bull market cycle you had bought the Dow in late 1965, you would have been down 70%, adjusted for inflation, in late 1982, seventeen years later. It would have taken until 1993, twenty-eight years later, to break even. Conversely, if you had waited and bought the Dow right at the bottom of the crash in late 1974, you would have still been down, adjusted for inflation, eight years later in late 1982. That is the harsh reality of real-life investing. Although stock returns average 10% to 11% over most longer-term time horizons, the performance can be very dismal for a decade or more. And these cycles could hit right when you need retirement money the most! Ask the typical couple approaching retirement in Japan in the last decade.
In fact, if you had bought the Nikkei in Japan at the very bottom of the first extended crash in 1992, that would have seemed to be a brilliant move at the time. But you would have been down by another 45%, and more adjusted for inflation, at the recent lows in early 2003, eleven years later. The Nikkei was down by 80% from its top in early 2003, thirteen years later. Why did this occur? Japan did not have a baby boom in the 1950s and early 1960s like most of the major developed countries around the world but had a brief one in the early 1960s to early 1970s instead. So there isn't a new generation to earn and spend more money -- until around 2009 to 2020. Then Japan should be growing again while we are busting. In the meantime, Japan's downward slide in demographic spending is coming to an end and there will be modest growth for the rest of this decade.
Only highly predictable demographic trends and technology cycles can tell you whether a major stock crash is just an extreme correction at the worst of overvaluation cycles and short-term political events or the beginning of a long-term decline in the economy and an extended bear market in stocks.
It was the peak in spending and new technology penetration cycles in the late 1920s, the late 1960s, and as we forecast to occur again around 2009-2010, that foreboded the extended economic declines and bear markets in stocks to follow. The Japanese economy hit such a peak, off cycle from the rest of the world, in the late 1980s. That is why Japan has seen a continued decline in the 1990s and early 2000s. We were one of the only forecasters who saw a long-term slide in the Japanese economy when it looked so strong in the late 1980s.
Just as we did in the early 1990s, we offer a unique perspective when the future doesn't look so great. First note that every decade of this boom and most decades in the last century have started off with a slowdown in response to the incredible expansion that occurred in the previous decade. We call this the "Decade Hangover Cycle," and it occurs due to ten-year planning and expansion cycles in large corporations. This cycle is one of many we will present in Chapter 3 in forecasting key turning points within this boom and in the bust to follow.
It is only human nature to overexpand when growth sets in and then have to cut back and recalibrate for continued growth in the future. We saw the 1980s begin with a slowdown and then likewise the 1990s. In the early-1990s contraction it was the home-building stocks and S&Ls that were hit the worst (Figure 1.1). They represented one of the strongest sectors in the 1980s, as the baby boomers were peaking in their starter-home buying. Despite not seeing a bubble anywhere near the degree of the tech stocks, home-building stocks crashed 60% in the early 1990s.
In the 1990s it was the technology sector that expanded the most rapidly and was due for a major short-term slowdown and consolidation. Were the early 1990s the end of the boom or simply the end of the housing boom? We are saying that the early 2000s are clearly not the end of the technology boom, nor of the broader economic boom that has been generated by the spending cycle of the massive baby-boom generation. We will tell you how to prepare for that in the coming chapters as well.
The most important points to understand are two, and we explained these concepts in detail in The Roaring 2000s. First, since the early 1980s, it has been the rising earning, spending, and productivity cycle of the massive baby-boom generation, here and around most of the world, that has driven this unprecedented economic boom. The Spending Wave in Figure 1.2 is simply a lag on the birth index in the United States (adjusted for immigration) for the quantifiable peak in spending of the average household at between age 46 to 50 today, moving forward 1 year every decade. Our recent analysis of the Consumer Expenditure Survey from the U.S. Department of Labor, Bureau of Labor Statistics, shows a double peak in spending at ages 46 and 50. Then spending declines for the rest of the average family's life. Since 1988, when we discovered this indicator, we have been forecasting that this generation would continue spending until 2007 to 2009 and that this boom and bull market in stocks would be much greater than forecast.
As you can see in Figure 1.2, the correlation between the broader stock market and the economy has been very strong, despite major short-term political and economic shocks. Hence, as in the early 1990s, we see a very strong recovery in consumer spending and economic growth with a very strong rebound in the stock markets into at least 2009, and likely into 2010. And then we will see another major long-term decline in our economy set in as there are fewer baby busters to spend money on housing, cars, computers, and so on. New generations create very predictable boom-and-bust cycles in our economy and they occur about every forty years, as we can see by looking at the Dow adjusted for inflation in Figure 1.3.
The first important insight we can give you after the crash of 2000-2002 is that this economic boom is not over. It will be over only after the baby boom finishes its spending and productivity cycles around late 2009-mid-2010.
Another key point made in The Roaring 2000s was that every second generation, or about every eighty years, radical new technologies and a new economy emerge, as you can see in Figure 1.4. Since the invention of electricity, cars, telephones, and many other crucial new technologies in the late 1800s, a new economy emerged around the assembly line and the modern corporation, which brought standardized products increasingly into the mass-market price range, along with factory and office jobs and suburban living. The new economy is bringing greater customization of products and services to consumers who increasingly drive a highly bottom-up, network model of more direct marketing and produce-to-order systems that will evolve from real-time production to real-time personalized service in the coming decade and beyond. This new economy will continue to enable a growing shift toward "exurban living" in high-quality smaller towns such as Aspen, Martha's Vineyard, and Hilton Head, and in the outer rings surrounding most urban areas.
At first these new technologies and companies move slowly into niche markets; then, once they hit about 10% adoption by consumers and households, they accelerate rapidly into the mainstream. This is the S-curve principle that we have so consistently stressed in our past books. Figure 1.5 shows that progression of new technologies and products. Cars were adopted by 10% of urban households in 1914, and then suddenly accelerated to 90% by 1928. Cars were invented back in 1886 and took another fourteen years after initial commercialization around 1900 just to penetrate the upscale niche markets. Twenty-eight years after their invention, they suddenly exploded into the mainstream in just fourteen years! We as consumers and experts alike tend to project trends in straight lines into the future. That is not how reality works, any more than average 10% stock returns! And that is why the S-curve is such a powerful forecasting tool.
The Internet, along with cellular phones and home computing, hit 10% between 1994 and early 1996, after the microchip emerged between 1968 and 1971, twenty-eight years earlier. Now these critical technologies are accelerating toward 90% adoption by 2007 to 2009. Just as cars hit 50% penetration in 1921, the Internet and cellular phones hit 50% exactly eighty years later, in 2001. In 1920-1921, as in 2000-2001, we saw a massive consolidation and correction in tech companies and stocks. But this is the critical insight: We still have the 50% to 90% rapid growth and penetration to follow, just as automobiles and other key new consumer technologies did from 1922 to 1928. Hence, the technology sector will continue to lead this advance, adding continued productivity surges and advances in living standards and lifestyles into the top of this boom around 2008-2009 -- just as occurred from 1922 to 1929.
The second major insight we can bring you after the crash of 2000-2002 is that this technology revolution is not over. It will peak between late 2008 and 2009, when most key new consumer technologies have penetrated 90% of their potential markets. Hence, we predict the great boom will resurge into its final and strongest stage, accelerating more fully again by mid- to late 2005. This final stage of the boom will last into late 2009 or early 2010. The winners of the race for leadership in most of the emerging new industries will be established in the coming decade, not the last decade. The greatest opportunities for investments, business, and career advancement will therefore come in this decade. This is not only the investment opportunity of a lifetime, but the best time to reposition your business and career -- including how and where you live -- not only for the great boom ahead but for the great bust to follow.
We will examine all of the opportunities for you to personally leverage this last stage of the great boom in the many chapters to come. But first let's look more closely at the crash of late 1919-early 1922 and see why it so closely parallels the crash of 2000-2002. The more critical insight is why we are going to see the greatest bull market in history from late 2002 into at least 2009 and the greatest economic boom in history from late 2003 into 2010. Naturally, you will need some very good reasons for investing aggressively again after the shocking events of the past few years. We will give you those reasons and some very sound strategies for doing so.
The Crash of 1919-1921 and the Roaring Twenties: Uncanny Parallels to the Early-2000s Crash and the Roaring 2000s to Follow
A closer look at the tech wreck of late 1919-early 1922 will give great insights into the incredible tech correction in 2000-2002 and the unprecedented
investment opportunity it has created. First let's take a look at another dimension of how the business cycle changes as new technologies or industries emerge on an S-curve progression in Figure 1.6. There are four stages that occur. First there is an Innovation Stage, where many of the new companies emerge as start-ups from a period of radical innovation. Then there is a Growth Boom, wherein those new companies grow rapidly into the mainstream for the first time. That stage is followed by a Shakeout or consolidation as overexpansion meets the first slowing in growth rates as the industry approaches the 50% point in the middle of the acceleration cycle from 10% to 90%. Then fewer surviving companies compete for the final 50% to 90% growth phase in a Maturity Boom. This final boom establishes the leaders for many decades ahead as the industry starts to mature for the first time.
After the invention of the automobile in 1886, car companies first started to commercialize around 1900 (Figure 1.7). There was a start-up boom between 1904 and 1908 that saw the peak of the Innovation Stage. Then the industry started to grow rapidly with many new companies and brands entering, marking the beginning of the Growth Boom. But the biggest breakthrough for accelerating the growth came just as cars were approaching 10% penetration in 1914: the moving assembly line by Henry Ford. With the dramatic drop in prices that resulted, cars suddenly moved to 90% of urban households by 1928. However, the Growth Boom reached its peak in late 1919 and was followed by a very severe Shakeout into early 1922, before the Maturity Boom continued into 1929, spurred on by many further innovations in cars and roads, including installment financing, starting in 1921.
Note that the boom in the stock market during this time of technology acceleration continued up despite World War I and up very strongly for auto stocks (Figure 1.8). In fact, the valuation levels on the Dow and the broader stock indices hit price/earnings (P/E) ratio levels of 26 in late 1919, almost as high as the most extreme P/Es of 28 in the 1929 bubble. We don't have P/E measures for the Auto Index, but I am sure they were much higher than on the Dow, as occurred for the Nasdaq in 1999. From the beginning of 1912 (as far back as we can measure) to the peak of the auto bubble in late 1919, the S&P Auto Index went up about fourteen times. As spectacular as the Nasdaq bubble of the 1990s may seem, it grew only ten times from mid-1992 into the peak -- during the same time horizon as the S&P Auto Index in years.
Here is an even more startling correlation: Figure 1.9 shows Intel from mid-1992 versus General Motors from early 1912. The charts are too close for comfort! We saw a similar boom in both leading stocks -- and a similar correction to follow. The cycles are almost exactly eighty years apart in line with our New Economy Cycle, which comes every other generation (Figure 1.3). Just ahead we will show how General Motors and the tech indices of the day saw a second great boom and bubble that corresponded with the Maturity Boom stage of the S-curve. But first let's more closely examine the Shakeout Cycle and correction.
Just as the auto and tech bubble looked as irresistible as the Nasdaq market in 1999 and early 2000, a funny thing happened. From late 1919 into 1921 there was an incredible "tech wreck" and shakeout in auto and many other key new-technology industries. As we showed in Figure 1.6, a shakeout occurs as new technologies or industries approach the 50% penetration level. Why? There is an incredible reaction to such rapid growth resulting in overexpansion just as growth rates start to slow at the 50% inflection point. The technologies continue to grow rapidly into mass markets; it's just that the actual rate of growth slows down increasingly. This causes a temporary slowdown and consolidation in the industry to shake out the overexpansion and to create greater efficiencies for further expansion.
Between 1917 and 1922, 24% of car manufacturers and brands went under, as we can see in Figure 1.10. That was only the beginning of the continued narrowing of companies in the race for leadership into the late 1920s and early 1930s. By the early 1930s downturn the leaders of the future had been set. At the bottom of the 1921 recession and stock market crash, General Motors had only 12% of the car market versus Ford's commanding leadership of 60%. GM not only led the even greater revolution in creating the new modern corporate organization through Alfred Sloan's stellar leadership in the 1920s, GM also catered to the rising new generation's increasing affluence by offering trade-up brands from the original Chevrolet -- to Pontiac to Oldsmobile to Buick to Cadillac -- and was the first to offer installment financing. By 1929, at the top of the boom, GM had rivaled Ford's market share, and by the early 1930s it pulled ahead forever. The rest of the story is history. That's why we predict that the leaders in most new emerging technologies, industries, and brands will be established in the coming decade!
This incredible boom ahead will represent the most important time in our lifetimes for creating winning business, career, and investment strategies!
Let's go back to the great crash of late 1919-1921. During this shakeout period, the Dow fell by 45% (Figure 1.11), very similar to the Dow's decline in 2000-2002. The Auto Index (Figure 1.12) crashed 70% into early 1922, very close to the Nasdaq's recent 77% decline. The Tire and Rubber Index fell 72% (Figure 1.13). The leading public stock in the auto sector (Ford was still privately held), General Motors, was down 75% in that correction (Figure 1.14). It is this necessary and violent consolidation in the middle of the rapid growth phase of the S-curve that causes the most violent corrections in the stock market and technology indices during major bull markets. And these extreme corrections, as in 2000-2002, occur only about every eighty years during ongoing bull markets, when radical new technologies are emerging into the mainstream.
From late 1919 into early 1922, the U.S. economy saw a severe fall in consumer and commodity prices as well as 12% unemployment from the shakeout in the rapidly growing tech sectors -- much worse than the brief recession in mid- to late 2001. The early 1920s looked very much like the beginning of the Great Depression between late 1929 and 1932. But the difference was that this was a shakeout and consolidation in the middle of the explosive new-technology cycle and was followed by continued spending and productivity from the rising Henry Ford generation. Only a clear understanding of demographic and technology cycles would have told you that this was the buy opportunity of a lifetime and for the twentieth century!
The Roaring Twenties, Which Followed the Great Crash of 1920-1921
The rest is history. The United States and most of the world recovered after that extreme correction and we saw the greatest boom and bull market in history up until that time and for the entire last century. Here are the startling facts. The Dow (Figure 1.15), from the bottom in late 1921 to the top of the boom in late 1929, advanced by six times in just eight years, an average annual compound return of 23.87%. The S&P Auto Index (Figure 1.16) advanced twelve times, for an average return of 42.69%, and General Motors (Figure 1.17), one of the leading large-cap stocks, advanced twenty-two times, returning 58.17% to investors who bought in late 1921-early 1922. In how many eight-year periods of history could you have achieved those extraordinary levels of return? None! That's what we mean when we say the buy opportunity of a lifetime!
Now look back at the Intel and General Motors data in Figure 1.9, which are virtually identical going into the shakeout stage eighty years apart. If Intel did as well as General Motors did in the Roaring Twenties boom to follow, Intel would peak around 330, twenty-two times its 2002 low of around $15. That would be four to five times its high in early 2000. This is our argument for forecasters that say the leading tech stocks will never see their highs again after the recent bubble. We are not specifically forecasting that Intel will reach these levels, but we do feel that the key tech stocks that dominate the coming decade could see similar returns and gains relatively, and Intel is certainly a top candidate for such performance.
In the incredible boom of the 1990s, from the bottom in late 1990 to the top in early 2000, the average annual compound return on the Nasdaq was 33.02%, 50.03% on Microsoft, and 20.03% on the Dow. The average return from the Dow in the eight-year bull market from August 1982 to July 1990 was 17.34%. The other stellar decade for stocks, the 1950s, saw an average annual compound return of only 13.00% for the Dow. Even if you take the best eight-year period, from March 1948 to March 1956, the average return was only 14.84%.
The average annual compound return on the Dow, 23.87% from September 1921 to August 1929, was greater than any comparable bull market in the last 100 years, making late 1921 the buy opportunity of the last century.
If you look at the projections in Chapter 2, you will see average annual compound returns of 24% on the Dow from the lows of late 2002 into the highs we project in late 2008, and 39% on the Nasdaq if we do see our target of 13,000, and 47% if we see as high as 20,000. That's why we claimed at the beginning of this chapter that investors should see returns as good as or better than in the 1990s in this next and last great stage of the bull market. That is why we published our special report "The Buy Opportunity of a Lifetime" in late 2001 and our second special report, "The Bubble Boom," in late 2002. Given the dramatic long-term market correction and economic slowdown we are forecasting after 2009, we forecast that this will end up being the buy opportunity of the coming century and our lifetimes! And it's not as important that our actual targets get hit, rather that the stock market enters another strong bull market that you as an investor don't foresee until much later in the cycle.
Why was the Roaring Twenties the best decade in United States history for stock returns? Because we saw the highest productivity rates in United States history. The only time that such rates have averaged above 3% was from 1917 to 1929, when the average was close to 4%. High productivity rates generate earnings that grow much faster than GDP and the stock market simply projects earnings growth many years into the future in valuing stocks. The reasons productivity rates were so high are twofold. First, the Henry Ford generation had its peak numbers moving into its peak spending and productivity years. (Back then, with much less education and lower life expectancies, the peak age would have been in the mid- to late 30s.) Second, radical new technologies were in their peak years of mass-market penetration, moving from 50% to 90% of urban households.
The other period with high productivity rates was the 1960s, wherein we saw the peak spending and productivity years of the Bob Hope generation and the mass-market saturation of a whole new cluster of less radical but powerful technologies ranging from home appliances to TVs to jet travel to synthetic fibers. We are projecting that this decade, the 2000s, will see similar, and perhaps higher, productivity rates than the near-3% rates in the late 1990s, more like 4% again. That will generate much more growth in earnings than will be expected by economists -- and much stronger stock market growth, as occurred in the Roaring Twenties.
It is worth noting that the Roaring Twenties boom was no cakewalk. We have been warning for over a decade that this 1982-2009 boom would not be anything like the 1950s and 1960s boom that followed World War II. That was an orderly time of the maturing of the last revolution in technologies, business models, and lifestyles. This current boom represents the emergence of radically new trends in these areas and will necessarily be more gut-wrenching here and around the world. In the early 1920s, Great Britain saw peak unemployment rates of 18% and was slower to recover than the United States. Germany's currency started to collapse in 1922 from the excessive reparation payments from World War I and Germany's economy collapsed from hyperinflation in 1923. So should it be a surprise that despite this boom there are continued declines in Japan and political crises around the world from Russia to the Middle East to Asia? And remember, as mentioned earlier in this chapter, the first modern terrorist event on Wall Street occurred in late 1920, followed by strong anti-immigration sentiments and ethnic tensions.
The Current Technology S-Curve and Shakeout
Figure 1.18 shows the trend in the Nasdaq back to its inception in 1971. The last major wave of the Nasdaq bull market, from late 1990 into early 2000, saw the technology sectors growing at very high rates since late 1994 and accelerating into a classic bubble after the late 1998 correction, between 1999 and early 2000. We argue that this clearly is not the end of this incredible technology and economic boom -- any more than the 1987 bubble and crash was in the Dow and broader markets fourteen years earlier. It takes a few years for such a shakeout in the growth of new technology and business sectors to consolidate as it did from late 1919 through early 1922. But then they boom again!
You can see in this chart how a trend line back to 1994 through the highs and lows of the bubble would project a fair value at the top of this boom of around 10,000. But allowing for another extreme overvaluation cycle, the trend line through the tops would go as high as 20,000. For now, consider that if the Nasdaq simply advanced as much as the Auto Index did in the Roaring Twenties boom, twelve times, that would imply a Nasdaq of approximately 13,000 from the low of 1108 in late 2002. In Chapter 2 we will show a channel technique for projecting the Nasdaq that also points to around 13,000 by the end of this decade.
Our best projection for the Nasdaq is about 13,000 around the end of this decade, but it is possible we could see as high as 20,000.
But why do we argue so strongly that a technology boom that so clearly looks to have peaked in a classic bubble is not over? Because the S-curve clearly tells us when a technology boom is over, just as demographics tell us when an economic boom is over. We can see that, in 2000 and 2001, the leading new consumer technologies were at the same point of market penetration on the S-curve as occurred for autos and other key consumer technologies coming into the 1920-1921 crash, eighty years earlier. The Internet hit the key 10% penetration point of U.S. households in early 1996 and has accelerated ever since as we can see in Figure 1.19. The Internet hit 50% penetration in 2001, just as autos did in 1921. Approaching that point you would expect a major shakeout in the industry as has occurred from 2000 through 2002. We were aware of this Shakeout Cycle in the emergence of new products and technologies, but we had no reference for how extreme it could be until we went back and broke out the industry sectors in the 1919-1921 crash when there wasn't a prominent technology index and saw the extreme crash in the Auto Index.
We were aware of that correction as well, but economists and historians had attributed it to the winddown from World War I and the commodity price collapse. But was there a great winddown and collapse in the economy and stock prices after World War II, a much more encompassing war? When we took a closer look at the data, we found that it was the high-tech sectors such as auto stocks that were at the center of that major stock crash and economic downturn.
Mobile phones, another key emerging consumer technology, also hit 50% market penetration in 2001 after reaching 10% in 1994 (see Figure 1.20). This technology paralleled cars by exactly eighty years. The point here is simple: once new technologies emerge into the mainstream they continue to grow rapidly, much faster than the economy, until they reach 90% penetration. We are predicting that Internet access will hit 90% penetration by 2006 or 2007 and that mobile phones and wireless technologies will hit 90% by 2008 or so. The terrorist crisis will only increase the impetus toward cellular phones as they proved to be the ultimate emergency response system on 9/11. Not only did they allow many people to communicate with their loved ones at the last minute, but they likely saved the White House from being attacked by the last hijacked airliner.
We also forecasted in The Roaring 2000s that the real consumer revolution in new technologies and the Internet would not hit until 2002-2003, when the broadband revolution would accelerate bringing video communications and voice activation to the masses. We never forecasted that a whole new group of dot-com companies would suddenly create new brand names and take over the world. Most of the key technologies and brands that would dominate this revolution were created in the 1960s, 1970s, and early 1980s, much like the last revolution in the 1880s and 1890s and early 1900s. What we forecasted was a radical change in business models and how companies were designed and managed -- from the bottom up, not the top down. This is the real impact of the Internet or network revolution, as we will further elaborate in Chapter 8.
The real revolution is yet to come, as we can see in Figure 1.21. Broadband connections to households, from DSL to cable modems to other applications, hit 10% in late 2001 and are already approaching over 30% in 2004. Digital cameras are following an S-curve similar to that of broadband, and wi-fi is just emerging at rapid rates. Broadband represents the second or incremental S-curve that starts coming into the shakeout stage and accelerates into the Maturity Boom. Hence, the Maturity Boom should formally start in 2003 and accelerate in 2005.
Broadband is growing at twice the rate of the Internet, which has penetrated homes at twice the rate of PCs. We observed this same acceleration of new technologies and S-curves in the early 1900s and Roaring Twenties boom. Key infrastructures such as telephones and home electrification hit the 10% to 90% S-curve acceleration earlier from around 1900 to 1928. But autos and the early home appliances went from 10% to 90% in half the time, from 1914 to 1928. Then radios went mainstream from around 1921 to 1928, twice as fast again.
We are forecasting that the broadband revolution will go mainstream toward 90% penetration of U.S. households by 2009 at a blistering pace that is totally unexpected in the early 2000s. As we forecasted in The Roaring 2000s, the broadband revolution will bring the most important stage of the information, computer, and Internet revolutions. Why? It will bring video capability! And that means the ability to communicate face-to-face humanly and to receive real-time personal service over the Internet from companies. This next stage also brings the continuation of massive power in semiconductor chips along Moore's Law and will bring voice activation, which is already beginning to become a reality, as we forecasted. Voice activation means we can increasingly tell computers what we want without a keyboard and complex commands. That will make them more user-friendly as well.
That is why we forecasted in The Roaring 2000s that the real revolution, the consumer revolution, would not hit until 2002-2010 (pages 116-117). We continue to think, despite the great crash of 2000-2002, that the coming years will represent not only the greatest stage of the greatest boom in history -- but the investment opportunity of a lifetime for investors. But you have to act now -- sooner -- rather than later. Although the markets have already rebounded substantially since late 2002, the cycles we will present in Chapter 3 strongly suggest that the best years in the markets will come between 2005 and 2009. But the same cycles suggest caution and a substantial correction into mid- to late 2006, and possibly in late 2007. In Chapter 3, we will also use a variety of technical tools to make our best forecasts for how high the markets could go in the coming boom as well as how far they could fall in the great downturn to follow. We will also present the simplest long-term model ever devised for investing in stocks for the long term, while protecting yourself against the worst corrections.
Get ready for the next and final stage of the greatest boom and bull market in history. We said it profitably in late 1992 and we are saying it again a decade later, in late 2002 and again in late 2004. Don't wait years to see the incredible proof. Use the power of demographics to take advantage of the greatest investment opportunity in history -- today!
Copyright © 2004 by Harry S. Dent, Jr.