Party Like It’s 1995 – or The 35% Year

UPDATE 2014.02.24 – Almost, almost. Fine work Laszlo.

459.27 12/30/1994
615.93 12/29/1995

I chuckled the other day watching business news with Laszlo Birinyi talking S&P500 at 2500 and others talking about how we could have a 35% up year like 1995.

Consider what was happening in 1995.  The end of 1994, beginning of 1995 represented the Great Inflection Point in stocks (see below).  What caused the inflection?  The most obvious reason was that the Republicans took the House of Representatives for the first time in something like 2 generations in November 1994 which you can see IS the inflection point.  Newt Gingrich, yeah that Newt Gingrich, threw a spanner in Clinton’s works with the Contract With America.  This set the stage for bending the growth of government down and the primary surplus that happened a few years later in the US Budget.


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At least as important, 1995 was the year that Microsoft brought multitasking computing to the desktop with Windows 95 and a revamp of Windows NT. And more important than that, 1995 marked the year when ordinary people could actually start using the internet and when Netscape was hatched. These things led to an actual leap in productivity and also instilled the wild animal spirits that ignited the .com bubble. Here is a short list of some of the other reasons for the Great Inflection:

  • Computing power was increasing in accordance with Moore’s Law and Intel was printing money.
  • The Uruguay round of GATT had recently been completed and set the stage for a long period of outsourcing and labor market rationalization worldwide.
  • Oil prices oscillated between $18 and $21/bbl!
  • We were still looking at the great rise of indebtedness that would lift Total Debt to GDP over 350% by 2007 (See


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  • The Soviet Union had collapsed and the Berlin Wall torn down just a few years prior and so Military spending decreased.
  • Inflation was in the process of being slayed or “opportunistically disinflated”.
  • The world was moving right politically, embracing market economics and the Anglo-Saxon model.
  • The mantra of the day was to minimize the footprint of government, embraced even by Clinton.
  • Demographically, babies were still being born in developed countries and there were many workers supporting each retiree in the pension systems of the West and in Japan.

In short all tailwinds and few if any headwinds.

Fast forward to today. Does anyone think animal spirits are flowing in abundance? Is there any technology on the horizon that would greatly improve productivity?

  • No global trade agreement has been done since the Uruguay round.
  • The great rationalization of labor costs has basically run its course and labor costs in China are now rising fast, slowly erasing the delta that made outsourcing so tempting.
  • Microsoft is a shadow of its former self. Windows 8 is a disaster. It actually decreases productivity rather than enhancing it.
  • The rise of computing power has stalled; Moore’s Law a dead letter.
  • Oil is around $100/bbl.
  • Politically the world has moved viciously left in the west and Latin America while turning (Russia) or remaining (China)viciously authoritarian in the East.
  • Rather than being on the upswing in the debt creation cycle, we are on a plateau or a downswing with total debt still around 350% of output (see Yardeni/Fed Flow of Funds debt chart above).
  • America has re-elected a guy who actually believes that the Government is the wellspring of prosperity and that those who have built the prosperity in this country did not really build it.
  • Demographically, developed countries have more or less stopped having babies and in the US immigration is a dirty word.

In short, all headwinds and few tailwinds.

So the next time you hear someone talking about how we are at the liftoff point like 1995, you can safely consider that person a clown and discount their opinion to right around 0 probability. The economy continues to suffer and slog along, its lifeblood constricted by the sclerosis of too much debt and too much government. Yes, the market continues to rise. There is one reason and one reason only that the stock market is climbing to new highs. It is called the Fed but that is a topic for another post.

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