Stock Markets and The Third Law of Motion by IceCap Asset Management
Three hundred years ago, physicist Isaac Newton, compiled the Third Law of Motion. Ever since, people everywhere have noticed how every action does indeed have an equal and opposite reaction.
This Third Law of Motion is certainly evident in the music world where The Rolling Stones gathered a lot of moss. The hoodlums of rock & roll seduced the world into sympathizing with the devil as well embracing the emotion of never being satisfied. At the time, the Rolling Stones represented the dark side of music and life.
The Beatles on the other hand represented the opposite reaction – they wanted nothing more than to simply hold your hand. They embraced the rising of the sun and were seemingly always twisting and shouting about love. At the time, the Beatles represented the bright side of music and life.
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Of course, as time passed the social infatuation and rejection of each band, swung dramatically and often in opposite directions, just as Newton’s Third Law of Motion predicted it would.
The pendulum of the money world also swings from side to side, yet most of the time, most investors, mostly see what they want to see. The good times are always just around the corner and any bad times were simply the luck of the draw.
Astonishingly, Newton’s Third Law seems to be either forgotten or dismissed altogether, and this is a shame because the world’s financial pendulum is the process of reaching that ever so brief pause, after which it then begins to swing in the other direction.
To many thoughtful investors, it has become crystal clear that the world is indeed on the cusp of a dramatic change in direction. There will be extreme cases of financial, social, political and economic losses. But there will also be extreme cases of financial gains – the secret is understanding how and where global capital will flow.
Applying Newton’s Third Law of Motion will help you realize that for every negative action, there will also be an equal positive reaction is crucial to both preserving and growing your wealth.
Unfortunately, many investors make the mistake of taking a singular stance without the thoughtful consideration of Newton’s Third Law. Of course, this one dimensional thinking is deeply rooted in our recent past – the one that dominates our investment expectations to this day.
We’ve written and presented before that practically everyone in the investment business today earned their stars and stripes during the famous 1982-1999 bull market (see Chart 2).
We’ve experienced countless occasions and situations where investment firms would use market data with 1982 as the starting point to flog their newest mutual fund to the unsuspecting public. Better still are the moments when a grey haired, industry veteran begins lecturing us with the all too predictable “…I’ve been in this business for 30 years, and …”. And since 30 years is a long time, they must be right.
But, and this is a pretty big BUT – they are only right if you use the early 1980s as the starting point. Otherwise, they are pathetically wrong.
For those not in the know, both the stock market and the bond market enjoyed their greatest runs ever when using 1982 as the starting point.
In fact, almost every investment fund ever created produces perfectly, perfect returns using the magical 1982 start date. Yet, simply shifting the start date back to 1952 and counting forward 30 years will give you a not so rosy story – and most likely, fewer clients. It appears that IceCap is not the only one to observe this seemingly obvious point. Chart 1 on the next page perfectly illustrates this exact same concept.
The point we make is that many investors in the world today are too trustworthy of their local banks and advisors, and have swallowed the industry sales pitch hook, line and sinker. Instead, respecting and understanding that financial, economic, social and political histories actually predate 1982, will provide you with a different perspective on how the world is now shaped.
The belief and hope (there’s that word again) that the world will continue along a upward trend with a few bumps here and there has been grossly miss-sold. Instead, the pendulum is changing direction and this change in direction will create untold losses for the Euro currency, government bonds, and banks & insurance companies around the world.
Yet, the brighter side of the investment world will see untold gains for the US Dollar and US stocks.
The key to understanding this paradigm shift is respecting Newton and his Third Law of Motion. As Europe further disintegrates down its rabbit hole, private sector money will seek safety. And, the only market big enough in the world to absorb this kind of capital movement is the US Dollar.
The Biggest Fallacy
The world is riddled with many untruths, and none compare to those perpetuated by the investment industry and its staunch belief that economic growth is the driver of stock market growth.
On the surface, it is a nice story – after all, if a company makes profits, pays out dividends and then makes more profits and pays out even more dividends, it has to be good for the stock price.
Yet, if any half-respected investment analyst sharpened their pencil just a little, and researched economic growth and stock market movements, their objective conclusion would be a jaw-dropper to say the least. Yes, there certainly are times when stock markets do well when our economies are growing, but there are also times when the exact opposite happens, and even more times when there is no rhyme and reason to connect one with the other at all.