Playing the Trends: Lessons From a Decade’s Worth

They turned off the National Debt Clock last week.

The electronic billboard near New York’s Times Square had since 1989 dutifully recorded the gross federal debt--which for most of the last 11 years--and most of 20 years before that--had known only one direction: up.

Real estate developer Seymour Durst’s idea in erecting the odometer-like clock was to make us think about the terrible legacy our borrow-and-spend society was leaving our children.

But today, amid budget surplus projections that stretch as far as laser-improved eyeballs can see, the kids must be thinking they can shift from focusing on how to repay our profligacy to how they’re going to spend their future windfall.

A National Debt Clock whose numbers are getting smaller? The sense of drama is certainly lost. Hence, the clock had to go.

The story of the rise, and now fall, of the U.S. federal debt is an interesting tale of how a trend in motion can continue for far longer than even the most astute forecasters can predict--and then, suddenly, shift into reverse.

But it’s also a story of how the expected side effects of a major trend may not develop as logic would seem to dictate.

Trend-following is, of course, a key element of the game of investing. Many investors naturally seek to bet on companies that would appear to be the beneficiaries of a particular trend--say, the rise of the Internet-based economy.

Likewise, it makes sense to stay away from investments that appear likely to be victims of a sustained trend. The disinflation cycle of the 1990s, for example, suggested bad times for the price of gold, and indeed that’s how it turned out.

Recognizing bona fide investment trends, however--that is, those that will have some longevity to them--often is only easy in retrospect. Today’s “hot new trend” in something may be seen months later to have been little more than a blip.

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A beautiful thing about the last decade was the bumper crop of true long-term trends it hosted:

* The current great U.S. stock bull market began, conveniently enough, in 1990, and has proceeded with relatively few significant interruptions--at least, until this year.

* Japan’s stock bear market also began in 1990 and, by many accounts, still isn’t over.

* Interest rates spent most of the decade in decline, enriching investors who bought bonds early in the period and held on to their spectacular yields.

* Southern California home prices, on average, declined for most of the first half of the decade, a period that must have seemed like an eternity to people who bought homes here in the late-1980s.

* The public’s excitement over Internet-related stocks, though perhaps now a has-been among major trends, began about 1995 and gathered steam for several years before exploding in late 1998.

In each of the aforementioned cases, many investors doubted at the outset of the trend that it could continue for very long. A 10-year stock bull market on Wall Street? Seemed too far-fetched to imagine in 1990. Ditto for a 10-year bear market in Tokyo.

In each case, recognition of the trend--and a willingness to be patient with it--bore rich fruit.

That’s contrary to the way many investors think about trends. It’s often assumed that to be a successful investor you should aim to buy at the bottom of an investment cycle and sell at the top of the cycle.

But picking the absolute peaks and valleys is far too difficult a game for most people. What the 1990s taught us is that, once a positive trend gets underway, there is usually plenty of time to get on board and make money.

Being there at the beginning of a trend is wonderful, but it isn’t critical. Getting on board later, then staying there, is the challenge for most people.

The flip side also often is true: When a market trend has turned, just because you failed to sell at the peak doesn’t mean it’s too late to get out. The Tokyo market’s decline began in 1990, but the initial wave of the downturn took more than two years to bottom.

Now, all of this simplifies the idea of playing investment trends. As I freely admit, hindsight is always 20-20.

Even getting a long-term trend right doesn’t mean you’ll correctly pick the winners and losers that will be generated by the trend.

We saw that in the surge of the federal debt in the 1990s. At the start of the last decade, many an economist predicted that unchecked growth of the debt would be ruinous for financial markets and for the economy.

Logical analysis suggested that mounting borrowing by Uncle Sam would drive market interest rates sharply higher because the government would be competing for funds with all of the private borrowers that were desperate for money.

But long-term interest rates fell in the early ‘90s even as the federal debt rose, amid $200-billion-plus annual budget deficits.

True, the Treasury was aided and abetted by the Federal Reserve, which pumped up the nation’s money supply--and drove short-term rates dramatically lower--amid a slow-growing economy.

We’ll never know how many more private borrowers might have been helped if Uncle Sam hadn’t been feeding at the debt trough.

Other factors, however, also kept the federal debt from becoming the bomb that many intelligent people figured it would become. For example, foreign investors didn’t desert the United States en masse because of our debt level, despite the constant finger-wagging and warnings that they would.

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Today, the United States arguably faces the opposite problem it confronted in the early ‘90s.

Back then, the nation was considered ridden with severe troubles, and many people believed that the best days of the American empire were behind it.

Now, the popular view is that almost nothing can go wrong in the U.S. economy. And with the United States leading the way, the equally popular view is that the global economy has relatively little to worry about.

On Friday, the International Monetary Fund’s first deputy managing director, Stanley Fischer, declared that the U.S.-driven world economy will manage real growth of 4.7% this year--and that “no major clouds” are on the horizon.

Given the IMF’s track record--most notably, in completely missing the gathering storm that became the Asian economic crisis from 1997 to 1999--the latest glowing forecast has to make even the most ardent optimist a little nervous.

With regard to the federal debt, and the anticipated surpluses now universally celebrated as inevitable, any assumption that that trend would have to be positive for markets should be weighed against the experience of the 1990s: If the buildup of debt didn’t kill us, or drive interest rates sharply higher, is a reduction of that debt necessarily bullish for stocks and bonds?

Simply put, the reversal of the debt buildup has to be viewed in the context of many other trends, or reversals in trends, that may have more significant effects on the investment climate.

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Already, we’ve learned from the spring crash in many highflying stocks that a wonderful economy, and a surplus-rich Uncle Sam, are no protection against market trouble.

Other trends that dominated the global economy in recent years bear close scrutiny now, for signs that they, too, could be reversing.

What if energy prices are in the early stage of a long-term recovery, for reasons of both strong demand and tight supplies?

What if the U.S. dollar, the superman of global currencies, were to begin to weaken, for reasons known (the massive U.S. current account deficit) or unknown? A weaker dollar could mean higher prices for the tidal wave of imported goods we now consider our birthright--a development that wouldn’t sit well with the inflation-paranoid Federal Reserve.

Wall Street’s biggest bears say the market already senses that some of the best trends of the 1990s are unraveling--hence the measly 1.7% gain in the Standard & Poor’s 500 stock index so far this year.

It’s probably too early to make that call. But it’s a sobering thought nonetheless.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.

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Definition of a Trend:

the Fall of Gold’s Price

A trend in the financial markets can often last a lot longer than many investors initially expect. Case in point: The dismal performance of the price of gold since the 1980s.

Yearly closes and latest for near-term gold futures in New York, per ounce

Friday: $273.30

Source: Bloomberg News, Los Angeles Times