The market needs another positive story. Some people understand that the old stories are fading away, and the new stories will not only serve as drivers of equity returns but may also disentangle humanity from conflicts.
We provide a chart with the four major regimes of the stock market starting in the 1990s and the stories behind the drivers of equity returns (S&P 500 total return).
Information highway and globalization
The information highway narrative and globalization drove a dynamic uptrend with gains of about 440% in the 1990s. Although the stock market greatly benefited from the development of the Web and globalization, the main beneficiary was China, which grew to challenge the hegemony of the USA. After this regime ended with a crash, reality sank in.
China win-win
The assumption that globalization and free trade with China would be a win-win arrangement ended with the 2008 financial crisis. The Chinese pegged their currency to the dollar and applied capital controls. The result was the accumulation of huge surpluses that were invested back in the US. The resulting liquidity kept interest rates low, leading to the real estate crisis and a stock market crash after gains of about 120%.
Quantitative easing, cheap money, EVs and green energy, and crypto
After the reality about a win-win arrangement with China sank in, the solution was quantitative easing in conjunction with a story about climate change, electric vehicles, and a new digital economy driven by cryptocurrencies. After extraordinary gains of about 800%, inflation got out of control due to a long period of interest rates at 0% and the refusal of the central bank to hike interest rates, which was justified with a “transitory inflation” narrative.
AI
As the market crash was about to accelerate, a new story appeared: artificial intelligence and the road to an accelerated abundance. In conjunction with a promise of low rates, the stock market rebounded, and it has gained about 70% since the bottom of October 2022.
Where are we now?
At this juncture, some individuals recognize that a fresh positive narrative is necessary to prevent the market from plunging. Prominent investors such as Warren Buffett have been selling and amassing cash in anticipation of a new narrative, which may emerge after another bear market. Elon Musk is pushing the “interplanetary life” story. This is a promising narrative that has the potential to alleviate some of humanity’s challenges, including geopolitical conflict, but it necessitates a complementary narrative. One of those narratives involves a looming catastrophe resulting from an approaching Earth pole reversal and a cataclysmic event. The pseudoscience theories are prevalent on social media, possibly because they support the push for space colonization. However, we believe that humanity has focused on internal conflicts, and it is about time to consider other possibilities and goals that will foster unity and raise the odds of sustained growth. Therefore, while Musk’s vision may seem unrealistic, it could be precisely what humanity needs to avoid self-destruction at this juncture.
In case there will be a massive focus on interplanetary travel and colonization, expect significant gains from equities, especially new IPOs on space technology, and an explosion in equity returns. However, given the current political structure in the world, this shift is unlikely unless aggressively pushed by the US and its allies. In that case, everyone else might follow suit.
Our position: We agree with Musk that going “interplanetary” is the only way out, even if we fail. We urgently need a new global narrative.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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