Strange summer, huh? One part awesome, two parts insane. It reminds me of the time when . . .
It was September 1991. One year into the last decade of the millennium. U.S. businesses were barely starting to stir after a short but harsh recession.
Jobs were hard to get, home prices had been down for years, savings and loans were still failing left and right, the Soviet Union was coming apart, and the fear of another 23% single-day crash like Black Monday of Oct. 19, 1987, was smothering investor optimism. Grunge music captured the public angst and hit the mainstream with Nirvana's "Smells Like Teen Spirit."
Yet stocks seemed oblivious to these problems. Craziness, to be sure. That was the word on the Street. It was hard to buy anything with all the problems in the world, but stocks had been climbing since the initial shots were fired in the Persian Gulf War's land campaign in January, and by the fall stocks seemed to defy gravity, up a surprising 15% for the year.
And those small caps? Whoo, boy. Speculative juices were overflowing. Cisco Systems (CSCO, news, msgs), one of a dozen young companies focused on the new business of computer networking, was up 110% for the year. Microsoft (MSFT, news, msgs) was up 75% after the release of Windows 3.0. And EMC (EMC, news, msgs), a company with a new idea for data storage that it couldn't quite get rolling, was down 10% year to date. Split-adjusted, the stocks went for 29 cents, $1.86 and 15 cents, respectively. (Microsoft is the publisher of MSN Money.)
So why were stocks about a thousand times more buoyant than the public mood, and why am I telling you this?
It was because of superlow interest rates and because the government was about to spend more than $150 billion to clean up the S&L mess. Sound familiar? A massive stimulus worked massively, as a process that veteran money manager Robert Drach calls the "monetary infusion cycle" worked its magic.
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Picture this: At least $10 trillion has been created and poured into the world's financial arteries in a process that will take at least three years to seep out through various government spending programs. And if bearish skeptics don't understand the impact that money will have, it's mostly because they've never seen something that big before and it's frankly almost unimaginable. "People don't see it because monetary infusion cycles don't happen very often, and certainly not on this scale," Drach said.
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How did it go down in 1991? Well, central bankers were worried stiff that year, and they slashed the federal funds rate to its slimmest levels in decades, down to a then-shocking low of 3% in late 1991. (That level is mountains higher than our own current rate of 0.5%.) The Federal Reserve tried to make sure it was providing enough cash to float the country out of recession, fight a war and battle the deflationary effect of banks blowing up on every street corner due to bad real-estate loans.
Maybe you wouldn't think that low rates could have such a massive effect, but then maybe you've never been a spreadsheet jockey in the planning department of a big company. When interest rates are near zero, almost anything can be built at a profit, at least on paper, because funding costs are minimal. Managers' eyes get wide. They start talking about "hockey stick" growth patterns with off-the-charts demand. Spreadsheets become PowerPoint slides; green lights are given; blueprints are drawn up. Expansion happens, big time, just because rates are low.
This is basically what occurred in the background in 1991 -- with a few nuances, of course. And out of a year that started with the world in great pain came the start of the single greatest stock decade for the market. By the close of 1999, Cisco shares would be up 37,730% from January 1991, while EMC would jump 27,860% and Microsoft 5,500%.
It seems the plan worked, as debt built wealth despite fears that the country's economic health was about to wash away.
Continued: A runaway money train
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