Supply and Demand

Take a look on craigslist at the Northern Virginia and DC area housing section. You'll notice that many people have put up their house or apartment for a few nights around the inauguration. No central planner told them to rent out their home for a day or two. Regular people saw an opportunity for profit from the increased demand that hotels could not satisfy. The markets work like this everyday for almost anything you buy. If we outlawed "price gouging" this new supply of rooms would not be available, and a visiting family might decide to buy two rooms instead of one. Supply and demand at work. Laws against "price gouging" would not change how visitors to the inauguration value a room near DC. However, such a law would block the signal, and the price of a room would bear little relation to how people value it. With no restrictions on pricing, the supply increases, more people get what they want, and those that place a high value on a room can get one. Prices serve as signals every single day, and if policy blocks those signals there are clear repercussions. So, when you want the government to set prices for something, think about this example of a market at work.

Secular Bear Market

If you watch CNBC you see talk of a rally in the markets regularly, but the truth is the market has done basically nothing since 2000 other than stay within a fairly narrow range. You would have been better off keeping your money in treasuries. This has happened before, from 1966 to 1982, real returns on on the S&P 500 were negative. From 1982 to 2000, it was good to stay long since the market was going up dramatically. Is that the best strategy for a secular bear market like this one, 2000-????

I would say that it is not if you want to beat inflation. First, if you are going to invest in the market, remember there is more than one market. The United States is a large country, but it is far from the only market to invest in. Emerging markets such as Brazil and India have seen stellar returns from 2000-2008. Exercise caution when buying into these developing countries though. They can only maintain high levels of growth for so long and their growth is dependent on a fast pace of reforms and opening their economies to outside investment. Your portfolio needs a wide variety of asset classes and countries represented. This secular bear market is likely to persist, the average is 17 years. The idea of secular bear and bull markets raises interesting questions of what causes long term trends in valuation and growth. I suspect much of it is based on changes in technology and industrial organization. I believe that the 1982-2000 boom was largely fed by technology helped in part by economic reforms to open trade and lower taxes. What could cause the next secular bull market? Nanotechnology, advances in space travel, low cost alternative energy, something else