Above the Noise: The decade's survival guide may be the 30s & 70s

We all know that we use the past as a guide to the future, no matter what the regulators say. And regardless that every new state on our evolutionary path is never the same, we need to hang our hat on something. Well, perhaps the hat rack we use should be the 1930s and the 1970s.

The chart below shows the total returns in the S&P 500 for every decade since 1930. The decades that best resemble our current situation are probably 1930s and 1970s in the sense that the 30s were about deleveraging and the 70s were about ballooning government deficits, below trend economic growth, oil shocks and high unemployment.

The S&P's performance in those two decades was pretty dire - among the three worst decades. The other bad decade was the one we just left (2000s) as we saw both mild and very severe recessions in combination with a technology and real estate bubble. Oh, and a small credit-inspired financial meltdown.

Parts of the global economy have now definitely entered a deleveraging phase and you might say that deleveraging phase actually started in the 2000s as the pool of private capital providers diminished. This decade will be about government funding problems and lower economic growth, and based on that this decade may be more like a hybrid of the 1970s and 1930s, maybe even like the 1940s, which will also translate into low annualised returns for this decade. Only when we have worked our way through this deflating debt dycle and cleared some of all the bad debt, we can reignite the next debt cycle based on a larger and stronger pool of savings and equity. This should then begin to translate into higher equity returns.

But that doesn't mean there is no money to be made in equities. The subject of my piece next week will be the results of my reading about the opportunities that were exploited in the 1930s.

Incidentally and significantly, three decades - 1950s, 1980s and 1990s - produced 71.0 percent of the cumulative total return since 1930! This observation is in itself quite extraordinary. What do those three decades have in common? This will be very general... High economic growth, less government problems (funding etc.), credit was growing and capital provideres were able to provide the necessary savings to fuel the credit growth.

Also, I have not forgotten to provide a framework for finding quality companies in Europe so that I will also do next week.