FOOL ON THE HILL
Bull Market History

Is this market really the "greatest bull market in history?" Why is it here, what caused it, what's sustaining it, and how long is it likely to last? We may experience some dips, but until the baby boomers retire, computers stop getting faster and cheaper, and people stop figuring out new things to do with computers connecting through the Internet, we can survive and prosper on the other side of any downturns.

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By Rob Landley (TMF Oak)
November 6, 2000

I keep hearing the phrase "greatest bull market in history." It percolates through the message boards, drips from commentator's tongues, and generally annoys the heck out of me. Of course, I agree that we are in a bull market. I just take issue with the way people glibly dismiss history like that.

If you want to trace the current bull market back, I'd say it really started in Italy around six hundred years ago. Plenty of people got rich in Venice and Florence during the Renaissance. The modern economy has grown from there in a sustained economic boom, with plenty of bad patches (the Spanish Inquisition, World War II, Dan Quayle) but plenty of notable bright spots as well (the invention of paper money, the Industrial Revolution, peanut butter).

A decent overview of economic history would take at least a week's worth of columns, so I'm not even going to try right now, but I'd like to point out that ancient Rome went from mud huts to bathrooms with inlaid marble floors and hot and cold running water. Just as going from one to 100 is a bigger gain than going from 100 to 1,000 (a 100x increase versus a 10x increase), humanity's rate of advance in the past 2,000 years may actually have been outpaced by the previous 2,000. (If nothing else, they didn't have to put up with 1,000 years of rigidly conservative medieval theocracy.) Overall, they're probably pretty comparable.

The bull market those with a much narrower focus idolize so much is about 20 years old. The last major down period the market had was in the 1970s, and the reason for it was, as always, the economy. The boom of the '50s and '60s was driven by the GI bill educating the workforce, and by the energy and chemicals (plastics, medicines, etc.) made possible by fossil fuels.

The 1970's "stagflation" resulted from a combination of factors including the Vietnam War, the 1973 oil embargo, a bad worldwide drought, the virtual surrender of American manufacturing efforts (such as the entire automobile industry: "Look! Fins!") to the Japanese, a no-win-scenario for the Federal Reserve trading off hyperinflation for stagnant growth, and rampant unemployment exacerbated by an already traumatized economy attempting to absorb millions of "baby boomers" who had no work experience. In brief: Ouch. Jimmy Carter -- who was president at the time, really! -- summed it up as "malaise." (No, that's not what happens to mayonnaise when it goes bad.)

Around two decades ago, the economy cleared up. The market has headed upwards ever since. Even the profound economic incompetence of President Bush a decade ago was a fairly minor slump in two straight decades of boom times. (Although I've got to give him credit for throwing up on the Prime Minister of Japan. There's no way anyone could possibly have expressed the American sentiment on the trade deficit any more clearly, distinctly, or succinctly than that... But I digress.)

So what's driving this boom? What took a country hip-deep in expired malaise and drove 20 years of prosperity? Three things: baby boomers, the IBM (NYSE: IBM) PC, and the breakup of AT&T (NYSE: T).

I've already written a column on the baby boom. Once the babies had a few years of work experience under their belts, they stopped being a drag on the economy and started driving it. Many of those had gone to college full time in order to get an exemption from the draft. Just as college tuition funded by the GI Bill after World War II helped fuel 1950s prosperity, the 1970s "study or die" program inadvertently led to a well-educated workforce at the start of the 1980s. There were a lot of them, and they were all young, so they worked relatively cheap.

Equally as important as the baby boom labor pool was the era of personal computers, which dawned with the Apple (Nasdaq: AAPL) II, and blossomed into maturity with the introduction of the IBM PC. The PC offered the world's first standardized commodity computing platform constructed from interchangeable parts. Although IBM didn't mean to lose control of its own creation, the commodity nature of the PC quickly placed it beyond the control of any one vendor. Overnight, computers stopped being proprietary incompatible things, with no two vendors shipping truly equivalent products, and started being a useful item like a car or a television, valued not for itself but for what could be done with it.

Without computers there would be no word processing. Without computers, there would be no spreadsheets. The biotech boom couldn't sequence DNA or simulate molecules without computers. Desktop publishing changed everything from magazines, newspapers and greeting cards to the boxes your cereal comes in. Computer Aided Design (CAD) affects more than cars, planes, bridges, and skyscrapers: Your toothbrush may have been designed on a computer. The entertainment industry may gripe about MP3 files, but the video game industry is now bigger than Hollywood -- and even Hollywood's effects are mostly digital these days.

The third major effect was the 1984 breakup of AT&T. The company agreed to the breakup because it owned the most valuable single software property there was: a Bell Labs creation called "Unix." But it couldn't profit from the computer boom while it was a heavily regulated monopoly. To escape from a 1956 consent decree forbidding it from entering the computer business, AT&T had to stop being a monopoly.

After the breakup, AT&T quickly killed the goose that laid the golden eggs -- fragmenting the Unix market so badly that it took over 10 years and the arrival of the Open Source movement to repair the damage -- but in the meantime its surrender of its phone monopoly allowed the Internet to spread from its home in universities and computer corporations to every home and office in the country.

These three forces feed off each other. The baby boom was the second widely college-educated generation in the U.S. after the World War II veterans with the GI bill, which helped boomers adopt and adapt to personal computers. By connecting computers, the Internet has magnified the effects of the PC revolution, and turned what was merely a useful tool into a communication device. And as the workforce meets the Internet, the entire economy changes.

So when does the boom end? I'm sure people in Florence were asking that question centuries ago. Here and now, the current boom seems fairly resilient. We may have another dip (we vote about that tomorrow), but until the baby boomers retire, computers stop getting faster and cheaper, and people stop figuring out new things to do with computers connecting through the Internet, we can survive a dip and prosper on the other side.

I'm voting against him anyway, of course. :)