The Double Bubble Blues Era Has Ended: Now What?

“As technology makes the world ever wealthier, the returns on both riskless and risky assets will of necessity fall.”

                                                                                WILLIAM J. BERNSTEIN“THE PARADOX OF WEALTH”FINANCIAL ANALYSTS JOURNAL, SEPT-OCT 2013

An Eighth Investment Era?

Long-time readers of this publication will recognize Table 1 below. It has played a central role in our prognostications about capital markets prospects for decades for three reasons:

1. The table reminds us that financial markets have mindsets that swing from extended periods of growing optimism to extended periods of growing pessimism.
2. It also reminds us that these mindset swings impact pricing in the capital markets in predictable ways. Growing optimism leads to rising prices for risk assets, generous risk premium realizations, and hence falling prospective risk premiums. Conversely, growing pessimism leads to falling prices for risk assets, negative risk premium realizations, and hence rising prospective risk premiums.
3. The table facilitates focused conversations about past investment eras, about the current one we are living through, and about periods during which one era transitions into another.

This Letter will focus on the third reason. We think it is becoming increasingly plausible that the Double Bubble Blues era ended a few years ago, and that we have been transitioning into a new era which for reasons set out in this Letter, we will tentatively call Mature Capitalism.