It’s the 1970s…
Economic growth is weak, unemployment is rising rapidly, and the world is losing faith in the U.S. dollar.
Unsurprisingly, the stock market is a shambles.
In a matter of 18 months, it will decline by a staggering 40%. For a decade to follow, no one will want anything to do with it.
It will take four recessions, three Federal Reserve chairmen, and a brutal policy of tight money for the stock market to turn around.
But what brought about the trouble in the first place?
Are we facing a similar situation now?
And can we have faith that our current leaders won’t make the same mistakes?
After all, history tends to repeat itself.
A Toxic Cocktail Of Loose Money, Budget Deficits, And Poor Leadership
The blame for the Great Inflation of the 1970s fell on everyone from the Saudis to currency speculators and greedy businessmen.
However, the real culprit was American leadership.
At the time, the U.S. Congress and President Nixon both supported loose monetary policies and massive budget deficits, in part to support the Vietnam War.
Those deficits made dollar-holders nervous. Many thought the Greenback was overvalued… and, soon enough, they were proved right.
When Nixon broke the gold standard in 1971, turning the U.S. dollar into a fiat currency, its value dropped.
Arab oil barons with millions of petrodollars were left with only one solution—to raise the price of oil… which only further increased inflation.
Nixon attempted to restore the faith in the U.S. economy by instructing Fed Chairman Arthur F. Burns to keep the unemployment rate at 4%.
Burns, eager to please, significantly lowered interest rates… and, for a while, he looked like a hero.
The economy boomed, and most Americans were awed by the low unemployment and robust economic figures.
However, the Fed’s “easy-money” policies soon succeeded in overheating the economy and causing high inflation, which would reach 14% by the end of the decade.
The Great Inflation Of 2019?
Fast forward to today, and you see many parallels with the 1970s.
The economy is booming. Again, it’s at the expense of loose fiscal and monetary policies.
The president is focused on low unemployment, economic stimulus, and record budget deficits.
So far, inflation is under control… but for how much longer?
The price of oil is already up nearly 30% in 2019 and is set to increase even further.
The United States aims to cut Tehran’s oil exports by around 20% starting in May, and, eventually, to halt these altogether. Iran is the world’s sixth-largest oil exporter, and a complete ban will significantly reduce global supply… which will increase prices.
Moreover, low unemployment translates to increased spending, which in turn translates to increased demand for goods… and inflation.
Meantime, running a large deficit while the United States is already dealing with a record high debt-to-GDP ratio is unsustainable. Foreign investors realize this and could soon start dumping the U.S. dollar, which would devalue it and cause inflation.
What To Avoid, Where To Hide, How To Profit
In the end, it all boils down to the current Fed chairman’s ability to raise interest rates fast enough, should the economy begin to overheat.
So far, Powell has been rather slow to do this. And, when last he did raise rates, he retreated as soon as the stock market showed any signs of weakness.
I can’t blame him. Would you want to be responsible for a market crash? Chairman Powell doesn’t want to be either.
However, this means he’s headed down the same path as his 1970s predecessor, Arthur F. Burns.
Fortunately, history doesn’t teach us only about the perils, but also about the solutions.
When inflation hits, it will hurt interest-sensitive industries, such as cars and housing, the most. Many people won’t be able to afford them. Therefore, you should be avoiding these stocks.
Instead, look at companies whose goods and services increase along with inflation. Consumer staples, health care, and utility stocks tend to overperform in such times… as does gold.
During the 1970s, the price of gold increased from $36 per ounce to nearly $700 per ounce. That’s about a 20x times increase.
With the price where it is right now, I see gold as one of the best possible long-term investments.
Good investing,
Leon Wilfan
