Guest Post: Don't Bother with Comparisons to the 1970s... They're Useless

Tyler Durden's picture

Submitted by Mark Spiegel

Don't Bother with Comparisons to the 1970s... They're Useless

Some folks believe that we're headed for a stagflationary era similar to
that of the mid-1970s to early 1980s, when inflation got out of control
and even nominal stock prices essentially went nowhere despite
significantly higher nominal earnings. The difference between then and
now, though, is that then the Fed wanted to control inflation, whereas now it's trying to create it.

That
nasy inflation of the 1970s that we've all read about (and many of us
are old enough to remember) began in 1973, when the CPI finished +8.7%
vs. +3.4% for the previous year. It continued (dipping to as "low" as
4.9% in 1976 and climbing into double-digits in 1974, 1979 and 1980)
until it was finally broken in 1982, when it declined to 3.8% from 8.9%
in 1981. The way inflation was broken, of course, was via increasingly higher interest rates; the Fed Funds rate started 1973 at 5.75% and climbed to as high as 20% (!) in 1981.

Those
high rates served (presumably, not intentionally) to compress stock PE
multiples despite corporate America's generally much higher earnings.
Specifically, the S&P 500 began 1973 (the beginning of the
high-inflation era) at 118.05 and ended 1981 (the end of the
high-inflation era) at 122.55, for a total eight year gain of just 3.8%,
despite the fact that trailing nominal S&P earnings increased over
that time from $6.17 to $15.18. Thus, 2003 opened with a trailing
12-month PE of 19.13 while 1981 ended with a trailing 12-month PE of
just 8.07. The reason stocks went nowhere, of course, was who needed
stocks when one could earn a high double-digit return simply by parking
cash in the money market?

The goal of the current Fed, though, is to inflate away enough of the national debt to make it manageable. (The Fed doesn't really
believe that at this poiint, additional QE can do much more for the
"real" economy.) Thus, this Fed won't be providing the kind of higher
interest rates that capped PE multiples in the 1970s. So, after perhaps
an initial earnings squeeze due to compressed profit margins from
higher input prices (i.e., if you want to short nominal stock prices,
right around now may be your last chance), we may start to see higher
nominal earnings as prices are increased while wages-- due to the
international fungibility of labor-- are capped, along with either
steady or expanding PE multiples.

What could cause higher
interest rates (thereby crushing PE multiples and, presumably, stock
prices)? Well, if the price of gasoline spikes north of $4, folks (and
their politicians) may scream loudly enough to force the Fed to stop
trying to "create" inflation. Or, of course, it could happen if the rest
of the world suddenly stops buying our debt unless it gets better
compensated for it (via higher rates). The fact that either of these
things could happen (and, in fact, at least one of them may even be likely to happen) means that inflation-induced higher nominal stock prices in a very slow-growth economy are not a sure thing.

Thus,
one might conclude (assuming that one believes that we're destined to
remain in a slow-growth economy) that upside vs. downside risks in the
equity market are currently somewhat equally weighted, with the
resolution dependent upon whether or not the Fed is able to cap interest
rates which, as a "by-product", would allow steady or expanding PE
multiples to combine with inflation-induced higher nominal earnings, and
thereby create higher nominal stock prices.

 

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e_goldstein's picture

<sarcasm on> but but how can they do that? it's not in their mandate <sarcasm off>

buzzsaw99's picture

but, but, what about the all important fundies?

Justaman's picture

In my best Ron Popeil (Billy Mays RIP) voice over:

We've all heard of inflation, deflation, stagflation, hyperinflation, and thanks to the ZH community "Biflation"...

Well, now we are proud to bring to you a cutting edge, state of the art 'flation that will blow all of the others away..BUYflation.

Yes, that's right, BUYflation. Why BUYflation, you ask...

It is the culmination of an incompetent governments policy to embrace paper liabiliities to buy all of the shit no one else wants in an effort to prop up deteriorating values forever. That's right...FOREVER.

But wait, there's more, buying crap like MBS and UST was just not enough, nooooo... Now, this entity, locally known as the Treserve, is buying other crap like public stocks all in an effort to kill the dollar and inflate its way out of many decades of bad, bad monetary and fiscal decisions.

And the best part is there is no payment needed as all the costs will be passed onto the U.S. taxpayer. You heard that right...YOU. 

No rush to order because the stink is being shipped to you directly and will keep coming and coming and coming...the Treserve knows where you live bitchez.   

Legal disclaimer: Due to strict patent rights and some other bull, BUYflation cannot be sold outside the good ol' USA since nearly every other country has its own dungpile to pass on to its citizens as they have been working on BUYflation for quite some time already. As all of this global shit is collecting in one big dung pile, the race to the bottom will be competitive.  

Instant Karma's picture

The mood and politics of the USA is similar to what I remember of the 1970s....

Nixon (Bush) followed by Carter (Obama).

Stock market was dead money while inflation surged along with commodities.

 

snowball777's picture

Don't forget foreign invasions on specious grounds and the associated national debt incurred.

chrisina's picture

The mood and the politics of the 70s was maybe similar to that of today, but I'm quite sure the decade that is ahead of us will not be similar to the one that followed the 70s:

in the 70s:

debt (public + private) was the lowest it's been

inequality was the lowest it's been

share of income going to wages and benefits vs profits and dividends was the highest it's been

The US was still the number one competitor for production and innovation, China and India were not on the economic map

 

today:

debt (public+ private) is the highest it's been, let's not forget this is the main cause of this crisis

inequality is back to a high level

share of income going to wages and benefits vs profits and dividends is the lowest it's been

China and India are the new growth engines of the world economy, the US lost most of its manufacturing base

 

so the 70s and today were radically different. I agree with the author, comparisons are useless. We're in a crisis that's caused by excessive debt, the systematic redistribution of the wealth of the middle class who work for a living towards the rentiers who live from what they have amassed during the bonanza or inherited, and the systematic outsourcing of production towards lower wage countries... quite the opposite of the 70s.

His name is Hank Paulson's picture

No, China and India weren't on the Map.  But the USSR was.  And 15 years later it was Japan that was going to surpass us.  Now it is China.

 

I'm not saying that China won't surpass us and that we're undergoing massive experiments with unquantifiable risk - far from it.  I just think our ability to forecast massively complex issues has been questionable at best.  

 

The grass is always greener, especially when times are tough, and we are very good at ignoring the political and economic risks that other countries face.  Even given all our problems, I'm not sure theres a country out there that wouldn't trade places with us in a heartbeat.

Freewheelin Franklin's picture

Umm, I think Ford was in there between Nixon and Carter.

Kayman's picture

I remember a 14 month order file on key units at Cat drop to zero in a few weeks.

This time is indeed different since the productive base of america has been outsourced.

Just imagine how tough it must be in China.  They have jobs and inflation. 

If Benny and the Inkjets succeed, we will have no jobs and hyperinflation- half the problems China has to deal with. Aren't we so lucky....

MGA_1's picture

Well... hmmm... think the fed might have been in on the job also during the 70's...

Ropingdown's picture

Yes.  Fed Chairman Arthur Burns was absolutely known anti-chairmanship, as an inflation hawk.  Nixon broke him.  It was pathetic.  Also the early 70's had not only the oil shocks, but the enormous victory of the UAW in '71 which took time to flow through.  At the same time the Federal Gov went on a wild spree of "inflation adjustments," and Civil Service Unions demanded that they be included in the party. Nixon added to the benefits growth of the Johnson years.  Today it's commodity inputs and imports that will inflate, prices will rise but unit sales will stagnate, and as labor falls further behind demand will fall faster.  When foreign demand also falls as an eventual result, deflation has to become a fact for a time.  Printing money will cause nothing but civil unrest with no upside and trade war.

kaiserhoff's picture

In the seventies, the US had a solid manufacturing base, medical costs were trivial, housing costs were modest, jobs were (relatively) abundant.  It was possible to believe that the future would be even better.

FEDbuster's picture

Those are the core reasons we cannot compare the two time periods. 

I would warn Benron to "be careful what you wish for" and "it's hard to put the genie back in the bottle (ask Paul Volker)".

Mercury's picture

The ~30yr. Treasury rally began when Volker killed rampant inflation and will end suddenly when Bernanke reanimates it.

5 trillion volts to the temples...It's ALIVE !!!  (thunder, lightning, evil laugh).

TooBearish's picture

Yea I'd take the 70s over today's crappy environment - the music was one helluvalot better too....

goldsaver's picture

the music was one helluvalot better too...

 

Including Disco?

Rogerwilco's picture

@goldsaver

Disco sounds like Beethoven compared to the banal shit from Mylie Cyrus or Beiber.

hbjork1's picture

70's:

Crooners, Sinatra, Dean Martin were still around, Elvis was still alive general optimism of WWII results still in place.  Dollar still valuable abroad.  Physical work was still fashonable. 

FEDbuster's picture

Food stamps were made of paper in coupon books, and you had to stand in line every week to get unemployment (plus they made you prove that you looked for a job) and we still had government cheese.

http://www.youtube.com/watch?v=t-HiXqqUItM

nmewn's picture

Ah yes...the term "government cheese".

As a kid I remember going to one of the places where it was handed out along with other staples The people getting the "cheese", for the most part, were grateful to be getting it. But it also came with a sense of shame and embarrassment.

Flash forward thirty years.

Screwball's picture

NO - not disco!

That shit was the start of all our problems.  Everything changed when Disco came along.  That's when we became the "me" generation.  Instead of fast cars, slicked back hair, jeans, cigarette pack in our tee-shirt, and an attitude, we went to looking like John fucking Travolta in Saturday night fever.

Wimpy fucking suits, everybody drank fancy ass drinks, disco lights, the fucking Bee Gees.  Those WERE NOT the days.  Fuck the suits, fuck Travolta, fuck the Bee Gees - and fuck Disco.

DosZap's picture

I'd go back in a nano second, Bee Gees have sold more albumns than any group on the planet.

The Polyester suits sucked, (esp near flame), but the chicks were hot,wore a lot less than now, and we were Burn Baby Burn!.

IMHO, some of the best music ever made came from that era.

Hell even the young people still like it.

The fun part was anyone could be someone, even if it was just a for a weekend.

Ropingdown's picture

Automatic inflation adjustments led inevitably (and in a new way) to the devaluation of currencies, except in small countries which successfully exploited niches. In '79 the Sw Franc was 2.1 to the dollar, the Swedish Krona 4.5 to the dollar. The Swiss won, the Swedes lost ground.  Medical costs are going to break the US if we don't accept any triage and keep assuming that government will provide every medical device, surgical innovation, transplant, and pharmaceutical.  That's simply a fact. We either accept limits to public and employer costs, or we'll go broke.  There isn't another set of facts.

sethco's picture

The reason stocks went nowhere, of course, was who needed stocks when one could earn a high double-digit return simply by parking cash in the money market?

and TPTB learned their lesson very well. No one would ever again be provided with any incentive to save any money. Dump it in the stock market. Take out a huge loan. It's cheap.

Wall Street Fuckers

Ropingdown's picture

In the 70's so-called "unearned income" tax rates went absolutely through the roof, maxing at 70%, while salary income maxed at 60%. It was hideous.  Only idiots and the fearful parked money in CD's.  The smart money bought land and buildings held within corporate shells, and held for the long term.

Sancho Panza's picture

Thought experiment:  if inflation rises to 10% per year, and the Fed keeps interest rates near zero, how long will it take before the crack-up boom?

If I could have a conversation with Bernanke, it would be this:  Mr. Bernanke, I would like to share two observations with you and then ask you a very pointed question.  First, my grandparents lived through the depression and spoke of their sacrifice.  It built their character.  They learned to work hard and save.  Second, the hyperinflation of 1923 Germany ruined their society.  Lifetimes worth of savings were wiped out by a printing press.  People learned the wrong lessons.  History knows this led to Hitler's horror.  Mr. Bernanke, here is my question: why do you think the risk of hyperinflation is preferable to a depression?"

Justaman's picture

Since he ONLY studied the first great depression and as we all have heard is a great historian of it, this academic hack may have no idea what hyperinflation means. 

buzzsaw99's picture

don't waste your breath, bernanke is a puppet.

Justaman's picture

(sarcasm definitely on) But he looks so smart with that beard and diploma hanging in his office...

jdrose1985's picture

The Fed actually has no power in create hyperinflation. In fact, much to mr bernankes chagrin, oil is calling the shots.

Yes any rising oil prices are in fact extremely deflationary. Any attempt to raise prices is counterproductive as it merely crashes the "real" waste based economy. Oil will be more expensive at $30 than at $50 or $60.

Burnbright's picture

That or it causes a lot of business operating on a small margin to close and thus reduce the supply of goods and services (inflationary), and also causes a further loss of faith in the US dollar. 

Rising oil prices wouldn't be deflationary for the reason that business overhead is rather static, most business would just be shut down and never opened again, that is not deflationary. If this were a free market I would agree, but its not. 

jdrose1985's picture

If business close down what does that do to wages which would bid up those goods? Exactly, eventually the "goods" will just quietly disappear from the shelves as demand falls to zero. Food prices don't even have to be rising in nominal terms to be going through the roof in real terms in such an environment!

As we continue to bleed more and more jobs due to the lack of oil affordability/availability (Joint Military Command says oil surpluses to be gone by 2012, 10mbpd shortfall by 2015) the velocity of money creeps ever lower as cash becomes too valuable to spend and is withdrawn from circulation.

DosZap's picture

 "if inflation rises to 10% per year"

Sancho, hate to tell ya, it's already over 9%.

pitz's picture

Dow 36,000, motherfuck*rs!

Seriously though, very little of the Dow is positioned to take advantage of higher inflation.  Its not exactly full of producer stocks, nor is the USA, as a country. 

Take your dollars and buy the Canadian stock index (TSE60) if you want something that's actually weighted heavily enough to benefit.

P/E's on the Dow probably will continue to fall, and keep falling along with the currency. Probably fall until there's a 1:1 ratio between gold and the Dow.  TSE60 should be 2000-3000 (currently ~700) by then because of the 50% weighting in commodity producers. 

Jasper M's picture

NOTE the assumption: The (admittedly, nigh omnipresent) toxic belief in the Potent Director.

 AUthor seems to be embracing the same mythology the Fed depends on, to wit, the notion that the Fed actually has all the influence it and its proponents claim it does. 

The Federal Reserve has labored agaisnt the forces of deflation, for well over a year; labored mightily,  in tandem with the Treasury, and brought forth . . . a mouse. 

Housing is Not coming back. Certainly not after mortgage-gate. Delinquency rates and recovery rates are still down. So all those MBS are still garbage. And since those form a significant percentage of the balance sheets of most financial institutions, They aren't coming back. That's a vast impairment of the money supply, an impairment the Fed, in a credit saturated environment, cannot deal with. 

logicalthought's picture

>>AUthor seems to be embracing the same mythology the Fed depends on, to wit, the notion that the Fed actually has all the influence it and its proponents claim it does.<<

 

Hi Jasper,

I'm "the author". Are you saying that the Fed can't tank the dollar, if that's what it wants to do? Because once it does that, the prices of most non-labor inputs will go up, and as companies are forced to raise prices in response (even if such increases are "partial", due to a lack of "pricing power") higher nominal earnings should eventually follow.

Justaman's picture

Thanks for the article.  Good read and information. 

But I think the story ends if there are no buyers of these higher priced goods.  I too think the Fed does not have the power it thinks it has.  It has transferred some of its so called power overseas to our creditors.  As evidenced by a whining Timmy G on the value of the Yuan.  Keep crying Timmy, the world is laughing at you.  

The Fed's desire to avoid a high savings rate in a liquidity trap will be its downfall as the perfect global economic, global financial, global credit, and local political storm is upon us.  People don't care about interest rates if they worry about keeping their home, job, and food on the table.  Economic theory is being rewritten as we speak. 

kaiserhoff's picture

I think what Jasper was pointing out, pretty well actually, is that a full two years of this medicine have been a complete failure.  Worst job market since the depression, housing still spiralling down, net worth of many families devastated, and where is the progress?  The banks are worse off than ever.  Only fraudulent accounting, forced on the accountants, keeps their doors open.

Economists, in general, have no interest in or feel for small business.  If you want to get to the heart of the problems in this country, that's the place to start. 

Bartanist's picture

That does not make sense. When prices go up, then people will be able to afford less and will spend less. Wages lag inflation.

Ropingdown's picture

Agree with Jasper. I've never seen the Fed more panicked.  I can only suppose, hope, Bernanke has a full bottle of Ativan at the ready.  Same goes for Geitner.  Every word they speak is heard in a room which smells of fear.

DosZap's picture

"Housing is Not coming back"

Any IDIOT, should have seen the loss of the buying power of the Boomers,and their preperations for retirement meant LESS( a lot less) disposable income.

 

Boomer Revenge Bitchezz.........Bankstas, we won.

Miles Kendig's picture

Or, of course, it could happen if the rest of the world suddenly stops buying our debt unless it gets better compensated for it (via higher rates).

The fed has that taken care of with their future centurions

jimmyjames's picture

The high prices in the 70's was nothing less then a run on the USD-

It started when Nixon defaulted on the US obligation to pay debt in Gold under International law known as the "World Gold agreement"

When France and Britian etc. demanded gold for debt payment-because of USD devaluing-

Nixon cut Gold loose-

Those Foreign lenders who were then forced to accept the $ started selling them and buying Commodities and Gold as fast as they could-

This is what drove prices and the only way to save the $-was to jack up rates and we know they did-

At 20% who could resist holding $--

So-money flowed back out of Commodities/Gold and back into the $ and prices declined-

Vocker is credited for taming Inflation-when in fact he caused it-

Volcker saved the USD-nothing more-

Lower prices followed-jmo-

Sam Clemons's picture

Wasn't the way the inflation is measured changed in the 80s?  Of course there is inflation now, plenty of it, just look around at food, energy, metals, non-food agriculture.

dark pools of soros's picture

i just paid $33 for 15 razors... you could get 50 ginsu knives for $9.99 a couple decades ago..

jdrose1985's picture

In a debt based monetary system, increased business activity is what drives inflation.

We aren't exactly a "paper based" system, cash is what extinguishes debts (or rolling over the old debts) but cash is not necessarily a store of value. In fact, its not really intended to be, at least I wouldn't think so. Highly valued commerce causes weak currency. Weak commerce makes for valuable cash as it is withdrawn from circulation.

The helicopters never existed. The crack up boom is already here and gone. All we have left to face is collapse and liquidation. Like Mako said, you ARE the helicopter.