Can this be 1973 again?

S&P 500

Today, the “setup” in financial markets looks a lot like 1973.

Back then, the U.S. had high unemployment (and was rising), it had overspent on war in Vietnam, increasing social uprisings and its monetary base has increased notably. The U.K. has a secondary banking crisis

There were tensions in the Middle East which saw Syria and Egypt launch attacks on Israel sparking the Yom Kippur War which lead to the 1973 oil embargo and the oil price doubling.

 

 

 

In August 1971, the U.S. pulled out of Bretton Woods and thus took the US Dollar off the gold standard. This saw the USD fall in value and upset oil producers who were receiving less for the USD denominated oil they were selling.

Between 1971 and November 1973, gold had tripled up to $95 per ounce.

US Dollar Index (DXY)

What then happened in 1973/74?

Stocks fell 40%, oil soared as did gold and agricultural (softs) commodities. Food inflation was already accelerating in 1972. By December 1974, gold rose doubled to $180. Inflation skyrocketed which led to the yield on the U.S. 10 year bond rising sharply. They eventually rose from 6% to 13% within 7 years.

Central banks raised interest rates in attempts to stifle hyperinflation.

What if interest rates in Australia rose to 14% by 2017, or if U.S 10yr bonds today rise from 2% to 6%?

In 1973, the US Dollar rallied as did gold, oil and the “softs”. The traditional inverse correlation of the USD and commodity prices decoupled.

Currently, equities are exhibiting weakness, the US Dollar is rising while oil and gold are “hanging tough”.

Are you seeing any similarities?

Today, my current macro thesis is based on a similar outcome – asset deflation and food and energy inflation. Stagflation.

Nevertheless, my intention is not to be dire but rather call it as I see, read or feel it.

The results of this scenario playing out could see natural gas prices rise, softs rise as will gold and oil, transportation business suffer as will retailers, bond prices fall (especially longer dated), AUD weaken as do industrial and base metals. Using the 1970’s playbook, caution would be warranted when it comes to property as inflation later rapidly decelerated in 1974-76 which when coupled with interest rates that remained high led to new stresses.

If we see a repeat of the 1970’s, then the good thing about it is the 1980’s are around the corner again. Better stock up on fluorescent leg warmers!

Finally, I found the attached link (The Age newspaper, 2005) an interesting summary of 1974.

http://www.theage.com.au/news/National/The-year-the-economy-went-bung/2004/12/31/1104344983057.html 

Wheat

Sugar

Gold

The ’70’s Graphs/Data source: Bloomberg.

Crude Oil

US government 10 year bond yield

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