What Historical Time Period is Comparable to Today?I have posted a number of times over the past year about inflation and an impending downturn in stock prices. We have already seen the beginnings of this so far this year. The media and politicans tend to compare the headline inflation numbers to the early 1980s and I have pointed out before that that measure compares apples to oranges since the way inflation is calculated today is not the same as it was back then.
In a recent post, I stated that the situation today is possibly actually worse than it was in the early 1980s.
This begs the question - "What is a comparable time period?"
If we were to calculate inflation the way it was done up until 1983 when there were major changes, the current inflation rate would be 11%. This is comparable to what it was when inflation triggered the recession of 1973-75.
What triggered the inflation back then?
In short, four things - high budgetary government deficits; a rapid rise in oil prices; easy monetary policy; a war.
Sound familiar to what is going on today??
So what actually happened to stock prices back then?
The DJIA fell by about 45%.
So far from its peak at the beginning of January of this year, the DJIA has fallen about 17%.
Will it go down as much as it did in 1973-1975?
Who knows but there is a good chance that it will go down more than it has so far and perhaps even more than it did in the recession of 1973-75 and that is why I used the analolgy in a previous post that we are just in Spring Training and the Regular Season hasn't started yet.
What are the catalysts that could make it worse than in 1973-75?
1....Migraine and others here have talked about it extensively. Oil prices are unlikely to go back down in the foreseable future and for a number of reasons well documented here. In the 1970s there was lots of excess oil production capacity in OPEC so the system could self correct.
2....The war in the Ukraine is likely to last for another year and perhaps longer. During that time, there will be continuing and worsening food shortages world-wide caused by the war and further food shortages caused by higher oil prices feeding into things like fertilizer which will trigger continuing high inflation. In 1973, the war had no such characteriztics. It was short and had no impact on food prices.
3....the recession in 1973-75, as I stated above was triggered in part by easy monetary policy. For the past 13 years we have had easy money. As I have mentioned many times in the past, this financial engineering results in a buildup of the natural forces and eventually it becomes impossible to hold back these natural forces because they become so large that the dam breaks causing widespread destruction. Are we there yet? Who knows? But in my assessment we are getting close (the start of the Regular Season).
Anyway, you can take my thoughts for what they're worth, draw your own conclusion, and make your own decisions about what you will do going forward. Above all else, please, for your own sake, be pragmatic and not rely on emotion or think that the market is a like a kitten - it's not - it can be very brutal at times. I know. I have the scars to prove it.