That 70’s Market

If you have read The Wall Street Examiner you have read Lee Adler comparing the trading pattern we are under to 1973: where seasonal “go to” trades lost money; where the Santa Rally was cancelled after the October rally fooled everyone.

But 1973 has other similarities other than price action on the markets –

1. Energy prices  spiked in October of 1973, squeezed disposable incomes and ultimately induced recession,
2. US fiscal policy was further loosened to try to finance large deficits (1973 was the last year of Bretton Woods), and
3. Worldwide protest movements underscored severe social tensions and political dissatisfaction (Students in Greece even managed to depose their government).

Many people learned in the 70’s that institutions they had relied on weren’t worthy of their trust.  Americans discovered that politicians lie, allies can turn on you and that expensive wars can be lost.  They also learned that economic advantages can be frittered away to bold newcomers.  Bad policy decision came after bad policy decision.  Each step intended to ease (or simply avoid) pain simply prolonged and deepened the pain.

We also learned that industrial societies are quite dependent on a steady, stable flow of cheap commodities.  Commodity driven inflation profoundly affected society.  As stagflation took hold anyone who had been stupid enough save money and keep it in a bank account (habits stoically developed in the Great Depression) saw their buying power shrink by the month.  Those who were able to negotiate better compensation and were sophisticated in their dealings were spared – some even figured out how to make money.   Those on fixed incomes or working the bottom economic rungs simply suffered as they lost buying power and had to ration spending on essentials.  For most people, every day carried a deepened sense of being trapped.

The Dow Jones Industrial Average really didn’t go anywhere from 1965 to 1980.  The double dip recession years of 1980-83 saw fiscal tightening and rapid commodity “dis-inflation” (the two are related) and then a sustained period of industrial productivity growth and full employment.

But that turn took a long time to produce.  The chart of the period tells the story – a story of pain.  The DJIA moved from boom to bust to boom with a 4 year periodicity.  For traders, the opportunity to double money with a two year long position, and then double it again with a 2 year short would have been great – except that inflation ended up eating much of the gains.  Few things focus minds like pain and few things motivate collective minds to effect actual reform like collective pain.

As happened in the 1970s, our policy makers have had the explicit policy aim of avoiding economic pain.  QE exists to take the pain of the few and spread it over the many such that (ideally) it isn’t felt.  That was the theory in the 1970s when Bretton Woods was thrown out and it is the theory today.  Today the pain isn’t spread around as much as it is transferred outright – those who took the big, leveraged risks in 2007 walked away in 2008 (after transferring the losses to the people of the United States) and saw record bonuses in 2009.  All while everyone else saw a slow motion decline in household incomes, employment and prospects.  Things will only change when the parasitic crowd that foisted bad policy on all of us feel profound pain and where the only road back to prosperity is one that involves mundane things like productivity growth and fiscal discipline.  A future in which a company like General Electric actually pays taxes (and doesn’t waste productive resources on reclassifying activities via 57,000 pages of forms to avoid them).

Crashes and panics often serve the purpose of focusing collective minds. When severe enough they are Reckonings – they focus all minds on what must be done where no “magic bullets” are even considered.

That’s what came at the end of the 70s. Santa Rally or not, we look likely to repeat that chapter in our history.

May I be the first to wish you a Happy Reckoning.  70’s style.