Welcome the Seventies!

No, you won’t get back your Intel 4004, you won’t need to grow back that Afro, nor will you easily get a hold of some new records from the Beegees. But what you are most likely to see a heck of a lot more inflating prices of goods (your favorite dinner) and deflating financial values (your favorite stocks).

The reason why some things just don’t change, is because people don’t. After the roaring 50s and 60s, we had evolved from savers to spenders, from investors to speculators. As the markets began to deflate, the Federal Reserve, along with the help of the U.S. Government Mint, began injecting even more liquidity into the marketplace in attempt to cushion the fall of falling asset prices, such as stocks and bond ratings.

In doing so they created a giant ball of cash that was rolling nowhere since due to its gigantic size was being rejected by the average consumer in favor for safer assets, such as commodities and real estate, and eventually gold.

It’s happened before in the 1970s and before that in the 1930s. Before that at the beginning of the last century. As a matter of fact, it’s been recurring about every 30 years or so, in almost identical cycles: Years of solid growth, followed by years of higher company profits trailed closely by stock prices, and then a euphoric blow-off of speculation and ill-appreciated prosperity. Then came the bust, the “credit crunch” when debts come due, loans are recalled, intrinsic values revisited. All speculative action dies along with the spirits of those who were riding it.

The primary differentiation between the “inflationary” depression of the 1970s and the “deflationary” depression of the 1930s was a simple one: Liquidity. In 1929 after stocks crashed and banks were failing by the day, there was nothing to fall back on. Man’s trust was in gold and its supply was limited. The Treasury was by no means interested in sponsoring such an event with goods of limited supply and unlimited value to those in need.

Today the story has a twist. One that has been in motion since its inception in 1944 with the Bretton Woods Agreement when the U.S. Dollar, became the unilateral global currency, “always” to be redeemable in gold. This was scrapped in 1971 with the closing of the “gold window” when these dollars became backed, not by resource of limited nature rather by the faith and credit of the people, assumed its role as the world’s global currency. This enabled the powers that be with the ability to constantly replenish the world’s liquidity in times of necessity. Unfortunately, this resulted in the same failures seen in the 30s. The rich got richer because they owned things and the poor got poorer because they owed things. Furthermore, how much you had became significantly inferior to what you had.

This being the predicament it has become quite clear in my mind that the scenario to unfold will indeed be that of an “inflationary” depression. the European Central Bank announced that it would make “unlimited” funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.

The only way for the Fed to limit the deflationary affect of illiquidity, would be to increase real value – earnings, commodities and gold. Unfortunately, and contrary to the belief in the Federal Reserve, that’s impossible.

Billions won’t be enough to mop up this mess, but trillions. Even then chances are good that amid the panic, much of that liquidity will get misallocated to places whom those injecting it don’t desire. There is no question in my mind that the damage has been done and one way or another values must realign.

Consumer costs will rise, while stock valuations (as measured between earnings and cost per share) will fall. Debt related issues will suffer, albeit not do to deflationary pressure, rather due to inflation and interest rates.

Tomorrow marks a significant day for hedgers as the deadline for withdrawal at the end of the quarter (45 days). This was obviously discounted as the Dow fell another 200 points.

Mark my words: These days will go down in history.

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