Managing Editor’s Note: Jason Bodner is a quantitative analyst… former Wall Street insider… and one of the people our colleague Jeff Brown relies on for market insights.
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Periods of runaway inflation leave an indelible imprint on your mind.
For me, it was the 1970s… As a kid, I can remember the rationing at our local gas station. There were also food shortages in some parts when grocery stores ran out of meat.
The OPEC embargo caused the oil shortage in the U.S. at that time (and was blamed for the rise in inflation that dominated that decade). But the story was more complicated than that…
Increased budget deficits to fund an expanded social security program before the 1972 election – followed by intense pressure on the Federal Reserve to lower interest rates – laid the groundwork for a breakout in inflation.
So let’s see what we can learn about our current situation from the past…
Temporary measures to control rising inflation – wage and price controls – proved to be just that… temporary. When these controls were scrapped, prices and wages jumped dramatically as businesses and workers tried to recoup income.
As prices and wages spiralled ever higher, inflation got way out of hand. The inflation rate was 3.41% in December 1972. It hit 12.34% just two years later. After moderating briefly in the latter half of the decade, inflation peaked at just under 15% in 1980. That’s over seven years after OPEC lifted its oil embargo on the U.S. in March 1974.
Runaway inflation and high interest rates ruined a generation of business owners. They also put millions of Americans out of work.
The objective of expansive monetary policy in the early 1970s was to create a business and jobs bonanza. After all, having just come out of a recession, the last thing the government and policymakers wanted was another one…
However, inflation only came back under control after interest rates hit an eye-watering 20%, causing a brutal recession.
Of course, no two business booms are ever the same… nor are recessions. There are always a whole lot of moving parts that make each of them different.
However, the one thing that ultimately brings all booms undone is runaway inflation. Interest rate hikes follow high inflation. The only question comes down to the timing.
To be clear, I’m not saying we’re going to see interest rates that high. Plus, unlike the 1970s, the U.S. is now largely energy self-sufficient.
But when I see inflation rising sharply – such as April’s Producer Price Index (PPI) print showing inflation tracking at 6% year-over-year and 1.4% month-over-month (almost triple the consensus estimates) – that leaves me deeply concerned…
The major indexes are ripping higher. The Nasdaq was recently up around 28% off its March 30 low. That’s a huge move in a month and a half, and the prospects of interest rate increases are rising by the day.
And as the 1970s showed, once inflation gets out of control, it takes a long time and a lot of pain to bring things back under control.
That would see stocks take a massive leg down, pulling the rug out from complacent investors.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
