When I heard that the FDA was lifting restrictions on silicone breast implants, I couldn't resist proclaiming that the 1970's were back. Oh, but we have more similarities than just breast implants.
The question now is will we see an end to this cyclical bull rally and see a 1973-1974 bear market, or will the market begin a new bull market without a final low?
1) Supply-side shocks (OPEC's two oil embargoes of the 1970's) caused energy prices to soar. Today demand for energy resources are high (China & developing nations) creating another supply-side shock.
The first mention of Hubbert's Peak began in 1970 when many proclaimed that U.S. oil production had peaked. Today, many researchers are saying that U.S. production has fallen to the levels of the 1940's. In 2005, U.S. oil imports were twice as high as domestic production.
OPEC countries like Saudi Arabia have not reduced their oil reserve figures for many years even leading many to doubt whether they have the reserves that they claim. This same situation occurred from 1973-1979 when U.S. oil companies claimed to have more oil than they actually had.
Two-thirds of the world's known oil reserves are in the Persian Gulf. Saudi Arabia is the world's largest producer, followed by Iraq, which may explain why President Bush keeps saying that" we must stay the course" in Iraq.
Today, we are seeing the same situation with U.S. oil companies. Many of these domestic companies report as their reserves the joint ventures they have with foreign countries. Given the political conflicts in South America, many U.S. oil companies are being expelled from countries like Peru, and Venezuela.
This weekend, Venezuelan President Hugo Chavez won a landslide victory in the nations recent elections. For the next six years, Chavez will continue to gain support from other countries in South America, and build coalitions against U.S. oil interests.
2) In the 1970's, high gas prices crippled companies like GM, Ford and Chrysler and caused people to switch to smaller cars. Today high gas prices are essentially doing the same thing.
Ford and GM have announced several plant closings, and thousands of workers will lose their jobs.
3) The 1990's were a period of solid growth and low inflation. From 2000-present we entered the beginning of a new phase of commodity and price inflation. The last time this occurred was during the growth and low inflation period of the 1950's and 1960's which was followed by the commodity/price inflation and recession phase of the 1970's.
The saving grace on the inflation front is how watered down the CPI has become since the 1970's. In fact, since its inception in 1921, the CPI has undergone six revisions or adjustments. Prior to these adjustments the stock market would react negatively to huge jumps in the CPI. So, as a solution, the CPI has continually been a work in progress and revised.
Besides having a negative effect on the stock market and the economy, the Consumer Price Index (CPI) is used to determine a government employee’s COLA each year. COLA means "Cost of Living Adjustment", and is an annual adjustment in wages to help offset the rise of inflation. Without a cost of living adjustment, employees of the Government could find themselves behind as prices rise. So, the CPI has been massaged in a way to make sure the Government does not have to shell out big bucks during highly inflationary periods.
Through the years, the components of inflation have been adjusted, revised (through trial and error), and watered down so much that inflation has been in a range of 1-5% since 1991. This makes it easier on the government to manage the COLAs for employees, not to mention being easier on the nation's massive financial debt.
What we have today is massive inflation that is no longer reflected in the CPI data. We continue to believe that the CPI is not an accurate indicator of inflation, nor does it reflect what is happening in the real world. At best it is a convenient measure, convenient only for the government and their pocketbook.
So, the next time you listen to the financial channels and get excited about the inflation rate, remember it has been within a 4% range for 15 years. Since everything inflationary has already been removed, you cannot rely on its accuracy.
In conclusion, if inaccurate CPI data, high energy prices, lost jobs, disappointing retail sales, an inverted yield curve, a falling dollar, and a bursting of the real estate bubble are all building blocks for a new bull market, then we are going to have a great stock market.
If not, then my economic books were accurate, and we are seeing the 1970’s all over again.
Comments (1)
The return of M3:
http://bigpicture.typepad.com/comments/2006/11/the_return_of_m.html
Posted by DollarBill | December 4, 2006 1:32 PM
Posted on December 4, 2006 13:32