📈  Chart of the Week 9/8/2024
By Mike Allison
There is an old saying that history doesn’t necessarily repeat itself, but it often rhymes. This week’s Chart shows the trajectory of the extended inflationary cycle from 1966 to 1982 (blue line). Overlaid on that line is the path of the latest cycle (yellow line) which is shown to have begun in 2013.
The two cycles are eerily similar up to this point and the Chart leads one to believe that if history does repeat, we’re in for a world of hurt in the coming decade or more.
However, I must point out that there is a bit of an optical illusion in how the chart is constructed. You can see that the scales are different. The first peak for the blue line was in 1975 at roughly 12.5% (right scale), while the yellow line peaked at around 9% in early 2023. So there’s a difference in magnitude worth noting for what that’s worth.
Why was there a second wave of inflation back in the 1970s, which resulted in an even higher peak than the first wave?
Of course, there was the ongoing turmoil in the Middle East at the time. That is well known.
I also believe that part of the cause was the demand for housing and the durable goods associated with that by the Baby Boomers as they established careers and began starting families of their own.
However, the most obvious and widely believed cause of the second wave at that time was the significant political pressure put on the Federal Reserve to lower interest rates too soon. I have no reason to disagree with that.
Which brings us to the inflation cycle of today.
I do worry that the Fed will be forced to lower rates too soon but not necessarily just from political pressure, but for fiscal reasons.
Interest payments on the national debt now exceed the U.S. Defense budget. As a matter of fiscal reality, they must come down.
Could there be an oil supply shock of a similar variety to that of the 1970’s? Given the current turmoil in the Middle East, I would say that’s a very plausible scenario. However, I would suggest that the impact of that shock, should it occur, would be less now than in the prior period given how much less dependent on oil our economy is today.
As I’ve written about previously, my base case expectation is for a persistent and prolonged period of somewhat higher inflation than the Fed’s (unrealistic, IMHO) 2% targeted rate - perhaps more in the 3-3.5% range. This would be driven by demographics related labor shortages moreso than commodity supply shocks.
If that expectation turns out to be well founded then I think that investors would benefit from including a material allocation to commodities in their portfolios, sourced from their bond allocations.
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