Stagflation in the 1970s vs. Today’s Economy

At first glance, the inflation picture from the 1970s doesn’t look anything like the economic conditions that we are facing in today’s market. However, there are distinct correlations between the 1970s and today that need to be identified.

Specifically, the Investment Rate tells us that consumer liquidity levels were declining steadily between 1969 and 1981. This encompasses the stagflation period of the 1970s. Further, the Investment Rate tells us that consumer liquidity levels have peaked in 2007 and that they are poised to decline steadily for the next 16 years. The distinct correlation is that consumer liquidity levels declined significantly during the 1970s and they are poised to decline significantly from this point forward.

Consumer liquidity levels on a macro basis do not decline often. In fact there have only been two distinct periods of prolonged declines in consumer liquidity levels since 1900. The first decline in consumer liquidity levels occurred between 1928 and 1938. The market, during this time, provided an annual compounded rate of return of -6.4% to investors. This was also the first downtrend in the Investment Rate and it was better known as the Great Depression.

Then, between 1938 and 1965 consumer liquidity levels increased year after year; the slope of the Investment Rate was positive for this duration. The market during this period of time also increased substantially. Specifically, during this uptrend in the Investment Rate the market provided a +6.85% compounded rate of return to the investor; this was a time when consumer liquidity levels were steadily increasing.

Over time consumer levels of liquidity do increase substantially, but there are distinct periods of decline in consumer liquidity levels that have already proven critical to the health of the economy and the stock market. The first was the Great Depression, and the second was the Stagflation period of the 1970s. Officially, we have now entered into the 3^rd major down period in US History according to the Investment Rate, which is a leading indicator of consumer liquidity levels.

The correlation between the 1970s stagflation landscape and today’s economic environment is that consumer liquidity levels are declining proven by the slope of the Investment Rate.

Comments

[Greg in Al:]

Thomas, Interesting article, but I am new to all this. How do you evaluate the investment rate and/or consumer liquidity levels? Any charts or figures available?

2008 Mar 02 09:01 AM

[pochovilla:]

Consider a translation of consumer liquidity as "drowning in debt" Add out of control credit card fees , interest and penalties which boost profits until the write offs occur and put that in the analysis for your next headline. The conditions of this economy do not have a good fit with any time in history. It would be instructive to know the definition of consumer liquidity, how the data is collected and what is the source of the data.The fact that most Banks and Brokerage firms did not identify the risk with the unwinding of derivatives still needs to play out. By then we may be very liquid (underwater)

2008 Mar 02 11:04 AM

[Joseph McSp...:]

Do you think that the banks are creating an even larger consumer liquidity crises with their raising of interest rates? I've seen headlines here and there that highlight consumers' increasing use of credit cards and gift cards to pay for necessities. The consumer seems to be positioning his/herself for a major crunch in the next few months by racking up credit debt just to survive. If more banks follows BAC's lead and raise interest on credit card loans (sometimes by 10% per year), I'm afraid the default rate and bankruptcies on mortgages will be minor in comparison to what may be in store in the banks. The banks will become even more fearful to lend, which will lead to even less liquidity in the market. The fed cutting rates will not suffice. Do you agree?

Will the legislation passed a few years ago that complicated bankruptcy laws on credit card debt exacerbate the problem?

2008 Mar 02 12:05 PM

[Will Rahal:]

We currently emphasize "ex Food & Energy"

The dangers of analyzing "ex a variable" can lead to wrong conclusions.

ND-Goods are greatly affected by food & energy.

I created an index of ND-Consumption/Wages and it shows that a greater proportion of Wages is going to ND goods and, therefore, less to Discretionary Spending.

2008 Mar 02 02:31 PM

[Thomas Kee:]

Will, you may want to read my piece on 'where's the inflation' There I related the growth of wages to food and energy inflation levels over the past 7 years.

Further, consumer liquidity by my definition relates directly to the amounts of excess capital consumers have to make investments into our economy. The anaysis is derived by evaluating lifetime investment patterns as they relate to systematic and aggressive investments all inclusive.

Details can be found here:

www.stocktradersdaily....

Good trading.

THK.

2008 Mar 02 03:05 PM

[Gary Meade:]

How will foreign investment affect this downturn in domestic and what factors go into this liquidity...is it just money? If so, why is this true? This article does a poor job of explaining the specifics. What it says may be true; I do not know and I venture to guess most people reading this article are scratching their heads right about now.

2008 Mar 02 03:26 PM

[Will Rahal:]

Great material, Thomas!

2008 Mar 02 04:58 PM

[Thomas Kee:]

Gary:

If our conomy is as weak as The Investment Rate suggests, foreign investments will be a negative, not a positive, as foreigners pull money out of the US and place it in healthier economies across the globe.

2008 Mar 02 05:30 PM