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 3rd 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.