View from the Front Office: Everybody Knows

For the last several months Ron has commented “This is where I came in” or “We’ve been here before” when discussing politics/economics/central banks/financial markets. That’s not necessarily reassuring, and here’s why.

Ron started managing money in 1968, just before a lot of what “everybody knew” to be true ended. Events occurring between 1968-1974 had an impact that created the stagflation of the ‘70s and lasted until the early ‘80s.

In 1968 nobody talked about inflation. It had been low and stable at 3% for so long that “everybody knew” it wouldn’t change and wasn’t a factor in the economy. Just as “everybody knew” normal interest rates were 4 ½%, growth stocks would go up forever, and that economists/central bankers had figured out how to lick the recession/slow down part of the business cycle by printing money.

By 1974 inflation was over 10% and would peak at 13% in 1980. Interest rates were at 7 ½ %, also on their way to 13% by 1980. Stock prices got cut in half in ’73 -’74, and price-to-earnings (P/E) ratios had fallen from 17 to 7. And we were deep in the throes of “stagflation.” Stagflation is characterized by high inflation, high unemployment, and slow to negative economic growth—essentially inflation and recession AT THE SAME TIME. This was theoretically impossible and was giving those same economists and central bankers fits. And nobody talked about what “everybody knows” anymore.

In 2021 “everybody knew” that inflation was stable at less than 2%, a Zero Interest Rate Policy (ZIRP) was normal, the FANG stocks would go up forever, and the Fed could solve or prevent any crises by printing money (think Modern Monetary Theory, Quantitative Easing 1-4, “helicoptering money”, American Plan Rescue Act of 2021, Inflation Reduction Act of 2022, etc.).

Today, at the beginning of 2023, inflation is up to 7%. Interest rates are 4-5% and rising. The stock market was down 20% in 2022, with the FANG’s market values down close to 50%. We are facing a recession. And what “everybody knows” has come under scrutiny and pointed questions.