Friday, 25 October 2019

The late 1960s curve inversion...

Late 60s were interesting. The economic framework since Bretton Woods was starting to become unbalanced. The start of the so called Second Turning.

The Fed went through several hiking cycles trying to stop inflation and the inversion in the late 60s saw equities fall, the curve invert, CPI roll over, no recession, only a small fall in equity earnings. The Fed had only hiked to 5.76%, then the Fed cut and everything rebounded. Oct 66 was the turning point. 
The Fed then had to hike from May '67 into the end of '69 to over 9% causing the 1970 recession. This time markets fell 30% as earnings fell 13%. But the market peaked 9 months in advance in Dec 68. 

The Fed then cut rates through July 1972 and the markets bounced. Nixon closed the gold window in Aug 71 and devalued causing an equity bounce followed by more inflation, the Fed hiking over 12% and an even bigger recession in '74 where earnings fell 15% or so but the market fell 50%. Gold also fell heavily in this recession. 

After that the stock market didnt perform well until Volcker killed inflation in the early 80s. 
The USD vs the DEM went from about 3.4 under Bretton Woods to 1.74 in 1980. 

So the question is, if 2019 is about rate cuts, will 2020/2021 be about hikes? 

Trump's MAGA economics of full employment, fiscal stimulus and pushing wages as a percent of GDP up via inflation and on-shoring outsourcing, is likely to put upwards pressure on inflation in his second term.




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