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"Stock Prices and the End of Disinflation " | Main | "Call to the Bernanke Federal Reserve: Round up the Debt!"

Posted on April 1, 2008 -
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By John Reizner |

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The inflation that I believe may throttle though our economy in the late 2008-2010 period may not be the first inflationary economy many of us have ever seen. There is widespread commentary these days about the similarities between the stagflation/inflation that transpired in the 1970's, and what may be starting to happen in that manner in 2008 and going forward. There are the behavioral similarities between the 1970's and now: a rising gold price, increasing oil prices, an increase in the rate of inflation in certain commodities such as food, milk, farmland, copper, and a declining dollar (concurrent with a rise in the value of harder money currencies such as the Euro and the Swiss Franc).

I wrote most recently in my article: The Stock Market and Economy: A Return to the 1970's in Form, that I foresaw for the present: a temporary cresting of the prices of inflation hedges such as gold and oil. In the case of gold, the price has shot recently through its old 1980 high of $850 per ounce like a knife through soft butter, to as high as $1,023.50 on March 17, 2008, causing me to believe even more strongly that the long term outlook is good for the yellow metal, though as I said, there may be a pause or even an intermediate consolidation/downtrend, before it may resume its powerful rise. I believe that this is so, as even the intense rise in the price of gold in the 1970's was interrupted by a sharp mid-course correction in mid-decade.

In The Handbook of Inflation Hedging InvestmentsRobert Greer of venerable money manager Pimco sees a return to inflationary times ahead. Add this one to your investment library!

I came into my initial age of investing during the late 1970's inflation when there was a dynamically rising gold price, rising interest rates, and high unemployment. The depth of the recessions this country experienced in the 1970's and early 1980's dwarfs those that we have experienced since then, including the banking/real estate collapse of the early 1990's.

Anecdotally, there were numerous popular newsletters and books at the time of the 1970's inflation predicting a permanent upward price spiral that would hobble the economy. Many writers in that last inflation were actually advocating converting one's money into gold, diamonds, rare coins, and stocking up on canned goods. Some newsletter writers were preaching to their readers regarding how to protect one's family should the U.S. economy collapse.

That the 1970's collapse did not pan out is a credit to the tight money Federal Reserve led by Paul Volker, who probably saved this country from a distinct possibility of hyperinflation into the 1980's. This proved that it is possible to stop inflation in a financial system based on paper money if the will of the Federal Reserve is strong enough. Volker's actions laid the groundwork for twenty-five years of relative price stability. Yet today our Federal Reserve under Chairman Bernanke is doing something altogether different - stoking inflation through powerful monetary easing - while at the same time inflation is percolating in areas of the economy.

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What are the markets telling us now in 2008 that so many commentators are beginning to make analogies from current trends to the 1970's? I personally have been invested in Canadian Maple Leafs and gold bullion for several years, and have offered positive commentary on gold during much of the last year on my website article blog. I believe that the rising gold price reflects not only increasing consumer inflation today as in the 1970's, but is anticipating a potential Democratic Presidential victory in the fall, where policies hostile to the stock market and economic growth not seen since the 1970's could be implemented - a poor omen for the economy and a harbinger of greater inflation. Please see my article, The Hillary Clinton Stock Market and Economy: Three Areas to Consider. Ken Heebner, a veteran fund manager whose opinions I have mentioned in my article blog in the past, was reported to say that he expects for the next few years a stock market showing out performance by inflationary hedges similar to 1976-1980. I would agree with this sentiment, reinforcing Heebner's view that money may be made with inflationary hedges such as gold and oil. 

Some of the advice the doomsday writers of the 1970's handed out might actually be worth taking now. Stocking up on goods before the price of those goods goes up seems a sensible strategy. I recently visited Nordstrom where I saw my Italian Napa leather shoes (the only kind of leather my feet will tolerate) on sale for $460 a pair, $60 a pair dearer than over a year and a half ago when I first bought them. Those extra $50's add up quickly! And owning gold which I believe will likely be worth more in a few years than the recent price of $879, appears to be a sound all-weather investment. Gold can be both an inflation and a deflation hedge (gold shares did well during part of the deflationary 1930's), which may explain why it is rising at the same time as the declining housing market.

Assuming the entire system does not buckle, and I do not think it will, I am also thinking of dipping a toe into the water and buying one or two banks not affected badly by the subprime effect, but whose price went down in sympathy with affected banks. Warren Buffett has bought shares of US Bancorp, a high yielder. 



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