Where is the economy flying us, and will it crash?
by John Myers
It was the good old days of the 1970s…
Elton John was a piano player. Bruce Jenner was an Olympian. Ronald Reagan was on the rise, and so was inflation.
Dollar stability and the post-war economic boom had previously fueled a bull market in stocks.
In January 1950, the Dow Jones Industrial Average was under 200. In January 1966, it breached 1,000 for the first time ever.
Over the next few years, the price of silver began to stir while the Dow moved sideways, twice testing, but never again breaking above the magic 1,000 point level.
When President Richard Nixon cut the final tether to the gold standard in August 1971, the Dow stood above 900. Through the next decade, the large stock indexes fell victim to two bear markets.
By April 1980, the Dow was trading at 759 — which doesn’t seem too bad compared to its 1966 apex, until you factor in inflation. Then the 1980 Dow, measured in 1966 terms, was really trading at 329.
In real terms the Dow had lost two-thirds of its value over a 14-year span that included those good ol’ 1970s.
Big Board stocks offered no protection from inflation.
Bond investors got slaughtered. In the late 70s, prices on 30-year Treasury bonds fell more than 25 percent as the yields on the bellwether 30-year Treasury bond climbed from a rate of 7.75 percent in 1977 to 14.7 percent in 1981.
However, during that same period, hard assets were undergoing an incredible bull market.
As confidence in the dollar weakened so did the U.S. economy. This convinced Fed Chief Arthur F. Burns pump ever more money into the economy. The cycle spun furiously until the annual inflation rate was running at double-digits.
People began switching out of dollars as quickly as they could, gobbling up real assets. No real asset appreciated more than precious metals.
Inflation had certainly grabbed the United States and it seemed like it would not let go.
In 1966, the Consumer Price Index rose by 1.9 percent. In 1970, it rose by 5.7 percent and in 1979 it reached a startling 13.3 percent. At the 1979 rate, oil prices would double and the dollar’s value would be halved.
While most Americans were losing their shirts in the stock and bond markets, a select few were becoming incredibly rich.
Their secret was to invest in physical gold, silver and platinum.
Plus, they bought equity in companies that explored and mined these three metals.
70s investing — child’s play
I was only a kid at the time, but I watched the great gold market of the 1970s with keen interest. I had saved every penny my grandmother left me and put them into in gold stocks and physical bullion.
There were many times during the decade that I was ready to bail out on my gold investments. What convinced me to hang in was my father’s fortitude and the belief that as long as the federal government continued to build up its debts and pursue a course of easy money, then gold — with stops and starts — would eventually remain locked in a long-term bull market.
I particularly remember 1974: I was a 17-year-old high school junior.
Every day at lunch I would go to the school’s pay phone and make a toll-free call to my family’s stockbroker, Bob Berlin. Bob was patient enough to put aside five minutes for me each day. What I remember most about that year is that gold was so strong. It continued to set new highs on growing volume, and the mining stocks demonstrated complete follow-through.
In 1974 gold reached $180 an ounce — more than a fivefold increase from its fixed price in 1971. Some of the gold stocks I owned had climbed 15-fold.
Of course, all great bull markets have setbacks. Gold faced its challenge in 1975 and 1976. During an 18-month span, bullion fell from its lofty price.
Why am I telling you about the 70s and early 80s? Let me channel Harry Truman and remind you that the only thing new under the sun is the history you don’t know. So if any of what I just told you sounds familiar, it should.
Today, gold has fallen from its lofty highs. The government is pumping out enough dollars that it should be producing inflation similar to those of the 1970s (although the “official” numbers somehow tell us it’s not) and the pressure on the U.S. stock market is decidedly pushing prices down, which will raise bond yields.
Not to mention that further squeezing of banks via new regulations, years of zero interest rates now moving to negative interest rates, and trillions spent buying government and corporate bonds will kill global bond liquidity even more.
It would only be natural to think that hard assets like precious metals are set for a huge upswing like we saw 40 or so years ago.
Air Force pilots call a bright blue opening in the clouds a “sucker hole” because it looks like a gift from God that will get you out of trouble and into the clear, but it usually puts you in deeper.
I was just getting started as an investment writer during the rolling recession of the early 1980s when the Fed pushed short-term interest rates to almost 20 percent. That was the price the Fed was willing to pay to squeeze out the inflationary excess of the 1970s.
It took two years to squeeze through that opening. But was it a sucker hole? Or did it put us in deeper?
Price swings in precious metals have brought about the demise of most great empires through the ages. The list of them is a long one that includes Egypt, Rome, Spain and England (debts from WWI and WWII).
In each case, the empire spent more than could be replaced with their gold or silver, or the amount of debased coin and currency stored in other treasuries.
We have certainly spent and owe many trillions more than the amount of gold and silver we could ever have, and certainly enough to swamp our forex accounts.
Normally, the only way to protect ourselves against either extreme inflation or extreme deflation is with physical gold.
Physical silver and resource stocks will do great if we end up with inflation. If money and credit are being destroyed instead, hold bullion and a few of the biggest gold corporations in the world.
Most of your money should be either in physical gold or physical cash. That does not mean in a bank account. I don’t know what is going to happen, but if things get very bad we know we can’t trust banks.
I hope I am wrong, and that we are not flying toward a sucker hole, yet fear that we are.