What the 1970s Tell Us About Today’s US Economy

Today, we jump back in time… to the 1970s.

Truthfully, that was one of my favorite decades. Then again, I was a kid, and my singular concerns were playing football in the street after school, watching Scooby-Doo on Saturday morning, and sneaking into the LSU football stadium through a broken grate with my friends to kick field goals at the south end zone.

I had no real understanding—or interest—in the economy of the day.

I heard my grandparents (they raised me) grumbling about prices, particularly my grandmother when I would accompany her to the long-defunct A&P Supermarket on Perkins Road.

But decades later, as I started writing about investing, economics, and economic history, that ’70s Economy began to fascinate me… particularly in light of the stagflation I saw coming to America starting several years ago.

And that’s the impetus for today’s dispatch: How today looks very similar to the 1970s, but more importantly how today is very much different in key ways, and what that says about the challenges we face today, and how you might want to think about investing.

First, the ’70s…

• US debt-to-GDP, a broad measure of economic health, was about 30%.

• Meaning: Debt was immaterial. No one cared about it. And US debt repayments were an easily manageable 5% to 7% of America’s annual budget.

• Consumer debt was minimal—about 30% of household income, while mortgages sucked up about 15% of household income with mortgage rates in the range of 8.5%.

• Housing was affordable, with median home prices just over 2x income.

• Well-paying, middle-class manufacturing jobs were abundant.

Because of that environment, Americans and the American government survived stagflation even as the Federal Reserve propelled interest rates all the way to 20%. The rate surge was certainly painful, but even lower middle-class households like my grandparents’ made out fine.

Now, today…

• US debt-to-GDP is approaching 130%, a level typical of basket-case economies, or in America’s case, an economy where politicians assume the dollar’s reserve currency status is a license to print money with no repercussions.

• Debt repayment costs are now more than 15% of the budget, the third largest expense behind Social Security and Medicare.

• Consumers are heavily reliant on debt just to survive day-to-day. Cumulative credit card debt is at historic highs above $ 1 trillion. Household debt exceeds household income and mortgage debt, on average, consumes about 40% of family income, with rates at about 6.3%.

• Housing costs are now more than 6x median income.

• And well-paying, middle-class manufacturing jobs have dramatically shrunk amid decades of offshoring efforts.

Because of today’s environment, America is in a pickle.

Americans and the American government will struggle mightily if the Fed must ultimately raise rates to battle the “flation” part of stagflation.

There’s absolutely no way the Fed could ever push to 20%—not even 10%—without annihilating American families and Uncle Sam.

And, so, the Fed is stuck.

Which means stagflation is likely to root even deeper into the economy.

Back in the ’70s, that version of stagflation saw the S&P gain 1.6% per year on average across the entire decade. US 10-year Treasury notes, the benchmark bond, gained about 4.4% per year on average.

But inflation rose at a rate of about 7.5% per year.

That math meant stocks and bonds, even though they advanced a bit, failed miserably in helping American spending power keep pace with inflation.

However, some industries did quite well. And in that there is a lesson to learn as we move deeper into a stagflationary economy.

• Energy. The world needs oil and gas to power modern economies. There’s more truth in that today than five decades ago. We need more and more energy for technology, for fertilizer production as arable land shrinks, and for the rise of the middle class and manufacturing economies outside the West.

• Metals and mining. We already see that on display today with gold prices setting new all-time highs more than 45 times this year so far. We have gold mining stocks racing higher, silver is pumping, copper companies are surging, and uranium is taking off again.

• Consumer staples. Regardless of the economy, people gotta eat. They also buy beverages… and basic clothing for school and work… and they continue with their vices like smoking and drinking.

• Healthcare. Same story. Doesn’t matter what the economy is doing, people have to go to the doctor’s office, the dentist, the hospital, etc. They have to buy pharma products to treat illnesses and pain. Staying alive trumps death, even if the economy is limp.

• Utilities. You can live in the dark, or you can turn on the lights. You can sweat in the summer and freeze in the winter… or you can turn on the A/C or the heater. If you’re a business, you need electricity to power your operations and run your cash registers and point-of-sale machines (for consumers surviving on the good graces of Mastercard and Visa).

Those are the industries today where you want to position some of your wealth to survive stagflation.

You’ll notice I skipped real estate. It, too, performed well in the 1970s. But that’s not likely to repeat this time around.

More on that tomorrow. Same bat-time, same bat-channel….