The Bear’s Lair: We are re-running 1973-74

Although it represented my youth, I am by no means nostalgic for 1973-74. In Britain, it gave us a banking crash, the 3-day week, the lead-up to 25% inflation and the most left-wing Labour government Britain ever had. In the United States, it gave us the nullification of 1972’s landslide election victory, a resurgence in commodity inflation, a Presidential resignation and “Whip Inflation Now” buttons. Globally it gave us the 1973 oil crisis, the first major crack in Western political/economic hegemony. I had hoped we had left that period behind forever, but alas we seem fated to repeat it, albeit with different details.

In the United States, the key event of 1973-74 was the annulment of President Richard Nixon’s landslide 49-state 1972 election victory by the left and the media through the Watergate investigation, leading to Nixon’s forced resignation. This was a more consequential Presidential attempted impeachment than those that followed against Bill Clinton and the two against Donald Trump because the election result that it nullified was far more decisive than Clinton’s moderate 1996 victory or the close 2016 election that elected Trump (the second Trump impeachment was even less consequential, since it occurred only after he left office).

Nixon’s 1972 landslide was not due to any sudden affection that the populace felt for Nixon, a politician whom it was difficult to love though impossible not to respect. Nor was it due to any nuanced preference for his fairly vague policies, even his foreign policy expertise (the Vietnam War had in any case not been “won” at the time of the election). It was due to a mass electoral revulsion against the social, political and economic changes of the late 1960s, and even of much of Nixon’s own first term, which had been dominated domestically by a heavily Democrat Congress. Essentially, the electorate was voting heavily for a return to the social tranquility and economic freedom of the 1950s and early 1960s. The 1972 vote was not a vote against civil rights but against hippiedom, Big Government and the domination of political and media life by the radical followers of George McGovern. Needless to say, the electorate did not get a reversal of the 1960s, much to its and our subsequent regret.

Economically, the electorate may in 1972 have glimpsed the future and recoiled in revulsion. The Environmental Protection Agency and the Occupational Safety and Health Administration had both been formed in the first Nixon administration, mostly by pushing by the Democrats in Congress, inadequately resisted by the President. As a result, the trend in annual U.S. productivity growth and the rise in living standards was to bend sharply downwards in 1973, from 2.8% annually in 1948-73 to 1.8% annually from 1973-2010, with a further drop to 0.8% annually since 2010. Had the voters of 1972 got their way, they and their descendants would be about 50% richer today. Working-class men without high-school diplomas saw their wages peak in 1973 and decline steadily thereafter; they are still worse off today than they were then. “Watergate” may thus have been a triumph for the Democrats and the left; it deserves to be remembered today as a wholly unjustified tragedy for the American people.

The parallel between the post-1972 and post-2020 election periods is not exact. While shenanigans surrounded the 2020 election, it was certainly not a landslide, unlike 1972. Moreover, the stakes were lower: so appalling had economic policies become generally that the electorate was merely being asked to choose between two rates of decline – the brave Nixonian dream of never-ending prosperity was long dead. Nevertheless, there are other parallels between 1973-74 and today that are also instructive.

As in 1972-73, the U.S. stock market is hugely over-extended, in the same way: rather than the prices of all shares being excessive, the over-valuation is concentrated in a few stocks: the FANGs and their hangers-on today, the “Nifty Fifty’ in 1972-73. Most stock market tops are broader-based than this, involving a wide range of different types of stocks if not the full market. We can expect a similar denouement to that of the 1970s; the market collapse in 1973-74 was of more than average severity, and involved numerous bankruptcies. The clearest analogy is in the U.K. market, which in 1973-74 suffered a full “secondary banking” crisis like that of 2007-08 and the bankruptcy of some notable high-flyers, notably Slater Walker and Jessel Securities, both in the fashionable and rapidly expanding field of financial services, neither of them apparently over-leveraged, but vulnerable to a decline that left the equity market down over 80% in real terms from its 1972 peak.

The equivalent crash today would undoubtedly involve tech. You can guess for yourself which current high-flyers might suffer, but I would suggest that Uber (NYSE:UBER), Twitter (NYSE:TWTR) and even Amazon (Nasdaq:AMZN) could be vulnerable in a downturn that extended further and more deeply than anyone now expects. In all three cases, renown and market capitalization exceeds profitability – Amazon may seem protected by its “cloud” business, but in a true downturn margins even on that will go to hell, and it will no longer be able to bail out the staggering retail behemoth.

The other parallel with 1973 is a surge in commodity prices, much more broad-based than that in stock prices. 1973 saw the first oil crisis, when the oil exporters of the Middle East suddenly realized they had the West over an oil barrel and could raise the oil price to three or four times its pre-1973 level. That had geopolitical implications, which I will discuss below, but it also reflected a broad-based rise in all commodity prices, reflecting a surge in demand that could not quickly be matched by supply – shipping costs also soared, for the same reason. This is happening now; wherever you look, commodity prices are rocketing, not simply because of post-COVID reopening itself, but also because the planning and construction of new mines has been put on hold for a year. The price of helium, to take just one example, has trebled in the past 3 years, as a major U.S. government storage facility has stopped supplying private buyers.

As in 1973-74, the commodity price surge, together with a labor market that is already tight at 6% unemployment, is feeding into consumer price inflation. I have previously forecast consumer price inflation running at an annual rate of 10% by spring 2022. While the current inflation surge includes a short-term effect from the economy’s reopening I expect it to continue (maybe with a few quieter months) and later rise further, as the world’s fiscal and monetary authorities are in no way prepared to fight it. The fight against inflation after 1973 consisted only of “Whip Inflation Now” buttons; it was 1979 before the first serious step was taken of appointing Paul Volcker to the Fed and allowing him to raise interest rates well into double digits, above the level of inflation. I expect the world’s denial of the problem and attempts to circumvent it by damaging and counterproductive regulation to last at least as long this time around.

There were other more serious geopolitical problems in 1973-74. Britain endured a miners’ strike and a three-day week, followed by the election of the most left-wing Labour government in history. This time around, any three-day week could occur on either side of the Atlantic and is likely to be caused by cyber-attacks on key infrastructure – the success of this week’s Colonial Pipeline cyberattack will encourage further attempts, no doubt in a coordinated fashion. As for the unprecedentedly left-wing government, it is at this point the United States that has this; we can expect the IMF to be called in to bail out the national bankrupt in 2023 or 2024, as it was in Britain in 1976.

Finally, the oil price shock of 1973 did not simply cause turbulence in the oil market and the global economy; it resulted in the fist major lurch downwards in the influence and dominance of the Western world. The Soviet Union, the West’s major competitor, was quick to take advantage of this, seizing about one new country for Communism every ten months for the next half-decade (think Vietnam, Laos, Cambodia, Ethiopia, Republic of Congo, Benin, Madagascar, Mozambique, Angola, Grenada, and Afghanistan). A similar lurch seems almost certain now – one hopes it does not involve China taking over Taiwan, but that seems the most likely flashpoint.

1973-74 was a thoroughly unpleasant period; new elements of unpleasantness appeared one after the other. We seem to be in the early stages of another such period now, for similar reasons.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)