Going nowhere fast: It’s time to reopen

July 14, 2020

My Dear Reader,

I want you to imagine for a second a world in which the US economy is home to millions of unemployed and out of work individuals. A world in which The United States stock market took a downturn of more than 25%. And the world in which confidence in the economy in the market overall has been shattered. Now I’m not talking about 2020, you talking about the 1970s. But you could have easily taken these numbers and applied them to the lost decade before the Reagan boom.

A growing number of financial professionals, including myself, have started to compare our current economic times to the Carter-era stagnation known as stagflation. Popular investment site Investopedia more sharply defines the era of stagflation as “Economic growth is weak, which results in rising unemployment that eventually reaches double-digits. The easy-money policies of the American central bank, which were designed to generate full employment by the early 1970s also caused high inflation.” Sound familiar? It’s not too far off from our current economic situation, and if we remind ourselves of the Fed’s rate cut in September of 2019, we can clearly see the cost of the continued lockdowns far outweigh any perceived benefits. In a white paper published by the Counselors of Real Estate, KC Conway and Thomas Curtin forecasted the potential cost of adding debt with no corresponding GDP growth.

“In aggregate, the Federal Reserve announced facilities that will increase its balance sheet to a record $10-$12 trillion by the end of 2020. Let’s put these figures in perspective. The Federal Reserve’s balance sheet 90 days into the COVID-19 outbreak was nearly 50% higher than its peak level during the Great Recession and is anticipated to reach the equivalent of one-half year of U.S. GDP by spring 2021.”

This has created an environment that is not too dissimilar to the era of stagflation.  In a recent New York Times article, Neil Irwin argues that 

“The early 1970s was also a period of labor strife: G.M. workers went on a major strike in 1970, demanding higher pay. But the context was different, and so were the economic implications. That was an era of rapid inflation, and labor unions were at the height of their power — two phenomena that were connected. The G.M. workers demanded pay increases that would outpace the already high rate of inflation, and with the strike, they got it. Over the three-year contract from September 1970 to September 1973, autoworkers’ pay rose 6.5 percent a year, comfortably above the 4.5 percent annual inflation rate. Autoworkers and other powerful unions in that era fueled higher inflation economywide by demanding — and getting — ever-escalating pay increases, which fed into consumer prices.”

While we don’t have the same labor issues that the 1970s brought us, we do have an issue with wage stagnation primarily driven by an unnecessarily high corporate tax rate.This create a situation in which inflation erodes the buying power of the average American and further contributes to the opportunity costs associated with personal and income taxes. Earlier this year, we did a 3 essay study on the relationship between radical movements and economic strife and it is not much of a stretch to compare the current economic downturn to the social unrest that we are experiencing. My natural inclinations would be to urge people to move towards real assets such as real estate precious metals, fine art, and away from speculatory investments such as stocks and luxury items. However, Sovereign Man investing makes an interesting point about the 1970s:

“Residential real estate, however, was a mixed bag. In some parts of the US, residential real estate as an asset class performed very well in the 1970s. California real estate, for example, tripled in value during the decade as the state’s population exploded. The population in counties like El Dorado (near the state capital of Sacramento) and Santa Cruz (south of San Francisco) grew at nearly 3x the national average, and home prices soared. But in other parts of the country, residential real estate was a dismal investment as local governments imposed rent control, limiting how much a landlord could charge. Reduced rents meant depressed property prices. So residential real estate was a very uneven asset class.”

That being said, I doubt will experience a situation exactly like the 1970s. In fact, I would argue that in some parts of the country, particularly the southeast, real estate should be relatively strong so long as voting patterns hold. That being said, it’s very important to understand that where your money is, is more important than what it could earn. And the ability to leverage what you’ve already earned in order to purchase real assets cannot be undervalued in these economic times. And yet, the financial industry seems oblivious to that fact. But I believe it’s time for you to take control of your finances, and I am sure that you will.

To Your Creation and Potential,

Kevin Prendiville