The 1970s were hellish. Are they coming back?
Markets worrying about inflation again. I suppose there must still be enough of us old timers around for this to scare the living shit out of anyone with an investment portfolio. Back in the late 70s and early 80s it really seemed as if we would never again be able to wring inflation out of the system. It took the enormous resolve of Paul Volcker, plus a deep and abiding recession, to get rid of it. A prime rate that reached, I think, 21%, and the long treasury at 15% in early 1982. You could get a 17% - 18% return just by staying in (the newly invented) money market funds. Milton Friedman was king of economists, and it really looked like controlling money supply was the answer. Thursday after the close the newest money numbers were released, and Friday's market pretty much came or went according to whether people thought they were regaining control.
There were also a lot of commodity shocks -- particularly oil (in 1973 and again with the fall of the Shah in 1979), but also all kinds of other commodities, like sugar, coffee, gold, silver and base metals. There would be periodic consumer scares: suddenly, everyone would be lining up to buy toilet paper because it was rumored to be running out, like gasoline. Once everybody began to expect inflation as a matter of course (and it seemed pretty likely, given that we'd gone for several years without being able to get rid of it), it got sort of built into the system. You expected your pay to go up just so you could stay even with rising prices. They began to put cost of living adjustments into everything, including social security. You'd stay the hell out of bonds, because you were getting paid back with fixed dollars that bought less every month. But even stocks just diddled around, never really going anywhere: most companies had trouble maintaining profit margins, because price increases wouldn't necessarily stick in a stagnating economy even though costs were rising because of wages and raw material prices. It was so bad that you were afraid to invest in companies that didn't use the more conservative LIFO (last in first out) method of accounting for inventories and COGS. Oil and other natural resource stocks did OK, but everything else got left behind. So even though many portfolio managers are too young to remember this horrible time, it's a relief to see they're not totally blind to the threat.
Apparently we're not as vulnerable to raw material costs as we used to be. Apparently, we use about half as much energy per unit of GDP as we used to in 1973 -- a response, obviously, to the 1970s price shocks, but one that took a very long time to come about. (Still, we do import around 10 - 11 million barrels a day of oil, which comes to around $16bn a month with oil at $55. Put that in the context of a trade deficit of $55 - $60bn a month and you can see it's a decent percentage of our total tab. The IEA has just adjusted upward again its estimate of world oil consumption for 1985, to 84.3mm barrels a day.) I suppose we do a lot less manufacturing than we used to; services aren't as badly affected. Still, the Fed noted in their latest beige book out this last week that companies aren't having any difficulty passing along cost increases; so inflation at the wholesale level will, most likely, start finding its way into our pocketbooks.
Speaking of services, a footnote to yesterday's post on hedge funds. CSFB just came out with a study. They say hedge funds now control around $1 trillion of assets. Last year they contributed about $25bn in revenues to broker-dealers worldwide, which would be, therefore, about 0.25% of their asset base. Total revenues to these banks were in the range of $200bn. That's $200bn charged, essentially, for investors to swap assets with one another; $200bn deducted from total returns to savers whose money is being moved around. Some day soon I'll write more about the great savings skim and the economic puzzle of bond salesmen's pay.
There were also a lot of commodity shocks -- particularly oil (in 1973 and again with the fall of the Shah in 1979), but also all kinds of other commodities, like sugar, coffee, gold, silver and base metals. There would be periodic consumer scares: suddenly, everyone would be lining up to buy toilet paper because it was rumored to be running out, like gasoline. Once everybody began to expect inflation as a matter of course (and it seemed pretty likely, given that we'd gone for several years without being able to get rid of it), it got sort of built into the system. You expected your pay to go up just so you could stay even with rising prices. They began to put cost of living adjustments into everything, including social security. You'd stay the hell out of bonds, because you were getting paid back with fixed dollars that bought less every month. But even stocks just diddled around, never really going anywhere: most companies had trouble maintaining profit margins, because price increases wouldn't necessarily stick in a stagnating economy even though costs were rising because of wages and raw material prices. It was so bad that you were afraid to invest in companies that didn't use the more conservative LIFO (last in first out) method of accounting for inventories and COGS. Oil and other natural resource stocks did OK, but everything else got left behind. So even though many portfolio managers are too young to remember this horrible time, it's a relief to see they're not totally blind to the threat.
Apparently we're not as vulnerable to raw material costs as we used to be. Apparently, we use about half as much energy per unit of GDP as we used to in 1973 -- a response, obviously, to the 1970s price shocks, but one that took a very long time to come about. (Still, we do import around 10 - 11 million barrels a day of oil, which comes to around $16bn a month with oil at $55. Put that in the context of a trade deficit of $55 - $60bn a month and you can see it's a decent percentage of our total tab. The IEA has just adjusted upward again its estimate of world oil consumption for 1985, to 84.3mm barrels a day.) I suppose we do a lot less manufacturing than we used to; services aren't as badly affected. Still, the Fed noted in their latest beige book out this last week that companies aren't having any difficulty passing along cost increases; so inflation at the wholesale level will, most likely, start finding its way into our pocketbooks.
Speaking of services, a footnote to yesterday's post on hedge funds. CSFB just came out with a study. They say hedge funds now control around $1 trillion of assets. Last year they contributed about $25bn in revenues to broker-dealers worldwide, which would be, therefore, about 0.25% of their asset base. Total revenues to these banks were in the range of $200bn. That's $200bn charged, essentially, for investors to swap assets with one another; $200bn deducted from total returns to savers whose money is being moved around. Some day soon I'll write more about the great savings skim and the economic puzzle of bond salesmen's pay.
posted by econoclast at 2:47 PM
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