Does history repeat?

[I’m out on vacation. So, in place of my normal weekly, I’m offering this special on historical analogies of our current economic situation.]

The 1920s? The Roaring Twenties was a time of great optimism. World War I had ended, the economy was booming, electricity and jazz music were bringing the modern world into being. Extreme margin buying was also lifting risk to new heights. It ended very, very badly, but while it lasted it was great. Might we now be in the midst of the Roaring 2020s? One key to such a development would be sharp, tech-driven productivity growth to ease the economy’s chronic shortage of skilled workers. It could even be that this productivity boom had begun by 2015 before the pandemic hit “pause.” The 1920s featured extreme stock speculation that led to the Great Depression. But the speculation was not baseless—the automobile, radio, airplane, washing machine and refrigerator are just some of the products that first saw a mass market at the time. Perhaps automation and artificial intelligence can drive productivity boosts that will make the present decade roar, too.

The Seventies? The 1970s was a decade of oil crises, fiat currency, inflation, recession and stagflation. That last word has been on people’s minds lately, as GDP growth slowed in Q1 to 1.6% even while inflation picked up. In 1972, inflation fell to 3.2%, seemingly beaten, but then came back stronger than ever over the rest of the decade. Could that stagflationary dynamic be replaying now? For starters, this year’s Q1 GDP report was likely misleading, as real final sales to private domestic purchasers rose at a 3.1% rate. Whether inflation is weaker than recent monthly readings suggest will likely come down to housing and wages. The M2 money supply is well off its April 2022 highs, whereas growth in the money supply was a key element of 1970s inflation. On the other hand, labor is tight, and tight labor markets and high inflation don’t usually resolve by magic. Rather, rates go up (or stay up) until they break the frothy excess that nurtured inflation. If rates aren’t yet restrictive enough, they have nowhere to go but up. Further, if oil rose, that would resemble the 1970s, which featured two distinct oil shocks. So far, however, we’ve seen turmoil in the Middle East, but oil prices have mostly been restrained and have retreated since briefly soaring in 2022 at the outbreak of war in Ukraine.

The 1990s? It’s hard to behold the rise of tech stocks embodied by the Magnificent Seven and the accompanying AI-related sentiment and not see a revival of the tech boom of the late 1990s. Then, as now, a wave of utopianism surged through Wall Street, sending stocks to fresh highs. The federal debt cost a record $658 billion to service in 2023. That’s 2.4% of GDP, the highest since 2000, the year the tech bubble burst. Yet for all the debt we’ve run up in recent years, the ratio of federal government spending (excluding transfer payments) to GDP is 6%, the lowest since 1950. The ratio of government jobs to total payrolls is 15%, the lowest since 1959. (Wait, maybe we’re living in the Fifties?) Like the 1990s, we see a massive run-up in tech stocks going on today. Back then, a melt-up in stock prices led to a meltdown and a bad hangover afterwards. Here’s hoping we avoid that fate. Then, as now, a surge in productivity provided a cushion against further inflation growth. Jeffries suggests that the less-fevered pace of job growth together with an improving supply of labor may mean wage growth will moderate, suggesting employment dynamics of the 1990s when Alan Greenspan postulated that technological improvements had suspended the Phillips curve. One area of difference from that time is that many of the hottest Nineties stocks were telecom firms building out hardware networks. The Magnificent Seven, by contrast, are much less capital-intensive. Whereas the luminaries of the Nineties depended heavily on spending from money-losing internet stocks looking to construct an “information superhighway,” the megacap tech stocks of today are highly profitable and their AI investments are basically self-funded.  What might serve as a sign of things to come? Cisco’s forward revenues peaked in January 2000 two months before its stock price. One way we’re clearly not living in the 1990s has to do with the federal debt. The Financial Times proclaimed in 2000 that the U.S. was on track to fully pay off the federal debt by 2013. If only!

Or maybe it’s a new world, and the old rules don’t apply? We had better hope so, BCA suggests. In the more than 40 years of BCA’s Global Financial Conditions Index, there has never been a case where the economy escaped recession following so much tightening. Or consider M2 and inflation, where the correlation between M2 growth and inflation was very strong on the way up, at the top and in decline until it stopped working. Or consider unemployment, where April marked the 27th straight month below 4%. Furthermore, structural issues, such as the Boomers retiring, set the labor shortage beyond the reach of central bank policy. It isn’t easy to see here or elsewhere how, absent immigration, the labor force can be put back into balance, filling systemic demand without further inflation. Such an influx of labor is in progress, however, and may account for the marginal softening of wage growth without mass layoffs. There are also fundamental differences between the modern market and that of the past. For one thing, the Fed now has recession-blunting powers and nimbleness that exceed that of prior ages. At the beginning of the pandemic, we saw the Fed rapidly extend liquidity—a skill it learned in the Financial Crisis—with the result that the Covid recession was very brief. Again, a year ago, the fast-acting Fed likely forestalled a recession when the regional banking crisis threatened to spread. Finally, the market’s composition is different today, with the S&P 500 half as levered as in the past and featuring less earnings volatility. The index was 70% capital-intensive industries like manufacturing, financials and real estate in 1980. Today, half of the index is in the asset-light tech and health care sectors. Is all this enough to mean it’s a new world? George Santayana said, “Those who cannot remember the past are condemned to repeat it,” but he was a philosopher in the 1800s. Mark Twain wrote, “History doesn’t repeat, but it often rhymes,” although he was a writer in the 1800s. Then there was Karl Marx, “History repeats itself, first as tragedy and second as farce,” but he was another philosopher in the 1800s. I think I’ll go with Abraham Lincoln: “The most reliable way to predict the future is to create it.”