As we teeter toward what could be the third U.S. recession in a decade, experts can’t help but sift through economic history to look for precedents. The eye is immediately drawn to the last decade of the recession trifecta – the 1970s.
That lost decade for the economy and the stock market was marked by a set of conditions so glaring that they popularized a previously obscure economic term: stagflation.
You’d think stagflation – the combination of high inflation and stagnant economic growth – would be of little help in understanding our current decade. After all, inflation rates in North America are running at a little over 3 per cent, compared with about 13 per cent at the end of the 1970s.
But veteran portfolio manager Don Coxe thinks there’s a new kind of stagflation. It may not be as dramatic as the stagflation that crippled the 1970s, but it may help explain the stalled economic and equity-market cycle.
Mr. Coxe, chairman of Coxe Advisors LLC and an adviser to BMO Nesbitt Burns, argues that while overall consumer price inflation has been fairly tame so far by historical standards, a form of “neo-stagflation” has emerged. Indeed, this trend is visible in looking at economic growth versus the inflation rate over the past several years, and has accelerated this year – inflation is clearly climbing while economic growth is stagnant.
This neo-stagflation is characterized by rising prices for food, fuel and metals – which were also key drivers in the 1970s stagflationary spiral.
“An OECD economic cycle in which prices of foods, fuels and precious metals rise far more strongly than prices of manufactured goods – or workers’ wages – is inherently stagflationary,” he wrote in a recent report. “A greater and greater share of total consumer spending goes to the commodity producers who own the farmland, the mines or the oil wells. The industrial and service-based economies find they cannot deliver the kind of strong, sustained, low-inflation economic growth that was the pattern for most of the postwar era.”
Old economy wins, innovation loses
Neo-stagflation has been evident in the stock market – not just in its lack of traction, but in the kinds of companies that have suffered and thrived over the past decade.
Mr. Coxe noted that the most valuable stock in the world in 1999 – Cisco Systems – has been stalled for most of the past decade, despite the growth in the adoption of technology, as the profits from high-tech have been unable to compete with commodity prices. At the same time, the world’s biggest energy, mining and fertilizer stocks (Exxon Mobil, BHP Billiton and Potash Corp. of Saskatchewan, respectively) have soared. “Dull stuff is outperforming brilliantly engineered wonder products,” he said.