Guns and butter and credit

Rob Armstrong (0:09)

Oil prices are high and rising. Inflation is scaring everyone, and men are wearing terrible clothes. The question that confronts us today, are we living through the 70s again? This is Unhedged, a markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, author of the FT's Unhedged Newsletter, and I'm joined at Unhedged World Headquarters today by my fearless lieutenant, Hakyung Kim. Welcome back to the show, Hakyung.

Hakyung Kim (0:48)

At your service, Rob.

Rob Armstrong (0:50)

Well, you better be.

Well, the analogy with the 70s is kind of obvious, given the oil shock that we are experiencing. But Hakyung, you recently wrote that the better analogy might be the 1960s rather than the 1970s.

Hakyung Kim (1:14)

Yeah. So Richard Bernstein at Janus Henderson, he put out a note recently saying that things are actually a lot more like the 1960s versus the 1970s. And basically he defined the whole 1960s era as this guns and butter period. The guns being all this defense spending for the Vietnam War that dragged on for years, which similar to now, we have a whole ramp up in defense spending. And then the butter being like fiscal spending.

Rob Armstrong (1:42)

That's Lyndon Johnson, the great society, right?

Hakyung Kim (1:45)

Yeah, the whole great society, all the spending on Medicaid, Medicare, all those social programs. And he's arguing we kind of have something a little butter like too, with Trump's one big beautiful bill and the tax cuts that come through it.

Rob Armstrong (2:01)

It's almost like you could sum up by saying President Johnson, like President Trump, tried to run the economy hot. They were gross guys because you had the war and you have both war and fiscal, just a non-war fiscal stimulus, just general social spending in the one case on great society, and in any other case on tax cuts. So that's Bernstein's thesis then. We have inflation coming.

Hakyung Kim (2:29)

Pretty much, yeah. And that does not really mean good news for basically whatever has worked for your portfolios in the last few years. He's saying if we're going to have this really high inflation coming on soon, like we did in the 1960s with all that guns and butter flowing through the economy, the longer duration investments, like long dated yields and all this growth, like the tech growth stocks, they're basically going to really screw your portfolio over if inflation gets really hot.

Rob Armstrong (3:00)

Yeah. So in 1965, inflation, core inflation was under 2 percent. And by 1970, it was 4, 5, 6 percent. You know, if you own 10-year treasuries in a classic kind of 70-30 portfolio and you own a hell of a lot of tech stocks, which are long duration, it's going to hurt over the coming years. Another interesting analogy between the two eras, the kind of late 60s and the late 2020s, is there was very similar Wall Street hype vibes. So now, of course, we've had like the Magnificent Seven and all this hype about AI and the productivity growth and so forth. And the analog to that for the late 60s was a group of stocks called the Nifty 50, which now you look over the list of the stocks and some of them seem a bit old-fashioned like Kodak or Polaroid or Xerox. But at the time, they were kind of cutting edge tech stocks that people believed would kind of grow forever.

And specifically, that were safe to buy despite being very expensive. And it was like the go-go 60s, they called it. That's a term that John Brooks titled a book after, an excellent book called The Go-Go Years that everybody should read. The parallels between the attitude towards the Nifty 50 then and tech stocks now, are almost eerie in a way. So that's another similarity. But Hakyung, you made a pretty convincing argument in your piece, that there are powerful disanalogies as well between the two eras.

Hakyung Kim (4:46)

Yeah, I think the biggest one to me just being that in the 1960s, all the spending led to really strong economic growth, and you had a really low unemployment rate as well. Now people are kind of fearing the opposite. People are scared of stagflation, that we're basically going to have really, really limited growth. And also, our labor market just looks not as hot right now. Things, it's a little sludgy, as you called it a couple days ago.

Rob Armstrong (5:12)

Yeah, I mean, it's not that the unemployment rate is so high right now, at four and a half or whatever it is. It's that nobody's hiring anybody. Nobody's firing anybody. Nobody's quitting. Things are kind of stuck or sludgy. And in the 60s, if you look at the unemployment back between 65 and 70, we just saw the unemployment rate just ticking down and down and down. The labor market was tight as heck back then, which is just a different situation than the one we're looking at right now.