Over a century ago, George Santayana famously stated, “Those who cannot remember the past are condemned to repeat it.” While this phrase resonates, translating it into actionable advice is far more complex. It raises intriguing questions about which aspects of history are worth recalling and which should be forgotten—consider the floppy disk versus a cherished first romance.
In the realm of investing, reflecting on the past can become a double-edged sword. Where does one draw the line? How does history shape future trends, and how can investors adapt their strategies accordingly?
These pressing questions guide this discussion. So, where do we start?
Many investment experts in the early 1980s found themselves predicting the future by looking to the past. Following a decade marked by rampant inflation, the prevailing wisdom was to fill portfolios with gold coins, fine art, and antiques—all considered time-tested methods for safeguarding wealth.
At that time, the United States was on the verge of hyperinflation, much like the Weimar Republic between 1921 and 1923. The dollar seemed destined to combust in a hyperinflationary frenzy, and many believed it was simply a matter of time.
Right On The Money
Conventional economic wisdom often leads to pitfalls. While people closely monitor the current state of affairs, the underlying conditions that created it are constantly evolving, often unnoticed.
In the late 1970s, A. Gary Shilling had a different perspective. He did not share the consensus view that inflation would persist indefinitely; instead, he believed the U.S. was poised for a prolonged period of declining inflation and concurrently decreasing interest rates. Under these circumstances, traditional inflation hedges could prove disastrous.
Shilling was determined to share his insights, leading him to author a book in the early 1980s titled Is Inflation Ending? Are You Ready?. Despite his foresight, the book did not gain much traction, as few could comprehend that inflation was on the decline. Yet, remarkably, his predictions were spot on.
In September 1981, the yield on 20-year Treasury Notes peaked at 15.32 percent, beginning a 35-year decline that likely concluded in July 2016, when it fell to just 1.5 percent.
Shilling not only shared his forecasts but also backed his convictions with his investments. By the mid-1980s, he achieved financial independence by focusing aggressively on long-term bonds. His journey and financial successes were later chronicled in John Mauldin’s 2006 book, Just One Thing.
Is Inflation Beginning? Are You Ready?
Shilling’s keen analysis and investment strategy during the long-term decline in interest rates are noteworthy, especially since he managed to maintain this trend long after many prominent investors exited.
Bill Gross, another investment luminary, also recognized and capitalized on this trend through his total return bond strategy, leading Pimco to become a $1.7 trillion asset management firm. However, following the Great Financial Crisis, Gross lost his edge, culminating in a series of controversies and eventually marking the end of his otherwise illustrious career.
In contrast, Shilling has remained a reliable predictor of economic shifts. Recently, he reiterated his forecasts in a Bloomberg article, stating:
“I first suggested the U.S. economy was headed toward a recession more than a year ago, and now others are forecasting the same. I give a business downturn starting this year a two-thirds probability.
“The recessionary indicators are numerous: tighter monetary policy from the Federal Reserve, a near-inversion in the Treasury yield curve, weakened stock performance, sluggish housing activity, and soft consumer spending. The modest increase in February payrolls, just 20,000 compared to a monthly average of 223,000 last year, and the impacts of declining European economies and slowing growth in China, alongside ongoing trade tensions with President Trump’s administration, add to the picture.”
Determining how Shilling arrived at a two-thirds probability for a downturn is a matter of internal analysis; we surmise the likelihood is actually 100 percent. However, it’s the developments that follow that warrant careful observation.
Currently, bad news for the economy appears to be good news for the stock market. The prevailing wisdom is that a slowing economy would prompt the Fed to adopt more stimulative measures. As evidenced by the Fed’s recent decision to maintain interest rates, this assumption holds true.
Yet, when truly dark days descend, and the Fed resorts to drastic measures like helicopter money drops, an unexpected outcome could unfold. Instead of declining bond yields and rising stock prices, we might see the reverse: falling stock prices, soaring interest rates, and increasing consumer prices.
Is inflation on the horizon? Are you equipped to handle it?
These questions might seem outlandish today, but tomorrow their answers could become glaringly evident. Possessing a gold coin or two when that reality hits could prove invaluable.
Sincerely,
MN Gordon
for Economic Prism
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