There is a lot to learn from history and of course it would be beyond the scope of this book to analyze the historical events that took place in the last century. We will look at economic and financial data and try to extract the most relevant information that directly impacts the investors’ assessment of the financial markets. What we will learn from history are some basic trends useful to identify basic strategic choices of assets and the long-term risks of certain economic developments.

In order to do so, we have subdivided the history of the past decades in three basic periods. The first period goes from the 1950s to 1968, the second is from 1968 to 1982, and the third is the years following 1982 to the end of the 20th century. These three groups offer great lessons for the investor and provide important guidelines on what kind of parameters investors should follow to assess the major economic and financial trends that will impact their investment performance. It will provide a useful guide to what kind of assets were the most attractive, and which were the least, during these periods and why.

The main distinction between the three periods is the rate of inflation. In the 1950s up to 1968, inflation was well under control. From 1968 to 1982, inflation in the United States and overseas soared and reached unprecedented levels. From 1982 inflation started to decline. We will examine the reasons for this transition and obtain some useful guidelines as they apply to investing.

The policymakers have the levers that control these huge movements in prices from the 1950s to the 1970s and following the 1980s. These levers are very powerful and effective. Ultimately though, it is the opinion of the author that it is we, the people, who have great influence in driving the actions of the policymakers.

In the 1950s, following World War II and the Korean War, the United States was the economic leader and the most powerful nation in the world. We realized our power and our dominance of world events. The peace that followed created a sense of optimism and wealth, also shared by Europe. As the world and the population of the industrialized world recognized the great wellbeing that they derived, they tried to seek more of it. Towards the end of the 1960s and the 1970s, the population of both the United States and Europe became more sensitive to the suggestion that government could provide even more wealth than what they had already attained.

As the population extended the demand on the government to provide and share more wealth, the governments in the industrialized world became bigger and bigger. It is not to pass judgment, but it is a fact of human life that the more and the bigger an organization becomes, it eventually becomes inefficient, especially because of the size of the bureaucratic apparatus. This inefficiency of the governments and the increasing expenditures created inflationary pressures that were beyond control. Eventually, towards the end of the 1980s, the people realized that large governments were not the answer that they expected. Instead of more wellbeing, they were getting less and less wealth as inflation soared.

The people demanded that inflation be brought under control, which is what happened in the 1980s. The experiment which lasted the whole decade of the 1970s, which was based on providing the country with social programs and regulations that went beyond what the country could afford, created serious problems. Government bureaucracy increased, inflation steadily rose, and the country soon realized that the price that had to be paid for all the social programs and the multitudes of regulations that were instituted was higher inflation. Of course, rising inflation was a major price to pay because it had the immediate effect of reducing income. As a result, toward the end of the 1970s the country elected leaders who promised in a credible way to bring inflation under control and bring back solid economic times.

This same experiment of the 1970s also took place in Europe. The same inflationary pressures that were experienced in the U.S. were also a major issue in Europe. European inflation had a more structural problem. Many laws were passed in Europe providing protection for the workers on the surface. This created a rigidity that the U.S. economic system did not have. In fact, even when inflation began its long-term decline in early 1980s, Europe did not enjoy the kind of vitality the U.S. economy had, because of the rigidities in labor laws that were designed more to protect the people who worked than those who were seeking new jobs.

Since 1982, lower inflation created other strains but also created great wealth. Countries that had extremely large governments had difficulty in managing themselves and they strove to survive. The collapse of the Soviet Union is ultimate proof that very large bureaucratic systems cannot survive. They have within themselves the seed of collapse and high inflation. As the population asked for lower inflation, government shrunk, inflation came down and new opportunities arose. The leaders elected by the country were successful in the U.S. in bringing down inflation and initiating a very positive process. Of course, as inflation came down, it forced people to become more efficient. Inefficiencies could not be tolerated as the country was committed to keeping inflation under control. It’s no coincidence that governments were forced to become leaner and reflect the mood of the country.

As the environment in the last century moved from one of low inflation to one of high inflation and back to low inflation again, the population had a major impact in initiating these changes. Great wealth was created in the 1950s and the 1960s, destroyed in the 1970s, and great wealth was attained again in the 1980s. The savvy investor would have recognized these trends and taken advantage of them.

How could an investor have detected these huge changes from the available data? We will try to identify the main parameters that would have shown the astute observer that the policymakers were following policies that would have a major impact for many decades.

(From Chapter 5 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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