Driving my daughter to her first day of summer camp today, I sat at a red light with the radio talking about today’s Congressional hearings into the attack on our Capitol. It was an insurrection, a coup, an attempt to stop the constitutionally mandated counting of electoral votes after a free and fair election. News doesn’t get much bigger than that.
Meanwhile, I saw two gas stations. One advertised a gallon of regular for $ 5.27, the other a penny less – as if saving a couple dimes when filling up makes a difference. AAA says prices are up nearly two bucks from a year ago, with 58 cents of that coming in just the last month. Talk about a pain in the gas. This, and surging inflation in general, is also a giant story.
The juxtaposition of both of these things, as we enter a long, hot summer with a big midterm election to follow, is fascinating. How we’re reacting to both reveals much about who we Americans truly are, and where our nation is headed.
First, consider this. The median age of an American is about 38. This means most of us have no first-hand experience with the period that I think is most similar to where we are: the terrible 1973-75 years.
Let’s compare. Then, as now, a major war led to the disruption of the world’s oil supply. (Israel was attacked by its Arab neighbors, we supplied the Israelis with arms, and OPEC, the oil cartel, responded with a crippling embargo.) Inflation skyrocketed. For the 12 months ended in December 1973, the consumer price index was 8.7%, right where we are now.
But the worst was yet to come: CPI at the end of 1974 was 12.3%. Unemployment was a lagging indicator: 4.9% at the end of 1973, but 7.2% a year later and 8.2% a year after that.
Stocks were crushed. In real terms, the S&P 500 Index SPX,
fell nearly 52%, led by the decline of a concentrated group of stocks that had previously been market darlings. The “nifty fifty,” it was called. Anyone who began 2022 overweight tech stocks (Netflix, anyone?) Can surely relate. If the collapse of 2022 winds up being anything like ’73 -’74, then, as a hit song from those days was titled, we’ve only just begun.
One more thing about the market’s collapse. The Biden administration has been trying to peg our troubles to the Russian invasion of Ukraine, but this is only partially correct. Oil CL.1,
rose from about $ 65 on Dec. 1 to 85 on Jan. 24, a full month before the war began. In 1973, by the way, stocks began dropping a full nine months before war broke out that fall.
That being said, Putin has undoubtedly made things a hell of a lot worse. Mark Zandi, chief economist at Moody’s Analytics, estimates, for example, that Russia’s invasion of Ukraine accounts for about one-third of our inflation.
What about the biggest source of wealth for most Americans – their homes? This appears to be one silver lining to all this historical unpleasantness. According to Federal Reserve data, housing in real terms held up in the ’70s. There are cracks in the market today, and interest rates TMUBMUSD10Y,
are rising rapidly, which may price some buyers out of the market. But a severe housing shortage could support prices, at least in some markets. Perhaps. But one thing seems clear: The housing party is probably over.
Inflation and rates up, and stocks down, doesn’t exactly spell good times, and although the job market remains tight – the jobless rate in May was 3.6% –Americans are skittish. It’s no surprise that consumer confidence is eroding, as folks tighten their belts.
Which brings us back to the other big story in this summer of ’22: the investigation into the attack on our Capitol. While more Americans are sitting around the kitchen table wondering how they’re going to make ends meet – inflation resonates immediately and powerfully with everyone – this does not mean that the investigation into the assault on our Constitution and our democracy is any less important. In fact, over the long run, it is even more so.
Why do I think this? Because as bad as the ’73 -’74 downturn was, it was part of a market cycle that occurred within the parameters of a functioning democracy and market economy. The worst excesses of the market were flushed out, and Watergate – which occurred at the same time – showed that our political excesses could be flushed out as well. That we could deal normally with both an economic and political crisis at the same time reflected one of our enduring strengths: Our enormous resilience and ability to self-correct.
The economy will bounce back; it always does. But how do we self-correct from what happened on Jan. 6, 2021, when tens of millions of Americans think it’s not important? Starting with George Washington stepping aside for John Adams in 1799, we’ve had more than two centuries of peaceful, respectful presidential transitions. Until now. Our Constitution, and respect for it, is paramount, and without it, we’d have nothing.
What do Trump supporters mean when they say this doesn’t matter? That’s why this, and not the cyclical ups and downs of a commodity and a nasty bear market, should be our greatest long-term worry.