The Rude Awakening
Bangkok, Thailand
Thursday, June 14, 2007 ------------------------- - Gold - The B-side of shattered economies through the
ages, - What exactly is "stagflation" and what does it mean
for your investments? - The 20-year retrospective formula, Happy Days aren't
here again and plenty more…
------------------------- Mike Mueleck, reporting from Thailand… There must be some kind of tried and true sit-com formula involving a 20-year look back. "Happy Days" was one of the most popular sit-coms airing in the 1970s and ran eleven seasons. "Happy Days" was set in the 1950s and revolved around a group of teenage friends, their mishaps, and their coming of age, in Milwaukee suburbia. "That '70s Show," set in the era of Led Zeppelin 8-tracks, Tab cola and Farrah Fawcett posters, debuted on the Fox Television Network in August 1998. This sit-com revolved around a group of teenage friends, their mishaps, and their coming of age, set in 1970s, coincidentally, in Milwaukee suburbia. An 8-year run in a prime time slot (Sunday nights at 8:00 pm) is a testament to the show's popularity. The 1980s look-back show was called "The Wonder Years" and was set in the late 1960s. The show revolved around, what else, a group of teenage friends, their mishaps, and their coming of age, in suburbia. Not being set in Milwaukee probably explains the show's relatively short (five year) life. "That '70s Show" was obviously targeted to late-stage baby boomers like me. I entered the decade of the 70s as a second grader and spent my formative years in the Disco Era. My memories of the decade are generally positive…Cub Scouts, trips to grandma's house, school band, going on dates (well, at least trying to go on dates). Of course, my memories are from the perspective of a relatively care-free teenage boy. I didn't have to deal with some of the harsher realities of the times. Vietnam, gas rationing, Watergate, leisure suits… I suspect people my parents' age may have less pleasant memories. The "70's Show" in the U.S. economy was one that most folks would prefer to forget. Unfortunately, this show might be making a comeback in 2007… --- Memo From the Desk of Addison Wiggin --- *** It took us nearly two years of careful preparation. But we're putting the final touches on what should turn out to be one of our best performing stock research services over the next few years. It's called the Energy & Scarcity Investor and it'll cost at least $995 per year when we launch it in the next couple of months. But since you're a valued Agora Financial member, you can receive it 100% FREE. Here's Why You'll Get Our Newest $995 Investment Research Service Completely Free… But you must respond before Midnight on July 5th… Read On Here: Energy & Scarcity Free Offer* *Offer Valid Until Midnight, July 5 Only ---------------------------------------------- Sucking in the 70's…and the 07s
By Mike Mueleck Traditional stock and bond owners of the 1970s might have no pleasant recollections of the decade. From an investment standpoint, the decade of the 70s was one of the worst of the 20th century. Even though the S&P 500 more than doubled between 1970 and the middle of 1982, the Consumer Price Index had soared more than 150%. The S&P 500, therefore, produced a negative inflation-adjusted rate of return, also known as the real rate of return. During the decade of the 1970s, the S&P retuned -1% per year in real terms. The only worse decade for stocks was 1910-1919, when the market averaged a -2.6% annual real return. 
"Sucking in the Seventies" is the name of a Rolling Stones "Greatest Hits" album released in March 1981. The title aptly describes the performance of the US economy during that period. And if Mick Jagger had finished his studies at the London School of Economics before fronting for the Stones, he might have penned one more song to go with "Shattered", "When the Whip Comes Down", and "Beast of Burden" on this compilation. The title of that unwritten song would have been "Stagflation". What exactly is the phenomenon economists call stagflation? Stagflation is a term that originated in the early 1970s to identify the simultaneous occurrence of recession and inflation. According to Sean Corrigan, the Chief Investment Strategist of Diapason Commodities Management, in the early 1970s the business cycle had peaked. Corporate profitability was "caught in the grinder between heightened costs… and less rapidly rising output prices and sales." Think about this a moment. Across the whole economy, costs are rising at a faster clip than sales. Profits are getting squeezed. Can't we fix this? Surely the government has a solution to the current state of the economy… French economist Nicolas Bouzou writes "in… theory, recessions (and the unemployment implied by them) are cured by inflation, while inflations are cured by recessions. When both occur at once, the theory is not only seriously challenged, but fiscal and money managers are at a loss concerning what to do next." So why won't inflation solve the stagflation dilemma? Corrigan examines the economy of the early 70s for some answers. Central banks attempted to mitigate the stagnating economic condition of the early 1970s by loosening monetary policy. Easy money did eventually drive the price of goods higher, but did not stimulate the overall economy. Corporations became reluctant to keep their expensive workers, let alone hire more. In spite of rising nominal prices and wages, the labor market continued to weaken. Stock investors in the stagflation of the 1970s as shown in the chart above, did not fare well. Neither did bond investors. Even CDs and T-bills, despite offering double-digit yields, failed to keep pace with inflation. Corrigan: "Under stagflation conditions, nominal bond yields may be rising, even as real returns are
falling…Equities may find that a nominal earnings slowdown (and probably a real earnings decline) is compounded by a contraction of the multiples thereto attached." In summary, stagflation creates a toxic brew for financial asset prices. There is some compelling evidence that the US might be entering another stagflationary period. The US economy appears to be slowing down. First quarter GDP growth came in at 4.7%, but when adjusted for inflation, real growth was only 0.6%. Interest rates in the US and around the world are slowly moving higher. John Williams, of Shadow Government Statistics, provides even more damning evidence. Williams writes a monthly electronic newsletter that exposes and analyzes the flaws in current US government data and reporting (see www.shadowstats.com). According to Williams, changes to the CPI made during the Clinton years drastically underestimate the true rate of inflation. Williams' estimate of inflation is 6.2% versus the official CPI of 2.6%. Even if Williams' adjustments to CPI are only half right, it still indicates that real economic growth in the U.S. is negative. My colleague Chris Mayer wrote a more detailed report on Williams…see Figures Don't Lie, Liars Figure Marc Faber, editor of the Gloom, Boom, and Doom Report, believes the US has reached the stagflation phase already. Faber cites weakness in the utilities and real estate indices (prior to the Dow's recent sell-off) as evidence of market expectation of rising interest rates. If stocks, bonds and cash did so poorly in the stagflation of the 1970s, what might the humble investor do to best weather the storm? Look no farther than the Rolling Stones' 1978 release: "Everything Is Turning to Gold" - a song that appeared on the flip side of "Shattered." (But isn't that where gold always appears?) While stocks and bonds were, um, sucking in the 70s, gold was "Hot Stuff." We should not be surprised if the timeless monetary metal becomes hot stuff again very soon. Joel's Note: And if you want to get your hands on some of this hot, shiny yellow stuff, you have just one more week to do so before Uncle Sam's guarantee is done for. What am I talking about? Government guaranteed gold, of course. Want to learn more? The full report is right here, but you'll have to hurry: Outstanding Investments - Government Guaranteed Gold | 
