How To Navigate Another Winter Of Discontent

9th Sep '22 by Alex Naamani

13 comments 4741 reads

I had a fascinating conversation with one of our subscribers back in March 2020. We speculated whether the economic climate of the 2020s would resemble the 1970s. Unfortunately, the comparison has become something of a cliche. Newspapers say the coming months will be like the Winter of Discontent (1978-79), when widespread strikes and industrial action resulted in rubbish piling up in the streets. Stagflation (inflation and low economic growth) is a trending buzzword and the economic historian, Niall Ferguson, recently said, ‘Why shouldn’t it be as bad as the 1970s?’ In a similar vein, the former Governor of the Bank of England, Mervyn King, suggested that we could be in for a ‘very unpleasant period’. King did add a sanguine caveat. We’re not there yet and we just don’t know what will happen next. We don’t have a crystal ball and the economic models could be wrong, but some noteworthy comparisons with the 1970s can already be made…

Could the FTSE 100 sink towards 2500?

Readers may remember the three-day week introduced back in 1973 by the Prime Minister, Edward Heath. The state limited the commercial consumption of electricity to three days a week. Perhaps the lockdowns of 2020-21 can be compared to the three-day week in the sense that in 1973, and again in 2020, the government of the time imposed severe restrictions on economic activity. It would be ‘good’ if the comparison ended there, but unfortunately there are more similarities…

In March 1978, Aldo Moro, the former Prime Minister of Italy, was found dead, assassinated, in the back of a truck. 44 years later, in July 2022, the former Prime Minister of Japan, Shinzo Abe was assassinated with a homemade firearm. These tragic and sad events may signal that we have returned to an era where people have very little faith in the ability of the political class to ‘control’ –for want of a better word– events and resolve crises. Political commentators argued that Britain was ‘ungovernable’ in the 1970s. In more recent years, successive UK governments have tried and failed to provide ‘strong and stable leadership’.

The 1970s and the early 2020s were marked by a comparable set of economic trends. Let’s take a look at these trends and consider what they mean for the stock market…

Trade union strikes –alongside afros, disco music and flared trousers– defined…

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hayton

9th Sep '22

The most thought provoking financial article I've read this year'

Thank you very much.

Ternheim

Very good article Alex. Thank you

whatmore1951

This is fantastic. It should be saved and reread every few months.

We are not that good at learning from history. I have a friend with a masters in economic history. He says that one of the best eras to be alive was the hundred years following the Black Death. There was plenty of land and plenty of food. Crucially for working people wages were very high because of shortages of skilled labour. Good for workers not so good for those who had to find the money to pay them.

Another lesson from history is that prosperity invariably coincides with cheap energy and visa versa. Coal became expensive prior to the 1920s and 1930s. Cheap oil after the second world war was a crucial factor in post war prosperity.

The oil price shocks of the 1970s brought prosperity to an end. In the UK North Sea oil and gas ushered in a new wave of prosperity in 1980s. Ordinary people found gas central heating to be affordable whist industry had affordable and sustainable supplies of energy. Unsurprisingly, this was also a good time to be a share investor.

There have been times in our history when the BoE has been forced to defend the value of the pound by bringing in sharp unplanned increases in interest rates. I think we are close to such a point now. UK energy prices are going up not just because of world prices but also because of the falling pound. Something has to give.

This could be a stressful time for private investors. As one of the old gits here I think private investors ha a choice to make.

1)either sell everything and try and time your re-entry. (Good luck with that.)

cont.

Sorry was submitted before I had finished.

2) Sop looking at your computer screen every five minutes, put your tin hat on and wait for the storm to pass.

In the meantime make sure each of your individual holdings have very strong balance sheets. In particular debts must be low because in the end companies have no control over interest rates.

Mark Carter

Interesting article. We must remember that shares once traded in the mid single digits, and could do so again. I think you have to consider interest rates, though. We're still at very low interest rates, so it shouldn't come as a complete shock that they may rise. Mind you, I would have expected rates to have risen years ago, but central banks have shown that they didn't have the belly for it.

How high could rates go? Well, 15% seems a reasonable upper limit, I guess. If we reach those limits then we could well expect markets to full further as PE multiples contract so that the dividend yield is more inline with high interest rates.

Where we stand now, though, 15% seems like a very pessimistic figure. So the likelihood is that the markets won't reach such extraordinary low valuations that occurred in the 70's. Still, never say never.

Leebod

Interesting article. The Portfolio Matters youtube channel has been a great place for a weekly macro perspective and covers a lot. I highly recommend it if you found this interesting.

TC99

Excellent, thought provoking article. Thanks

JonBeddell

10th Sep '22

great article, thanks

RishiS

Brilliant article thanks. We’ll done for working in The Seventh Seal. Hello to Jason Isaacs.

John_a _stuart

I liked this. It was both interesting and well-written...but:

1. We live in a different World now. It is much bigger. 50 years ago, countries like Indonesia, Viet Nam (or China!) were, economically, relatively insignificant.

2. Oureconomy, though bigger than then, is a diminished fraction of the World economy.

3. The economy, both local and global, has a different shape. Locally, we do different things nowadays. Service (dependent on disposable income) is a major factor in the ecenomic well-being of the nation. Conversely, manufacture has shrunk and what remains is dominated by quite different activities from the 70s.

4. AI may well improve productivity in some areas and of some people. However, I fear there is some Pangloss influence at work here. If some people are in high demand, and well rewarded, but displace many more, what are the "leftovers" going to do with their lives? This was not thought through before our national resignation from heavy industry; large-scale disunity and disruption ensued. A similar potential problem exists with autonomous vehicles. Currently, everybody driving is to some practiced and has some facility. By letting AI drive our cars, we risk raising a cohort of new drivers without either. There are many circumstances in which pragmatism and human compromise trump rule-based protocal.

aflash

11th Sep '22

As a synthesis the article deserves a prize.

As a guide it is clear.

The problem with cycles is that they evolve over years and we live through them day by day.

I have started small positions in the commodity stocks and house-builders, conscious of the falling market and that it will be years before the early purchases rise above the entry price. Sitting on losses is a worry.

In late 1974 my father looked down at me from the top of the stairs and said if the market fell any further then family finances would be seriously impaired. I crossed the Atlantic a few months later to a Canadian bank who had promised me work. The head of human resources shook his head, saying the recession was so bad all hiring budgets had been cut.

So how we react to these cycles depends on personal circumstances.

By 1979 I had accumulated enough to consider buying a house and the deposit was accumulating interest at over 15%. A colleague was considering selling because he could not avoid the mortgage.

In a flashback of this yet to be released film, my father flipped properties in the early Seventies as their prices jumped up week over week due to inflation. One can take advantage of events as well as being a victim of circumstance.

The other problem with cycles is that they rhyme rather than repeat themselves.

Alex does not mention Soros who expected the 1987 crash to happen in Japan. Famously, when it happened on Wall Street, he took his losses immediately and played the market up and down over the following weeks.

This is what we have to do to win our chess game.

Greenblobby

26th Sep '22

love the phrase " we live in a different world". Very much akin to " but its different this time". The phrase is generally wrong. Human psychology is never different

LaughingBuddha

4th Nov '22

Nice article.

How To Navigate Another Winter of Discontent

Could the FTSE 100 sink towards 2500?

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Alex Naamani

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