Robin holdings
June 13th,2022
“He who does not know his history is condemned to repeat it”; therefore, this analysis presents a brief historical overview of inflation in the United States.
Currently, the inflationary trend is on an upward trajectory, representing a risk for investors and causing a strong impact on people’s personal finances.
In an inflationary context, public policies will have significant difficulties in achieving their objectives and if the Federal Reserve decides to raise interest rates in a way that seeks to control inflation levels, an even more bearish market will ensue. Consequently, central banks and governments are likely to establish strategies to mitigate the impact of the underlying factors fueling inflationary pressures.
The most alarming concerns are in the political arena. Policymakers may take actions that allow this inflationary atmosphere to snowball. For their part, if central banks admit that inflationary pressures continue, they would cause periods of minimal returns in the markets where the most important assets are held. Conversely, if central banks take aggressive action, reducing the money supply, it would generate a bear market. So, either scenario is a challenging environment for investors.
The period with the highest levels of inflation in the United States occurred in the 1970s; however, it had its beginnings in the 1960s when President Johnson implemented a program that increased social spending and, at the same time, financed the Vietnam War. Inflation in this period was 5 percent per year.
During the initial inflationary period, S&P’s Price Earnings Ratio (P/E) in 1968 was 18x and at the end of this scenario in 1982 it was around 7.5x. The P/E is an indicator that relates the price of a stock to the earnings per share; therefore, companies that maintain a high P/E for a long time are considered riskier.
In the same sense, the yield of 10-year Treasury Bonds was around 4 percent, reaching a maximum of 15 percent at the end of the inflationary crisis. It is important to remember that in 1971 the United States broke the link between gold and the dollar, making the transition to FIAT.
Inflation during the 1970s averaged 7.9 percent, peaking in 1979 with annual inflation of 13.3 percent.
The past and its context is not far from our reality; however, why do we human beings seem doomed to constantly repeat the same mistakes without being able to learn from them? In the following posts of this blog we will analyze various proposals to counteract the negative impact of this inflationary scenario.
