It’s not difficult to compare today’s era to the 1970s. An energy crisis, a hot war, a cold war, persistent inflation, soaring interest rates, rising house prices. Even Abba, with its flared trousers, is performing again, albeit as a hologram. For investors, a rerun of the 1970s would require a profound rethink.
Scottish historian Niall Ferguson believes the similarities are striking and advises investors to adjust their strategy, not least because of shifting tectonic plates in geopolitics. Ferguson was one of several speakers at last week’s Amundi World Investment Forum in Paris who drew comparisons to the 1970s when addressing today’s economic challenges.
“If we are rerunning the 1970s, what does it imply for investors? If you look at inflation adjusted returns… it’s very striking that in the period from the late 60s to the end of the 70s, it was only housing that delivered positive real returns. Bonds, equities, bills delivered negative real returns,” Ferguson told the 650 delegates at the event.
“If we’re rerunning the 1970s, you’ll have to rethink your investment strategy quite profoundly. Because the things that worked in the period after Paul Volcker broke the back of inflation won’t work,” he said, referring to the chair of the Federal Reserve during the 1980s who raised the federal funds rate to a record 20 percent in 1981.
Bernanke sees a different Fed today
Central bank heavyweights conditioned to fight inflation disagree. Ben Bernanke, chairman of the Federal Reserve from 2006 to 2016, believes we are “almost certainly not” in danger of repeating the 1970s experience. The Federal Reserve, pressed by the political establishment, at the time simply did nothing to counter inflation, he said, something which cannot be said of the Fed these days.
“The Fed today has the independence it needs to make policy decisions,” Bernanke wrote in the New York Times this week. “The Fed’s credibility will help ensure that the Great Inflation will not be repeated.”
Back to geopolitics. Speaking in Paris, Ferguson described a world in which the intimate relationship between China and America has ended and turned into a new cold war. “Chimerica is dead,” he said. “And Cold War Two is underway. By Cold War Two, I mean that the United States is now in a competition with the People’s Republic of China, very similar to the one that it had with the Soviet Union from the late 1940s until the end of the 1980s.”
Ukraine war is ‘our version of the Korea War’
Ferguson’s reflection on the war in Ukraine is that it isn’t so much that it is like the 1973 Arab-Israeli war, which triggered a global oil crisis, but “our version of the Korean War that broke out in 1950.”
“The Korean War was the hot war that made it clear just how serious the superpower conflict could get. In a kind of mirror image way, the war in Ukraine is doing something similar,” Ferguson said.
Looking ahead, Ferguson said he believes that it is possible that the US will elect a Republican president in 2024, just like the 1970s ultimately helped propel Ronald Reagan into his presidency.
Trump re-election ‘conceivable’
“It’s conceivable that a similar process will see a swing to the right in American politics, beginning of the midterms later this year, and culminating in the election of a Republican president in 2024,” he said. “There is still a non-trivial probability that Donald Trump will become the second president in American history to serve two non consecutive terms.”
Geopolitical analyst Tina Fordham, whose wisdom also is highly valued on Wall Street, said that apart from the 1974 oil price shock there are a lot of differences compared to the 1970s. “One of them, we hope, is that central bankers and policymakers have learned something from the previous crisis, and will be able to manage it,” she told Investment Officer.
“Another big difference compared to that period, is just the kind of reduction in poverty, the economic boom of the last several decades that has seen improvement in living standards around the world and improvement in, let’s say, the shock absorbers for crises,” she said.
When it comes to fighting inflation, the Fed has a much tougher fight on its hand than the ECB, said Olivier Blanchard, senior fellow at the Peterson Institute for Economics and former chief economist at the IMF. “The Fed will have to step on the brakes in a fairly strong way, for Europe, I also think that the ECB will have to increase rates. But the situation is not as dire.”
‘Not afraid enough of inflation’
Nobel Economics Prize winner Daniël Kahneman recognised that inflation is a phenomenon not widely understood by the general public. “Undoubtedly, I think that people who have lived through high inflation remain afraid of inflation for a long time. This generation is probably not afraid enough of inflation, if inflation actually was out of control.”
Amundi Institute Chairman Pascal Blanqué said young people, even though they have not lived through periods of high inflation, do recognise its pitfalls. “Polls indicate that the young are actually also very scared of inflation, because it is nagging uncertainty. We just don’t understand what it means. So actually, the degree of fear seems to be rather high across age distribution.”
Amundi CIO Mortier’s key principles for strategic asset allocation
Amundi, Europe’s largest asset manager with some 2,000 billion euro in assets under management, in February named Vincent Mortier as its new Chief Investment Manager. Mortier took over from Blanqué, who had served in this role since 2005. Against the backdrop of today’s geopolitical and economic challenges that were discussed at the firm’s World Investment Forum in Paris, Mortier outlined his key investment principles for strategic asset allocations.
“Forget about the old technologies. They are not working that way anymore,” he said. “In fact, correlations are totally broken, volatilities are high and will continue to be high. And returns are getting more and more difficult to predict. So in that context, for strategic allocation, we believe it should be built around a few key principles.”
As a first principle, investors should forget about a balanced allocation between equities and bonds. “Indeed, the 60-40 approach is in bad shape. It’s not yet dead, and so you can well adapt it and it can still be valuable,” he said.
Diversification with Chinese impact bonds
Secondly, emerging markets need to be included. “It’s really believed that emerging market bonds and impact Chinese bonds should be a core component of allocations because of their diversification effect. And the fact that they are providing real returns.”
On equities, Amundi sticks to its view that quality and value should be favoured. “It’s a secure uptrend. So you need to select stocks which are with a good balance sheet, good earning streams, and good visibility,” Mortier said.
‘Markets will be built on trust’
Finally, real assets need to be included in a core allocation. “In particular real assets are actually working efficiently, like real estate, infrastructure, and private debt with floating rates,” he said, adding that investors need to understand what they are investing in. “It’s important that you, me and our clients understand what they buy and trust what they buy because markets will be built on trust.”
Speaking at a London conference earlier this month, Mortier spoke critically of private equity investments, saying that some parts of this industry will grow into a “pyramid scheme” that will create casualties in around three to five years. “You know you can sell [assets] to another private equity firm for 20 or 30 times earnings. That’s why you can talk about a Ponzi. It’s a circular thing.”
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