Guns and butter and credit

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Oil prices are high and rising. Inflation is scaring everyone, and men are wearing terrible clothes. The question that confronts us today is are we living through the 70s again? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I am Rob Armand. Author of the FT's Unhedged newsletter, and I'm joined. at Unhedged World Headquarters today by my fearless lieutenant Hack Young Kim. Welcome back to the show, Hack Young. At your service, Rob. Well you better be.

Ha ha. Uh well the analogy with the seventies is kind of obvious given the oil shock that we are experiencing. But Hack Young, you recently wrote that the better analogy might be the nineteen sixties rather than the nineteen seven. Yeah, so Richard Bernstein at Janus Henderson he put out a note recently saying that things are actually a lot more like the nineteen sixties versus the nineteen seventies.

And basically he defined the whole nineteen sixties era as this guns and butter period, the guns being all this defense spending for the Vietnam War that dragged on for years. Which similar to now we have a whole ramp up and defense spending. And then the butter being like fiscal spending. Lyndon Johnson, the Great Society, right? Yeah, the whole great society, all the spending on like Medicaid, Medicare, all those social programs.

And he's arguing we kind of have something a little butter like too with Trump's one big beautiful bill and the tax cuts that come through it. It's almost like you could sum up by saying President Johnson like President Trump, tried to run the economy hot. They were gross guys'cause you had the war and you have both war and

fiscal just a a non-war fiscal stimulus, just general social spending in the one case on Great Society, in the other case on tax cuts. So that's that's Bernstein's thesis then. We have inflation coming.

Pretty much, yeah. And that does not really mean good news for basically whatever has worked for your portfolios in the last few years. He's saying if we're gonna have this really high inflation coming on soon, like we did in the nineteen sixties with all that guns and butter flowing through the economy.

The longer duration investments, like long dated yields and all this growth like the tech growth stocks, they're basically going to really screw your portfolio over if inflation gets really high. Yeah. So in nineteen sixty-five inflation core inflation was under two percent and by nineteen seventy it was four, five, six percent. You know, if you own ten year treasuries in a classic kind of seventy thirty portfolio and you own a hell a lot of tech stocks which are long duration

It's gonna hurt over the coming years. Another interesting analogy between the two eras, the kind of late sixties and the late twenty twenties. is there was very similar Wall Street hype vibes. So now of course we've had like the Magnificent Seven and all this hype about AI and you know, the productivity growth and so forth. And the analogue to that for the late sixties was a group of stocks called the Nifty Fifty.

Which now you look over the list of the stocks and some of them seem a bit old fashioned like Kodak or Polaroid or Xerox. But at the time they were kind of cutting edge tech stocks that people believed would kind of grow forever, and specifically that were safe to buy despite being very expensive.

And it was like the go-go sixties, they called it. That's a term that John Brooks titled a book after, an excellent book called The Go Go Years that everybody should read. The parallels between the attitude towards the nifty fifty then and tech stocks now. are almost eerie in a way. So that's another similarity, but Hack Young, you made a pretty convincing argument in your piece.

That there are powerful disanalogies. as well between the two eras. Yeah, I think the biggest one to me just being that in the nineteen sixties, all this spending led to really strong economic growth and you had a really low unemployment rate as well. Now people are kind of fearing the opposite. People are scared of stagflation that

We're basically going to have really, really limited growth. And also our labor market just looks not as hot right now. Things it's a little sludgy as you called it a couple of days ago. Yeah, I mean it's not that the unemployment rate is so high right now at four and a half or whatever it is. It's that nobody's hiring anybody. Nobody's firing anybody, nobody's quitting.

Things are kind of stuck or sludgy. And in the sixties, if if you look at the unemployment back, between sixty-five and seventy, we just saw the unemployment rate just ticking down and down and down. The labor market was tight as heck. back then, which is just a different situation than the one we're looking at right now. Right. Yeah. I think that kind of also goes to just differences in how the Fed thinks.

Then and now because they hadn't lived through the seventies. Yes. They were a little naive. They thought that having inflation, a bit of inflation for pretty low unemployment was a much more reasonable trade off. But now we have obviously a much more vigilant Fed that's a lot more aggressive on both fronts.

You might you might say even a frightened Fed, not only Do all these people remember that we had an inflation spike in nineteen seventy and then in nineteen seventy five and then in nineteen eighty and then in nineteen eighty one, but we had an inflation spike in twenty two, twenty three.

So like these guys aren't gonna screw, I don't think, at this point. The way the Fed of William McCesney Martin Junior was, like you say, a little a bit willing to accept some inflation. I think the tendency will to be to Step on it now. Another question that you raised that I really liked is whether the butter side of these two economies is actually similar. So then it was social spending and now it is tax cuts for corporations and middle class to upper class individuals.

Yeah. There's an argument also that tax cuts just won't percolate through the economy. The spending multiplier basically is just not as strong as spending on social programs. So the growth aspect also just not looking as strong. Yeah, no, i it could be really different. And you mentioned that kind of multiplier effect or the marginal propensity to spend. Turning now to the present, I think it's important in this context.

the stagflationary context to talk about the bottom quartile of the American consumer. We both know that the economy is growing pretty well, but those lower income consumers are really struggling. And that makes our economy look again very different from the nineteen sixties. So I was introduced when I was writing about this recently, I was introduced to the term delinquency churn. It's interesting that in consumer debt.

Auto loans, personal loans, credit card loans, we're not seeing a big spike in defaults. People are paying their debts, but delinquencies are very high. So when I spoke to people in the consumer credit markets, they were saying There's a slice of the American population right now that is kind of just hanging on and they know to make those payments when they absolutely have to.

In order to avoid getting the car repossessed or getting the the their credit lines shut down. But they are just kind of hanging on. So I guess the question r that is relevant to this discussion is Does having that bottom quartile or or decile of consumers really struggling now under inflation and a sludgy job market? What effect does that have on the whole macro? That's kind of something I've been wrestling with. Yeah.

our highest, which isn't necessarily surprising in certain ways if you just think about they just have a lot less credit, right? They just started working, et cetera. But if you also think about They started working hack young. I mean uh unemployment rate. among young people has been rising or that's my general impression. Yeah, so in the last it's an interesting trend, so young people are super pessimistic about the job market, right?

there's these constant headlines like it's never been harder for young people to get a job. There's never been a tougher job market. And it is true that since twenty twenty, so in the post pandemic recovery, you've kind of seen a flip in young recent college graduates having a higher unemployment rate than the overall overall unemploym unemployment rate. Typically, you know, the overall unemployment rate was higher than for recent graduates.

So that is kind of a reversal. But then if you look at just historically the unemployment rate for recent college graduates, so the cohort from twenty two to twenty seven, it's not compared to historic levels, it's not unusually high. So like the relationship with the general unemployment rate has changed, but the picture ain't that bad.

Yeah, so now for recent graduates the rate is five point six percent. Mm-hmm. And then you have the overall rate at four point two percent. Yeah. So it's a bit higher, yeah, but it's not Why the gloom and doom if we don't see it in in the hard numbers? I think the low hire, low fire thing is a part of it. Like people don't really feel like they have a lot of options when they're entering this job market, right? And just kind of having to like desperately go for

Whatever is available. So just kind of that lack of optimism. And I also think the whole AI discourse has really put so much doom and gloom also into just general sentiment on the labor market, even though If you look at the data now, there's not that much evidence to suggest that AI has actually lowered opportunities for young college graduates. or that in sectors that are exposed to AI that there's a noticeable slump in job openings or a spike in unemployment rates. So we're not really seeing

very substantial effects of AI in the labor market. But I think just the thought of people thinking that they're gonna get replaced by generative AI in like two years is just really freaking The overall theme here, which is very interesting, is about vibes versus hard numbers. Hard numbers look good. are more like the seventies than the sixties, you might say like. There's a seventies vibe. Yeah. In the sense that when you talk to employers and employees, both sides say

We think there's gonna be less opportunities. We think th this technology is gonna change the number of people we hire, reduce the number of people we hire. So even though the economy is chugging along okay if you look at the macroeconomic data, it's a bit sludgy and vibes are bad. All right, we have a 1960s economy, but with some serious 1970s vibe. And we will be right back with Buller Bear Or fad, there's more than one side to every story.

Flipside podcast from Barclays Investment Bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flip Side on your favorite platform.

Listeners, welcome back. This is Long and Short, that portion of the show in which we go long things we like and short things we don't like. Hack Young, are you long or short something today? I am short good flight deals to Europe this summer. Oh Were you hoping to go to Europe this summer? I was. I was hoping to go to Portugal. I wanted to go to Sao Miguel and the flights are they have been insane since the war started.

Mm. And basically apparently there's not really much hope even after the war ends because the jet fuel prices are already so high and airlines are scrambling to deal with shortages, especially flights to Europe and Asia are affected. Uh you're gonna have to go to Coney Island to go to the beach this summer, hack young. I'm gonna tell you you're gonna love it. They've got Russian food out there. You're gonna meet a lot of nice people. I think it's a you know, it's a good summer to stay close.

That was not the Euro summer I had envisions, but promising. Uh I am short AI glasses. We have a nice piece by William Langley in the FT today, where a Chinese rival to Meta says that Meta's glasses will turn you into, and I'm quoting here, douchebag with a camera on your face. And the promise of even realities, which is this Chinese rival, glasses maker, is that they will collect less data on you.

and look less cumbersome. I think the whole idea is awful. I don't think we should have any electronics in our glasses. I hope this world never arrives epox on both of your houses. With that stunningly negative view on the future of technology, we will be back in your feeds on Thursday. Until then, stay sharp out there. Unhedged is produced by Jake Harper and edited by Bryant Erst. Our executive producer is Jacob.

We had additional help from TOFR4Hs Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com slash unhedged. Offer. I'm Rob Armstrong. Thanks for listening.