Is 2008 the year the markets crash?

The cause was soaring oil prices which hit $38 a barrel in 1974, equivalent to an inflation adjusted $102 a barrel today, although when adjusted for M3 money supply growth that $38 barrel would now cost $228.

Then, as now, the authorities in the UK and US had been pursuing irresponsible expansionary monetary policies to promote economic growth, and indeed growth levels had soared in the early 1970s. But the crunch came in 1974, with the oil price surge and market crashes, and from there on it was a decade characterized by low growth and high inflation, known as stagflation.

If my old friend is right, the current credit crunch in global markets and the big write downs by the major banks could be the end of the era of high economic growth seen in the early years of the twenty-first century and the start of stagflation. Ah, and it also might mean that asset devaluation in real estate markets and equities gets much worse before it hits bottom.

1970s

The trouble is that people's memories are short, and many money managers today are too young to remember the 1970s. They have grown up in the Alan Greenspan era in which the Federal Reserve has fixed all problems and ensured quick market recoveries from the dips. What if it is different this time?

Actually, that is not what this article is saying at all. It is saying that we have seen all this before back in the mid-1970s, and therefore if you want a guide to the immediate investment horizon imagine back to that time and what the credit crunch meant.

Then you would have to conclude that the most imminent market events have to be a synchronised series of crashes in global equity markets followed by major corrections in many real estate markets.

Cash is king

In the 1970s cash deposits outperformed equities and you might think it ridiculous to suggest that could happen again. Yet a fixed-rate dollar deposit outperformed the Dow Jones last year, and even that gain in equities was erased in the first few days of 2008.

We also saw a surge in the gold price in 1974 as we are seeing now. But investors rushing into the yellow metal should also recall that gold prices fell by half in 1975-6, a nasty bear market often forgotten when remembering the subsequent eight-fold gold price rise to 1980.

For commodity prices were very volatile in the 1970s, despite the excellent returns for investors positioned correctly at the right times. This was also a golden age for the oil states of the Middle East, which might suggest that their best investments will be local and not global for the next few years.

See also:
2008 outlook for currencies, stocks and commodities
Volatile outlook for UAE stocks in 2008