Guns and butter and credit

0:00Hakyung Kim: Bull or bear, trade or tariff, future or fad, there's more than one side to every story. With the 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 Flipside on your favorite platform.

0:25Pushkin. Oil prices are high and rising. Inflation is scaring everyone. And men are wearing terrible clothes. The question that confronts us today, are we living through the 70s again? This is Unhedged, markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, author of the FT's Unhedged newsletter. And I'm joined at unhedged world headquarters today by my fearless Lieutenant Hak-Yung Kim. Welcome back to the show, Hak-Yung.

1:07Hakyung Kim: At your service, Rob. Well, you better be. Well, the analogy with the 70s is kind of obvious, given the oil shock that we are experiencing. But, Hak-yung, you recently wrote that the better analogy might be the 1960s rather than the 1970s. Yeah. So Richard Bernstein at Giannis Henderson, he put out a note recently saying that things are actually a lot more like the 1960s versus the 1970s. And basically, he defined the whole 1960s 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 in defense spending.

1:59Hakyung Kim: And then the butter being fiscal spending. That's Lyndon Johnson, the Great Society, right? Yeah, the whole Great Society, all the spending on 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 growth guys because you had the war and you have both war and fiscal, just a non-war fiscal stimulus, just general social spending in the one case on great society and the other case on tax cuts.

2:44So that's Bernstein's thesis then. We have inflation coming.

2:48Hakyung Kim: 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 going to have this really high inflation coming on soon, like we did in the 1960s 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 hot. Yeah. So in 1965, inflation, core inflation was under 2%. And by 1970, it was 4%, 5%, 6%. You know, if you own 10-year treasuries in a classic kind of 70-30 portfolio, and you own a hell of a lot of tech stocks, which are long duration, it's going to hurt over the coming years.

3:47Another interesting analogy between the two eras, the kind of late 60s and the late 2020s, 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 analog to that for the late 60s was a group of stocks called the Nifty 50, 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.

4:36And it was like the go-go 60s, 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 50 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.

5:05Hakyung Kim: Yeah, I think the biggest one to me just being that in the 1960s, all the 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.

5:43Nobody's quitting. Things are kind of stuck or sludgy. And in the 60s, if you look at the unemployment back between 65 and 70, 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.

6:05Hakyung Kim: 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 70s. Yes. They were a little naive. They thought that having inflation, a bit of inflation for pretty low unemployment was a much more reasonable tradeoff. But now we have obviously a much more vigilant Fed that's a lot more aggressive on both fronts. You might say even a frightened Fed. Not only do all these people remember that we had an inflation spike in 1970 and then in 1975 and then in 1980 and then in 1981, but we had an inflation spike in 22, 23. So like these guys aren't going to screw around, I don't think, at this point, the way the Fed of William McChesney Martin Jr.

6:54was, like you say, a little a bit willing to accept some inflation. I think the tendency will 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.

7:26Hakyung Kim: 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, 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 now.

8:09And that makes our economy look, again, very different from the 1960s. 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 their credit lines shut down.

9:00But they are just kind of hanging on. So I guess the question that is relevant to this discussion is, does having that bottom quartile or decile of consumers really struggling now under inflation and a sludgy job market, what effect does that have on the whole macro economy? That's kind of something I've been wrestling with.

9:24Hakyung Kim: Yeah, it's among young people where the delinquencies are 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— If they started working, heck, young. Oh, true. I mean, the unemployment rate among young people has been rising, or that's my general impression. I think you know better than I do. Yeah, so in the last—it's an interesting trend. And 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.

9:59Hakyung Kim: There's never been a tougher job market. And it is true that since 2020, 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 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 22 to 27, 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.

10:45Yeah.

10:45Hakyung Kim: So now for recent graduates, the rate is 5.6%. And then you have the overall rate at 4.2%. So it's a bit higher. Yeah, but it's not. It's not catastrophic by historical standards. Why the gloom and doom if we don't see it 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 just 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.

11:52Hakyung Kim: 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 going to get replaced by generative AI in like two years is just really freaking out. Yeah, the overall theme here, which is very interesting, is about vibes versus hard numbers. Hard numbers look good. Anecdotes are more like the 70s than the 60s. You might say like there's a 70s vibe in the sense that when you talk to employers and employees, both sides say we think there's going to be less opportunities. We think that this technology is going to change the number of people we hire, reduce the number of people we hire.

12:34So even though the economy is chugging along, OK, 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 vibes. And we will be right back with Long and Short.

13:25We'll be right back.

13:29Listeners, 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?

13:41Hakyung Kim: 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 San Miguel, and the flights are, they have been insane since the war started. 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. You're going to have to go to Coney Island to go to the beach this summer, hakyung. I can tell you, you're going to love it. They've got Russian food out there.

14:18You're going to meet a lot of nice people. I think it's a good summer to stay close.

14:22Hakyung Kim: That was not the Euro summer I had envisioned, but promising. 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. A pox on both of your houses. With that stunningly negative view on the future of technology, We will be back in your feeds on Thursday.

15:17Until then, stay sharp out there.

15:43is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.