If History Rhymes... We're in Trouble

If they had the term 'soft landing' in 1948, they would've used it...

The massive effort to win World War II had pushed the U.S. to maximum employment for much of the early '40s. But no one was spending through much of those years.

So when we declared victory and rationing came to an end... everyone rushed to spend all that money that was burning a hole in their pockets.

In fact, they were in such a rush that it set off a historic run of inflation. The market panicked. Stocks tanked nearly 30% in 1946.

Once the Federal Reserve finally jumped into battle in 1947, investors worried the central bank would force a recession to halt inflation.

But fast-forward a year, and a downturn still hadn't materialized. The Dow Jones Industrial Average was up 17%. Investors took it as a sign that the worst was over.

If this story sounds familiar, it's because it's almost exactly what we've lived through for the past three years.

Back then, almost as soon as investors let their guard down... they regretted it. The market's ugly surprise hit just as folks were singing the Fed's praises.

And as I'll explain today, that's exactly what we're seeing this time around...

The post-war spending boom could only last so long...

Eventually, all the cash people saved during the war dried up. High inflation helped speed that along... and so did access to credit.

In late 1947 and 1948, the Fed was doing a lot to slow down credit access. It hiked interest rates. It increased reserve requirements for banks. It even sold a bunch of its Treasury bonds.

(If you thought "quantitative tightening" was first introduced in the 2000s, think again...)

By mid-1948, the Fed had cut inflation in half. But President Harry Truman was still concerned about persistent high prices. So he took even more drastic measures to cool things down...

In September 1948, Truman enacted credit controls that further limited folks' access to the credit market.

Truman's actions cooled down consumer spending. They also started a vicious cycle.

Businesses weren't selling as much... which made their financials look worse. Lenders already couldn't lend much to consumers. And they were getting nervous about lending to declining businesses.

Lending standards started to rise in 1948, which led to a credit crunch. And almost immediately, the U.S. economy dropped into a recession that lasted until 1949.

Take a look...

Gross domestic product dropped 1%. Even more telling, corporate default rates flared up... from no defaults in 1948 to defaults from almost 1% of all rated companies in 1949.

Of course, investors panicked about the wave of defaults. The stock market gave up all its gains from the past year and retested its post-WWII lows.

In short, investors forgot about the credit market...

They were too focused on the promise of a soft landing. And they missed the warning signs as a result.

Unfortunately, we're seeing the same mistakes play out this time around.

I spoke about this setup last year, at our corporate affiliate Stansberry Research's annual conference... and gave an updated version of the same talk this year.

If you were able to catch my presentation on Wednesday, you know my opening line was "We told you so"...

Last October, I said we wouldn't immediately fall into a recession in 2023. I warned that a strong market might lull investors into a sense of calm.

But I also explained that credit issues could come home to roost by 2024...

The S&P 500 is still up 12% this year despite recent volatility. At its peak, it was up 20%. The stock market is ignoring the credit market... like it did in 1948.

But trouble is brewing. Consumer cash is drying up. The bottom 80% of American households by income have less in savings today than they did before the pandemic.

At the same time, banks are once again worried about lending. More than 50% of banks tightened lending standards in the most recent quarter. And bankruptcies are already creeping up... a sure sign of a looming downturn.

Next year is going to be a rough one. Stocks will give up most – if not all – of their gains from the past year. Investors ought to be cautious in stocks going forward.

Be sure to check back next Friday. I'll cover the second part of my conference presentation... including how to protect your money over the next two-plus years.

In the meantime, we're getting closer and closer to a classic credit-crunch-induced recession. Nobody in the stock market seems prepared.

Don't make the same mistake.

Regards,

Rob Spivey
October 20, 2023