Imagine Your Portfolio Going up but LOSING Its Purchasing Power

Last week, I walked you through the 1970s playbook.

It began with the Nifty Fifty boom, then the brutal 1973 to 1975 crash, during which gold, copper, and oil held their value while the Dow and S&P 500 collapsed.

But today, I want to cover the final chapter of our 1970s story, the grinding years that followed the brutal market crash of 1973-74.

This was a time defined by economic stagflation: dormant economic growth combined with rampant inflation. Driven largely by the ongoing energy crisis of that decade.

Central banks were forced to aggressively hike interest rates to try to wrestle inflation back under control.

But here’s the part that catches people out…

Many assets posted decent gains in nominal terms across those years. On paper, portfolios looked just fine.

But in real terms, once you strip out inflation, plenty of those same gains turned negative.

Maintaining purchasing power was the real challenge of that period, not beating the market.

Most investors lived through years of quiet wealth erosion, regardless of whether they held stocks, bonds or real estate.

The Silent Portfolio Killer

Now, just imagine how that looks…

Stocks in your brokerage account going up, yet the actual buying power of those positions shrinking. Hard to fathom!

So, what’s the point I’m trying to make?

We can’t draw an exact line between the 1970s and now. But the parallels are hard to ignore, from persistent inflation pressure to a market once again leaning heavily on a handful of dominant US companies.

As I pointed out last week, right now, we’re still living inside our own Nifty Fifty bubble. US markets are just a few percentage points from their all-time highs.

However, that bubble is colliding with our own version of a 1970s-style oil shock, the ongoing disruption of the Strait of Hormuz. As we speak, we’re walking very close to the edge.  

Is stagflation really a risk?

You should know by now that the Strait of Hormuz reopening was a folly.

What’s less reported is that the Black Sea is now also being constricted thanks to an escalation in Ukraine’s assault on Russian energy infrastructure.

And now, Houthi Rebels are ramping up attacks at another key energy choke point, the Red Sea.

Three critical bottlenecks responsible for moving about 35% the world’s economic lifeblood, oil. 

Now, layer all of that on top of something that’s not making headlines at all:

The severe lack of investment over the past two decades into oil and gas exploration, production wells and refining infrastructure.

Yes, places like the US, Canada, Australia, Venezuela, Nigeria, and Brazil could alleviate some of the pressure.

Yet, their ageing infrastructure is already running at full capacity. While many of the key oil fields feeding refineries face year-on-year depletion.

We’re all about to face the consequences of not investing in raw material supply chains.

A Hard Lesson is Coming

When the correction in US equities does finally land, the 1970s blueprint suggests commodities aren’t automatically doomed alongside it.

That’s because they remain scarce.

Gold, copper and oil all held their value in real terms during the worst two years of the early 1970s crash. Gold alone compounded at close to 34% a year in nominal terms through that stretch.

It’s why I keep coming back to mining and energy equities in this newsletter.

Now, it might not be an exact repeat of the 1970s. Some argue that the conditions today are far worse!

But it’s close enough to highlight why exposure to real assets is a critical component for your portfolio.

Until next time.