Serious Money:The apostles of "new era" thinking are alive and well. Some of the perennial bulls on Wall Street believe that the high valuations afforded financial assets of almost every variety from Beijing to New York can be justified on the grounds that the current climate is a replay of America's golden age of prosperity that prevailed in the 1960s, writes Charlie Fell
Then as now, stock market volatility was low and long-term interest rates in the US remained below 5 per cent for much of the decade. Technological advances such as the microchip contributed to high levels of productivity which, like today, enabled corporate America to capture a double-digit share of GDP.
The rise of China and India today and the disinflation that accompanies increased globalisation resembles the revival of Germany and Japan four decades ago. The low inflation arising from the combined forces of high productivity and increasing trade contributed to an elongated economic cycle that began in 1961 and persisted through 1969.
The current economic expansion began towards the end of 2001 so, 40 years on, perhaps investors today can look forward to a modern version of San Francisco's "summer of love".
Comparisons with the "goldilocks" economy of the 1960s are appealing but, unfortunately, this particular fairytale is not true. The blue-sky optimists appear to be viewing the "go-go" years through rose-coloured glasses to the exclusion of facts that paint a different picture.
Analysis of the available evidence reveals that, by the time the first post-war baby boomers turned 20 in 1966, the golden age that began more than a decade earlier was at an end. A combination of factors including excessive government spending, increasingly militant labour unions and a dearth of foreign competition contributed to a structural rise in inflation that ushered in an "age of misery" that persisted until the early-1980s.
The year 1960 ended with the election of John F Kennedy as president. His arrival in the White House on the promise that he would "get this country moving again" saw Keynesian economic policies gain prominence in the US administration. Wall Street was never a fan and despite a drop following his assassination, the Dow jumped more than 4 per cent during the next trading session.
But if Kennedy was bad for business his successor was almost certainly worse. Lyndon Johnson became president following Kennedy's premature end. His "Great Society" programme, which included massive tax cuts, was launched in 1964 despite an unemployment rate that hovered below 5 per cent. Almost simultaneously, he escalated America's role in Vietnam following the Tonkin Gulf Resolution based on erroneous claims that the North Vietnamese instigated an unprovoked attack on two American destroyers.
Meanwhile, corporate America was doing well and the conglomerate boom that saw the diversification of "big business" into unrelated areas was in full swing. Increasingly militant labour unions did not pose a problem since, in the absence of foreign competition, corporate America could raise prices, knowing full well that in the presence of Keynesian economic policies the administration was unlikely to care.
While the corporate and government sector revelled in the "goldilocks" economy of the early 1960s, they failed to notice that the dollar had become increasingly overvalued relative to foreign currencies and America's merchandise trade deficit had all but disappeared by the end of the decade. The chairman of the Federal Reserve - McChesney Martin - noticed, but the decision to raise interest rates towards the end of 1965 saw him summoned to Johnson's ranch to explain his actions.
Meanwhile, the baby boomers were coming of age. Some were entering the workforce while others were studying in college. Strikes and protests were a common feature of the late 1960s. Indeed, the largest demonstration in US history occurred towards the end of 1969 when more than 700,000 individuals marched through Washington DC to protest against the war in Vietnam. The golden age of prosperity had long since passed.
The aftermath of the US's golden age was far from pretty. Inflation, though already on a secular rise, surged following President Nixon's decision to end the dollar's convertibility into gold in 1971. The previously overvalued dollar saw major US industries from cars to steel relinquish market share to low-cost and high-quality products elsewhere. Meanwhile, stock prices dropped spectacularly and did not reach a new high in real terms until 1992.
The lessons for investors should be clear. It is all too easy to select a certain period of history to support a particular view. Perhaps the optimists can cling to the fact that the 1960s contained the only period in postwar history that the combination of an inverted yield curve where short-term interest rates exceeded long-term rates alongside a sharp housing downturn, did not lead to recession. Can investors look forward to a "summer of love" or a "winter of discontent"? It's time to place your bets.
Charlie Fell is an independent consultant and lectures in finance and investment in UCD and the Institute of Bankers in Ireland.
