That Old Malaise: Inflation, the Middle East, and High Crimes in the Whitehouse
Now and Then
The current stock market, measured by the Dow Jones Industrial Average, bears certain resemblances in form to the 1966 - 1981 market. During that period, the Dow made five attempts to rally past 1,000 and failed each time:
The low point during this 15-year period came in late 1974 at 607.87. This marked the end of a 21-month slide that lopped 40% off the Dow and 50% off the S&P 500, making it the worst bear market since the Great Depression. The decline took place against the backdrop of a larger malaise that seemed to engulf the entire world, politically, socially and economically: The unpopular and ultimately futile Vietnam war was in full swing; the Yom Kippur War of '73 disrupted the Middle East and precipitated the '73-74 oil shock; oil and gasoline prices quadrupled in price and fed the fire of general inflation in commodities; interest rates rose; the country was in recession and suffering from widespread social unrest. Finally, Watergate grew from a seemingly minor incident into a full-blown Constitutional crisis that reached to the highest echelons of American power and ended in the resignation and disgrace of Richard Nixon. It was not until a full eight years later - 1982 - that the Dow was finally able to push decisively through 1,000 and sustain an 18 year bull market to an all time high of 11,750 in March, 2000.
Looking back at the events of 1973-74, it is striking how similar they are to events unfolding today. Since the Dow's Y2K peak, it has dipped as low as 7,400 and made several attempts to break back through 11,000 but has failed each time, with the most recent attempt being earlier this month. In Iraq, the United States is once again involved in an expensive foreign war of dubious origin, questioned merit and waning popularity. Oil prices have risen seven-fold, from a low near $10 a barrel in 1999 to highs near $70 today, and are threatening to move higher on renewed Middle East tensions. Some have even compared the Fed's recent decision to stop publishing M3 statistics to Nixon's closing of the gold window in 1971, which resulted in massive inflation that persisted throughout the 1970s.
Finally, a number of high-level political scandals are brewing that have the potential to reach to the highest echelons of power and once again test the powers of the President before the Supreme Court.
Background: 1970s Politics & Economics
In June 1971 with the Dow hovering around 900, the New York Times and Washington Post began publishing secret Defense Department documents pertaining to the Vietnam War, known as the Pentagon Papers. The documents, leaked to the papers by Daniel Ellsberg, a former defense analyst, revealed dramatic government deception and incompetence in the Vietnam War. President Nixon, incensed at their publication and citing national security, sued in Federal court to stop their publication. His lawsuit managed to temporarily muzzle the press until the U.S. Supreme Court ruled 6-3 in favor of the First Amendment, and publication was allowed to continue. In response to the leak, Nixon initiated the White House "plumbers" unit - so named for their orders to plug leaks in the Administration. The unit burglarized Ellsberg's psychiatrist's office in order to dig up "dirt" and discredit the man, and the plumbers later went on to infamy in their attempted "third rate burglary" and bugging of the Democratic National Committee at the Watergate Hotel that would ultimately cost Nixon the Presidency.
In spite of the publication of the Pentagon Papers, and the Administration's response, Nixon was reelected President in November 1972 in one of the largest landslides ever. No connection between the Watergate break-in and the President had yet been made. By early January 1973, the Dow rose to a new all time high of 1,020.20. To borrow a colloquialism from the time, everything was looking pretty "groovy" on the surface.
However, from its lofty zenith above 1,000, the Dow began to decline, signaling trouble ahead for the economy and the President. The advance/decline line had already long gone negative. The dollar, after being "decoupled" from gold by Nixon in '71, continued to fade. Gold and the price of oil were on the rise. Over time, connections between the Watergate affair and the President were made and political and economic uncertainty began to undermine investor confidence, driving the stock market down relentlessly for the next 21 months.
- November 1972 - Nixon reelected in a landslide
- January 1973 - Dow Hits a new, all time high of 1020.20
- January 30, 1973 - Former Nixon aides G. Gordon Liddy and James W. McCord Jr. are convicted of conspiracy, burglary and wiretapping in the Watergate incident. Five other men plead guilty; mysteries remain [Original Washington Post article]
- April 30, 1973 - Nixon's top White House staffers, H.R. Haldeman and John Ehrlichman, and Attorney General Richard Kleindienst resign over the Watergate scandal. White House counsel John Dean is fired [Original Washington Post article]
- June 3, 1973 - Former White House Counsel John Dean fingers the president in the growing scandal. [Original Washington Post article]
- October 10, 1973 - Vice President Spiro Agnew resigns in a scandal unrelated to Watergate. He pleads no contest to a criminal charge of tax evasion and accepting bribes during his tenure as governor of Maryland[More]
- October 20, 1973 - The Saturday Night Massacre: Attorney General Richardson and Deputy Attorney General Ruckelshaus resign rather than carry out Nixon's orders to fire Special Prosecutor Archibald Cox. Robert Bork carries out Nixon's orders to fire Cox and abolish the office of Special Prosecutor. Upon learning of his firing, Cox released a direct statement: "Whether ours shall continue to be a government of laws and not of men is now for Congress and ultimately the American people." Pressure for impeachment mounts in Congress [Original Washington Post article]
- July 24, 1974 - The Supreme Court rules unanimously that Nixon must turn over secret tape recordings of 64 White House conversations, rejecting the president's claims of executive privilege. [Original Washington Post article]
- July 27, 1974 - House Judiciary Committee passes the first of three articles of impeachment, charging obstruction of justice
- August 8, 1974 - Richard Nixon becomes the first U.S. President to resign. New Vice President Gerald Ford assumes the Presidency, only to later pardon Nixon of all charges related to the Watergate case [Original Washington Post article]
And it wasn't just politics - there was also big trouble in the Middle East:
A) Oct. 6, 1973 - Egypt and Syria attack Israel on Yom Kippur, starting the fourth Arab-Israeli War.
B) October 16 - 19, 1973 - Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait, and Qatar unilaterally raise oil prices by 17 percent to $3.65 a barrel and announce production cuts; Oct. 17 - OPEC's Arab oil ministers agree to use "the oil weapon" to punish the West for its support of Israel in the Arab-Israeli war. They recommend an embargo against unfriendly states and mandate a cut in exports; Oct. 19 - Saudi Arabia , Libya and other Arab states proclaim a total ban on oil exports to the United States. Gasoline prices quadruple from twenty-five cents per gallon to over one dollar.
C ) March 17, 1974 - Oil embargo is ended
As you inspect the chart above, note that there was no single "A-ha!" moment in which the market suddenly collapsed. The character of the decline was slow, grinding, and relentless - almost like a market in denial of where it was inevitably going. The market even staged a 15% rally on the Middle East tensions and Yom Kippur War, and did not make its final bottom until 3 months after Nixon's resignation.
On the other hand, the gold market continued its bull market that began when Nixon "closed the gold window" in 1971, when gold was officially priced at $35 per ounce. Aside from some healthy corrections, it was a bull market for gold, not only through '73-74, but throughout the entire 1970s.
The value of the US dollar during this period was extremely volatile. On balance, the dollar's fall during the 1970's was a mirror image of gold's rise. I have included longer-term charts of gold and the US dollar for further reflection, with the '73-74 period highlighted. If you have any insights you would like to share, please post them here.
Reflecting rising inflation, interest rates also rose. The Prime Rate is shown above. After turning down from its peak in '74 at 12%, it ultimately went on to hit 20% in 1980!
Back to the Future
Now flash forward to 2003. On July 6, 2003, the New York Times published an op-ed essay by Joseph Wilson, a former US Foreign Service diplomat, titled "What I didn't find in Africa." In the piece, Wilson accused the Bush Administration of manipulating intelligence and exaggerating the Iraqi threat in order to justify the war, which had already begun.
Like the Nixon Administration 32 years prior, this administration was outraged, and looked for ways to discredit the source of the information. Conservative columnist Robert Novak was enlisted, and noted in his column of July 14, 2003: " Wilson never worked for the CIA, but his wife, Valerie Plame, is an Agency operative on weapons of mass destruction. Two senior administration officials told me Wilson's wife suggested sending him to Niger to investigate the [claims that Iraq was attempting to purchase materials for a nuclear bomb]." These two sentences, which illegally revealed the name of CIA operative Valerie Plame, led to the appointment of Patrick Fitzgerald as Special Counsel to find out just who those "two senior officials" were.
As a result of Fitzgerald's investigation, Vice President Dick Cheney's top advisor and Chief of Staff "Scooter" Libby was indicted on perjury and obstruction of justice charges in late 2005 and forced to resign. Whether Libby was the source of the information or not is still unclear. Fitzgerald has accused him of lying (perjury) about his role, but the mystery remains as to whether he was trying to protect himself or someone else, perhaps his boss, Dick Cheney, or perhaps his boss's boss, President Bush. The investigation continues, with Fitzgerald now focusing on the role of Karl Rove, President Bush's top advisor and primary political "architect". As with Watergate, it is possible that the investigation could lead beyond executive advisors, directly to the Executives themselves. While Washington (and the market) seems to have forgotten about the investigation, new indictments could come at any time.
Like 32 years prior, the American people missed the larger picture contained in the news. Few understood the relevance of Wilson's claims, Novak's revelation, and the investigation of it all by a special prosecutor. The real story was not the leak, but the manipulation of information as a justification for war. Nevertheless, Bush was reelected President in 2004, untouched by the seemingly insignificant scandal.
Watergate, like the current affair, was a complicated story and no one immediately understood connections between the "third rate burglary" at the Watergate Hotel and the President of the United States himself. Nixon was most certainly banking on the public not making the connection and ultimately losing interest in the story. It was only through the hard work and diligence of Archibald Cox, a Harvard Professor who was appointed as special prosecutor in the Watergate investigation that the crimes of the Nixon Administration came to light. As Cox got closer to the truth, Nixon got nervous and wanted him gone.
On October 20, 1973 in one of the most surreal moments in American politics, Nixon ordered Cox fired, and the office of special prosecutor abolished. Rather than comply with this order, both Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned. Nixon found a willing subject in Robert Bork, who ultimately carried out his order.
Chaos had broken out at the top levels of the US Government. For some perspective on what a bizarre series of events it was, imagine Bush firing White House Counsel, Harriet Miers only to have her turn around and finger Bush for crimes committed. Then imagine Bush attempting to fire independent counsel Patrick Fitzgerald, only to have Attorney General Alberto Gonzales and Assistant Attorney General Alice Fisher refuse to carry out his orders and instead resign in protest! Imagine that Dick Cheney had just resigned in disgrace 10 days earlier, and that the Arab world is at war and cutting off oil supplies to the West. It must have seemed like the world was coming apart at the seams, and it is no wonder that the market was falling. It is a wonder that it didn't fall further.
Upon learning that he had been relieved of his duties, special prosecutor Archibald Cox released a simple, direct statement: "Whether ours shall continue to be a government of laws and not of men is now for Congress and ultimately the American people."
A Government of Laws and Not of Men
Cox's statement is one that Congress and the American people will likely once again be pondering in the coming months. On February 6, the Senate will begin hearings on the President's secret domestic spying program, which was just recently revealed by the New York Times. Like with Watergate, no one knows where the investigation will lead, or what other sorts of unsavory details could be revealed as a result.
At the root of the issue is President Bush's decision to wiretap hundreds, possibly thousands of Americans in violation of the Foreign Intelligence Surveillance Act (FISA). Bush has argued, in effect, that as Commander in Chief, he has the right to override the nation's laws. Ironically, FISA was enacted in 1978 in reaction to Watergate, to prevent the widespread abuses in domestic surveillance that were practiced by President Nixon. Like Bush, Nixon also ordered wiretaps to be conducted without warrants - in his case, of conversations between journalists and White House staffers. Like Bush, Nixon claimed the wiretaps were done for national security purposes. Just as Bush believes his warrantless wiretaps are justified by the 9/11 attacks, Nixon claimed his illegal wiretaps were justified by the Vietnam War. War can be a very convenient political tool for a president. However, Nixon's illegal wiretaps were among the factors that led to the articles of impeachment. Coincidentally (or perhaps not), two figures that were central to Nixon's administration - Dick Cheney and Donald Rumsfeld - are also central figures in this administration.
Recently, Bush Administration officials have complained that in spite of the great numbers the economy is generating, the economy's performance isn't getting a lot of media attention. Maybe that's because, as in '73-74, Americans don't feel so great with the threat of inflation, war, global warming, recession, and high crimes in the White House - that old malaise - hanging over our collective heads. Or maybe it's because people simply don't believe the words and numbers that the government puts out any longer. In spite of the fact that government statistics say inflation is low, the price of heating one's home, filling one's gas tank and shopping at the grocery store are at record highs. Health insurance, college tuition, housing - the list of things that have never been more expensive goes on and on. Or maybe it's because the economy is actually on the verge of a recession.
Like in '73, the Middle East situation is once again coming to the fore, this time with Iran's nuclear ambitions and her proposed oil bourse as the center of attention. Like in '73 gold is on the rise, and the dollar on the retreat due to the uncertainty and waning confidence in the US. Just like in '73, the American public is growing skeptical of the President, and after enough free passes, it appears that we're finally starting to ask tough questions. Zogby reports that a majority of Americans want to see Bush impeached if he broke the law. The American Civil Liberties Union has already filed a lawsuit against the NSA to stop the secret spying, and is aggressively campaigning for the appointment of a special counsel, saying, "When President Bush secretly authorized the National Security Agency to spy on Americans, he violated the law, the Constitution and his oath of office."
This is not intended to be a polemic against Bush or the current Administration. I simply want to emphasize the seriousness of the charges that the Administration is facing, and the effects on investor confidence of a long, messy investigation. With events similar to '73-74 unfolding in the political and economic arenas, it would not be a surprise to likewise see a collapse in the stock market, and similar behavior in the other markets discussed above.
Robert Prechter, in his book Socionomics: The Science of History and Social Prediction, has pointed out that periods of waxing social mood (such as we have seen from 1982 - 2000) bring about feelings of confidence, optimism and ebullience which are reflected in the stock market as well as in our cultural heroes. The opposite is also true. Waning social moods (such as 1966 - 1981, and 2000 - ?) are marked by feelings of pessimism, doubt, and uncertainty that also are reflected in a declining stock market, declining social standards and our treatment of cultural figures, including our political leaders. Just look at how history remembers Johnson, Nixon, Ford and Carter - the American Presidents from 1966 - 1981.
It looks like that old malaise is back again. Like in the Nixon Era, Bush's political fortunes and the stock market are likely to be intimately tied. Watch the news carefully and plan your investment strategy accordingly.
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I was five years old in '73. One of my earliest memories is sitting next to my dad as he peered into a little black and white television set, listening to the Watergate hearings. I remember two of the correspondents' names - Terry Drinkwater and Roger Mudd - funny names perfectly constructed; it seems in retrospect, for a five year old to remember. But what do you remember? It is surreal to read about the events today - it must have seemed like the end of the world, in some respect. An ex-hippie told me about being at an anti-Vietnam War protest in DC where 500,000 people were trying to levitate the Pentagon - and were certain they could do it! So what was it like? The politics? The inflation? How does it compare to today? How do you see the current situation shaking out? Let us know - please post your comments to my blog.
References used in the preparation of this article
American Civil Liberties Union
The Nation: The Impeachment of George W. Bush
Prime Rate Historical Data
Sharelynx: Historical Charts of Interest
Washington Post Watergate Chronology (Excellent!)
Wikipedia: The Watergate Scandal