Saturday, January 16, 2021

Party Like There's No Tomorrow!

After listening to the lyrics of “Party Like There’s No Tomorrow,” I think it might be a more fitting theme song for our current milieu than “Party Like It’s 1999.” The former was released in 2008 by an acid-rock band while the latter was released during 1982 by the rock star Prince. The former starts with: “Tonight we’re gonna party like there's no tomorrow / Forget about our woes and drown our sorrows.” The rest of the song is sprinkled with lots of expletives belted out by the nutty band.

While tomorrow will undoubtedly occur on schedule, the Covid-19 pandemic is raging like never before. Yet investors are partying with abandon: The S&P 500 and Nasdaq continue their meltups in record-high territory. On Friday, January 8, they were up 70.9% and 92.4%, respectively, from their March 23, 2020 lows. Previously, I have observed that these two widely followed stock indexes soared 59.6% and 236.7% from their LTCM-crisis lows on August 31, 1998 through their blowoff tops in March 2000—so the Prince song came to mind (Fig. 1 and Fig. 2).

The S&P 500 forward P/E rose to a record 25.7 during the week of July 16, 1999 (Fig. 3). It rose to 22.9 on Friday, January 8. The forward P/E of the S&P 500 Technology sector peaked at an all-time record high of 48.3 during March 2000. It was up to 27.7 on Friday, January 8.

I am still targeting the S&P 500 to rise to 4300 by the end of this year (up 14.5% y/y) and 4800 by the end of 2022 (up 11.6% y/y). I am increasingly concerned that the market could get to those levels much sooner, leaving valuation multiples even more stretched than they are today. That would make the stock market increasingly vulnerable to a meltdown. In any event, the bull market stampede has been trampling not only the bears but also even bulls like me since March 23, 2020!

While today’s multiples can be justified by near-record low bond yields, the 10-year US Treasury yield has been trending higher since it bottomed at a record-low 0.52% on August 4 last year (Fig. 4). Here are the new year’s firsts: First thing during the morning of the very first trading day of the new year, the yield rose just above 1.00% for the first time since March 19. It rose to 1.13% on Friday, January 8. The ratio of the price of copper to the price of gold suggests that the bond yield should be closer to 2.00% than to 1.00% (Fig. 5). It certainly seems headed in that direction so far this year.

Now, as in 1999, there are mounting signs of irrational exuberance in the stock market. This time, there are also more signs of ultra-stimulative fiscal and monetary policies than there were back then. The combination could be fueling MAMU—the Mother of All Meltups. Consider the following:

(1) The Blue Wave is coming. Now that the Democrats have control of the White House and both chambers of Congress for at least the next two years (until the mid-term elections), federal government spending is likely to continue growing faster than federal revenues, even if taxes are raised on upper-income taxpayers and on corporations (Fig. 6). The resulting increase in federal debt could be nutty.

The Democrats plan on sending another round of stimulus checks to households. The next package of support is bound to also include hundreds of billions of dollars to bolster the finances of state and local governments. The Biden administration is expected to use early legislation to push hundreds of billions of dollars in renewable energy spending as part of its stimulus and infrastructure measures, potentially including efforts to promote the construction of high-speed rail, 500,000 electric vehicle charging stations, and 1.5 million energy-efficient homes. In the fiscal follies, a billion here, a billion there can add up to trillions very rapidly. (We first discussed the incoming administration's agenda in our July 21, 2020 Morning Briefing titled “Meet the New, Improved Joe Biden.")

(2) The Bond Vigilantes are stirring. While the bond yield was higher in 1999 than it is today, the federal budget was actually in surplus back then (Fig. 7). Over the past 12 months through November, the budget deficit was a record $3.2 trillion. The Fed has helped to keep bond yields down by purchasing $2.4 trillion in Treasury securities over the 12 months through December (Fig. 8).

Those purchases have been concentrated in the longer end of the yield curve more so than in the past (Fig. 9 and Fig. 10). That certainly explains why the bond yield remained below 1.00% during the second half of 2020 even as the economy staged a V-shaped recovery.

However, the Bond Vigilantes are starting to stir. If they succeed in pushing yields higher, stock investors might have second thoughts about the nutty idea that even higher equity valuations are justified. Then again, I can’t rule out the possibility that the Fed would do something nutty like officially adopt a policy of yield-curve targeting to keep a lid on the bond yield. The Bank of Japan’s monetary madness has included doing that since September 2016. If the Fed started to officially target the bond yield, the result would almost certainly be a 1999-style meltup.

(3) The virus is mutating. What could possibly go wrong, causing the meltup to be followed by a meltdown? In my forthcoming book, The Fed and the Great Virus Crisis, my central theme is don’t fight the Fed when it is fighting a pandemic. That worked well in 2020. In 2021, investors need to have the vaccines win the world war against the virus (WWV) and its mutant variants.

While we humans have been celebrating the end of 2020’s annus horribilis, anticipating that 2021 will be a better year for humankind, the virus couldn’t care less. It continues to party like its 1919, which was the second year of the much deadlier Spanish flu pandemic. The near-term outlook on the health front is discouraging, but hopefully the tide of WWV will change meaningfully in our favor in coming months as more of us get inoculated.

Sunday, January 10, 2021

Blue Wave Makes a Splash in DC. Will Joe Manchin Be 'Senator Gridlock'?

The Blue Wave made a big splash as Tuesday’s Georgia election results, reported late Wednesday afternoon, showed that both of the state’s seats for the US Senate were won by the two Democratic candidates. A tsunami of socialist policies implemented by progressives in the Democratic party is now likely. A Blue Wave led by the incoming Biden administration, unimpeded by gridlock, certainly represents a radical regime change from the Trump administration. It is likely to be much more radical than the regime change led by the Obama administration. That’s because the Democrats in Congress are much more radical in their left-leaning political views than ever before.

The Democrats’ win in Georgia could be bad news for entrepreneurial capitalism. It could also be bearish for the stock market if the radical regime change causes a recession. That’s unlikely to be the case in 2021. Granted, the 10-year US Treasury bond yield pushed above 1.00% at the start of the week on preliminary news that the Republicans lost one of the two contested elections. I previously argued, even before last year’s elections, that the yield would be closer to 2.00% than 1.00% but for the Fed’s intervention in the bond market.

My analysis was based on the strong post-lockdown rebound in economic activity and the swelling post-CARES Act federal budget deficit rather than on a prediction of a regime change in Washington, DC. Now that the Blue Wave has prevailed, government spending will continue to boost economic activity, and federal deficits will continue to mount. And, most importantly, the Fed is likely to continue to buy notes and bonds in an effort to keep bond yields from rising too rapidly.

In other words, the Fed is likely to enable our deficit-financed government to get bigger under the Blue Wave regime. The Clinton administration was famously checked and balanced by the Bond Vigilantes. The Fed is implicitly assuring the incoming Biden administration that monetary policy will keep them buried as much as possible.

Now consider the following related observations about the stock market:

(1) Socialism isn’t necessarily bearish. Significant declines in stock prices are caused by recessions, not by socialist regime changes, unless they are so radical that they cause a recession. Socialism may be bad for entrepreneurial capitalism, but it provides fertile ground for crony capitalism. That’s as long as it doesn’t lead to communism. Under socialism, private property remains mostly private. Under communism, there is no private property; everything is owned by the state. In either system, the government gets bigger. Under socialism, the ruling regime enacts more laws and regulations that force businesses to manage their affairs increasingly to satisfy their socialist overseers rather than their capitalist shareholders.

(2) Betting on crony capitalists. In other words, making deals with the government matters as much as or more than competing in the market. That’s the fundamental nature of crony capitalism. Businesses become bigger and more politicized as the government gets bigger and more radicalized.

That’s not necessarily bearish for the stock market. However, it does mean that assessing the impact of government policymaking on business becomes as important or more important than traditional analysis of company fundamentals. Spreadsheets for individual corporations need to include columns for the number of lobbyists employed, percentage of business done with the government, cost of regulation, and so on.

(3) And the winner is ... Previously, in my November 2, 2020 LinkedIn newsletter titled “Gridlock Is More Bullish Than Blue or Red Waves,” I observed that gridlock tends to be more bullish for stocks than a united government. I analyzed the performance of the S&P 500 under unified and divided government since FDR took office (Fig. 1). I calculated the percentage increases in the index from January-through-December periods during the two alternative regimes. I found that during the previous six Blue Waves, the S&P 500 increased 56% on average. During the previous three Red Waves, the index rose 35% on average. During the seven periods of divided government, the S&P 500 rose 60% on average. This suggests that gridlock is more bullish than the two unified alternatives, which are also bullish, but less so, with Blue Waves more bullish than Red Waves.

So not surprisingly, on Monday, stock prices fell because the Blue Wave is coming. Yet on Wednesday, they rose because the Blue Wave is even more likely to come! Go figure. While gridlock was the loser in Georgia’s elections on Tuesday, the winner will surely be $2,000 stimulus checks. That's probably bullish for the economy and the stock market during the first half of 2021.

(4) Meet the other Joe, again. Perhaps investors figure Senator Joe Manchin (D-WV) will defend gridlock to the death. We first introduced him to our subscribers in our November 16 Morning Briefing. We wrote: “If the Democrats pull an upset and get both seats, Joe Manchin could be the most important person in America. He is the Democratic senator from West Virginia. He is viewed as a conservative Democrat and has championed bipartisanship.

On Monday, November 9, Joe Manchin was interviewed by Fox News. He said: “50-50 [control] means that if one senator does not vote on the Democratic side, there is no tie and there is no bill.’ He added: ‘I commit to tonight and I commit to all of your viewers and everyone else that’s watching, I want to allay those fears, I want to rest those fears for you right now because when they talk about, whether it be packing the courts or ending the filibuster, I will not vote to do that.’

“He continued saying that the ‘Green New Deal’ and ‘all this socialism’ was ‘not who we are as a Democratic Party.’ He remarked: ‘We’ve been tagged if you’ve got a D by your name, you must be for all the crazy stuff and I’m not.’”

Saturday, December 12, 2020

Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?

Inflation I: Post-Pandemic Worry. I was an early believer in “disinflation.” I first used that word, which means falling inflation, in my June 1981 commentary titled “Well on the Road to Disinflation.” The Consumer Price Index (CPI) inflation rate was 9.6% that month. I predicted that Federal Reserve Chair Paul Volcker would succeed in breaking the inflationary uptrend of the 1960s and 1970s, which he did.

Nevertheless, throughout my career, I’ve often fielded questions about the likelihood of a rebound in inflation from accounts who were worried that it just might make a comeback. After all, the Fed chairs who followed Volcker tended to favor stimulative monetary policies. This year, as a result of the unprecedented monetary and fiscal policy stimulus provided by governments around the world to offset the adverse financial and economic consequences of the Great Virus Crisis (GVC), I’m hearing more concern that inflation could come roaring back once the pandemic is over.

In this widely feared scenario, interest rates might soar. That would create all sorts of trouble. The mountains of debt accumulated by the public and private sectors would compound at a faster pace. The credit markets could seize up, causing a credit crunch and a recession, possibly worse than those of the Great Financial Crisis (GFC). Stock markets would fall into bear markets as earnings declined and valuation multiples tumbled. If inflation were to come roaring back, my upbeat Roaring 2020s outlook would be its biggest casualty.

Given the consequences of getting their expectations for inflation wrong, it’s no wonder investors are worried about this bad-case scenario even if they aren’t ready to do anything in response to it, other than talk about it more often. In any event, while I’m still a disinflationist, our YRI team is focused on watching out for signs of trouble on the inflation front. Before I review what we are seeing, let’s briefly recount what happened during the Great Inflation of the 1970s.

Inflation II: A Brief History of Inflation in the 1970s. Almost everything that could go wrong did so back then. I reviewed what happened in my 2020 book titled Fed Watching for Fun and Profit. For starters, on August 15, 1971, President Richard Nixon suspended the convertibility of the dollar into gold, which ended the Bretton Woods system that had kept the dollar’s value at a constant $35 per ounce of gold since the system was established in 1944. The value of the dollar in foreign exchange markets suddenly plummeted, causing spikes in import prices as well as the prices of most commodities priced in dollars.

During the summer of 1971, Nixon imposed wage and price controls. They didn’t work, and the controls were lifted in 1973. During 1972 and 1973, for the first time since the Korean War, farm and food prices began to contribute substantially to inflationary pressures in the economy. Also, there was a major oil price shock during 1973 and again in 1979 (Fig. 1).

Together, the two oil price shocks of the 1970s caused the price of a barrel of West Texas crude oil to soar 11-fold from $3.56 during July 1973 to a peak of $39.50 during mid-1980, using available monthly data (Fig. 2). As a result, the CPI inflation rate soared from 2.7% during June 1972 to a record high of 14.8% during March 1980. Even the core inflation rate (i.e., the rate excluding food and energy) jumped from 3.0% to 13.0% over this period as higher energy costs led to faster wage gains, which were passed through into prices economy-wide. During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. The result was an inflationary wage-price spiral (Fig. 3).

It’s my view that the 1970s were uniquely inflation prone. Paul Volcker stopped the inflationary wage-price spiral by tightening monetary policy significantly during the late 1970s and early 1980s, causing a severe recession. However, inflation continued to trend lower since then through today, mostly because of the four deflationary forces (i.e., the “4Ds”), which we have discussed many times along the way. (For a summary, see the excerpt from my 2020 book titled Four Deflationary Forces Keeping a Lid on Inflation.)

Inflation III: Will the 4Ds Drown in M1’s Tsunami? The question for us today is whether the 4Ds are still relevant or whether they’ve met their inflationary match in the extraordinary monetary and fiscal policy responses to the pandemic. The 12-month federal deficit rose to a record high of $3.3 trillion through October, while the Fed’s purchases of Treasury securities totaled a record $2.4 trillion over the same period (Fig. 4). Most of those expansions occurred since the week of March 23, when the Fed and the Treasury essentially embraced Modern Monetary Theory and morphed into “T-Fed” in response to the GVC.

Contrary to Milton Friedman’s claim that inflation is essentially a monetary phenomenon, it has remained subdued ever since the GFC notwithstanding the ultra-easy monetary policies of the major central banks. We soon should find out if money matters to the inflation outlook given that the GVC has resulted in ultra-easy monetary policies on steroids and speed combined! In the US, M1 has increased by $2.3 trillion since the last week of February to a record $6.2 trillion during the week of November 23 (Fig. 5). It is up an astonishing and unprecedented $498 billion during the latest week and 57% y/y! MZM and M2 are up 28% and 25% y/y (Fig. 6).

Our money is on the 4Ds. They should continue to keep a lid on inflation. Here is our current bottom lines on each of the 4Ds:

(1) D├ętente. In the grand sweep of economic history, inflation tends to occur during relatively short and infrequent episodes, i.e., during war times. The more common experience has been either very low inflation or outright deflation during peacetimes.

Periods of globalization follow wartimes. During peacetimes, national markets become increasingly integrated through trade and capital flows. The result is more global competition, which is inherently deflationary. The worsening Cold War between the US and China is a threat to globalization, but probably won’t heat up to the point of causing inflation now that a regime change is coming to Washington. In any event, China’s exports during November edged back up to the record high hit during July notwithstanding Trump’s trade war with that country (Fig. 7).

(2) Technological Disruption. Nevertheless, recent global trade tensions and the pandemic are likely to cause businesses to diversify their offshore supply chains away from China and to onshore more of them. That could be costly and inflationary. It could also be cost effective now that labor shortages attributable to global demographic trends are stimulating technological innovations in automation, robotics, artificial intelligence, and 3D manufacturing. These all enable onshoring and boost productivity to boot.

Nonfarm productivity jumped 4.0% y/y during Q3, the fastest pace since Q1-2010. We are expecting a secular rebound in productivity growth during the Roaring 2020s. So far, so good: The 20-quarter growth rate of productivity (at an annual rate) is up from a recent low of 0.6% during Q4-2015 to 1.7% during Q3 (Fig. 8). I believe that the pandemic accelerated the pace of applying new technologies to boost efficiency and profit margins, as we will discuss more fully tomorrow.

(3) Demographics. Fertility rates have plunged below population replacement in recent decades around the world as urbanization has changed the economics of having children. Instead of being an important source of labor and elder care, as they were in agrarian communities, children are all cost in urban settings. Nursing homes have few vacancies, while maternity wards have plenty. Increasingly geriatric demographic profiles are inherently deflationary.

4) Debt. During the 1960s through the 1980s, debt was stimulative; more of it stimulated more demand and added to inflationary pressures. Now, easy credit conditions aren’t as stimulative to demand as in the past because so many consumers have so much debt already. However, easy monetary conditions are a lifeline to zombie companies, enabling them to raise funds to stay in business and add to global supplies of goods and services, which is deflationary.

Inflation IV: By the Numbers. Now let’s review the latest inflation data around the world. Inflation remains remarkably subdued, as it has been since the mid-1990s. Consider the following:

(1) G7. The core CPI inflation rate among the seven major industrial economies has fluctuated in a flat range between a high of 2.2% and a low of 0.7% since 1997 (Fig. 9). The core rate was only 1.1% during October. Here are the latest core CPI inflation rates for the US (1.6%), Eurozone (0.2), and Japan (-0.4) (Fig. 10).

(2) China. While China’s economy has staged a significant recovery from its lockdown recession at the start of the year, the CPI inflation rate dropped from a recent peak of 5.8% during February to only 0.5% during October. The Producer Price Index was down 2.1% y/y during October.

(3) US. The pandemic has had a dramatic inflationary impact on only one component of the CPI: Used car and truck prices are up 11.5% y/y through October (Fig. 11). (They are up 14.4% in the PCED, or personal consumption expenditure deflator, measure.) This is a category with little weight in the CPI.

Rent of shelter has a much bigger weight, and its inflation rate has been falling sharply as a result of the pandemic because of two phenomena: people unable to pay their rent and renters becoming homeowners. This CPI item’s inflation rate is down from 3.4% at the start of the year to 2.1% during October (Fig. 12). It does include hotel and motel fees, which should reflate once a vaccine is widely distributed.

Inflation V: Bonds, the Dollar & Commodity Prices. Notwithstanding all the above, the financial markets seem to be signaling that inflationary pressures are making a comeback of sorts. More likely, in our opinion, is that they’re simply signaling that the deflationary pressures initially unleashed by the pandemic are abating as the global economy continues to recover. Consider the following:

(1) Expected inflation rebounds. The 10-year US Treasury bond yield has been relatively flat just below 1.00% recently, while the comparable TIPS yield has been edging lower again following a smallish and shortish rebound from its fall earlier this year (Fig. 13). As a result, the yield spread between the two, which is widely used as a proxy for the average annual 10-year expected inflation rate, has rebounded from this year’s low of 0.5% on March 19 to 1.9% on Monday (Fig. 14).

(2) Copper is red hot. The price of copper has rebounded dramatically along with China’s economy as auto sales in China rose for a fourth straight month in October. The price of the red metal is up 65.5% since the year’s low on March 23 from $2.12 per pound to $3.51 on Monday (Fig. 15). The two previous rebounds that exceeded the current one since 2004 were not associated with rising CPI inflation.

Meanwhile, the ratio of the nearby futures prices of copper to gold continues to signal that the bond yield should be closer to 2.00% than to 1.00% (Fig. 16). There’s been a tight fit between the ratio (multiplied by 10) and the yield since 2004. Without the Fed’s open market purchases of Treasury notes and bonds, the yield would probably be higher, boosting the expected inflation proxy over 2.00%.

By the way, the reason why the copper/gold ratio tracks the nominal yield so closely is that the price of copper is highly correlated with the yield spread inflation proxy, while the price of gold is highly correlated with the inverse of the 10-year TIPS yield (Fig. 17 and Fig. 18).

(3) The dollar’s descent. Yet another interesting set of correlations is the ones between the inverse of the dollar versus the price of copper and versus expected inflation (Fig. 19 and Fig. 20). All three variables are consistent with rising inflation pressures. However, similar past episodes in recent years signaled that deflationary pressures were abating rather than inflation rebounding.

Saturday, December 5, 2020

The Carrie Trade: From Bond Vigilantes to Bond Zombies

Carrie is a horror novel by Stephen King. It was his first published novel, released on April 5, 1974. It was turned into a movie in 1976 starring Sissy Spacek and John Travolta. Carrie is a misfit bullied in her high school and dealing with an abusive, religious fanatic mother at home. She finds that she can channel her angst into telekinetic powers, which she uses to exact revenge on her tormenters. Much blood is spilt along the way, including Carrie’s. In the final scene, she seems to rise from the dead but that’s just a bad dream.

The Bond Vigilantes have been buried by the Fed. However, in our nightmare scenario, they could rise from the dead like Carrie. It isn’t likely to happen if inflation also remains buried, as I expect.

Meanwhile, there are other vigilantes in the financial markets. The Dow Vigilantes sent out a blood-curdling scream when the S&P 500 plunged 33.9% in 33 days earlier this year (Fig. 1). The Fed responded with QE4ever on March 23. The Dollar Vigilantes are threatening a crash in the currency if US fiscal and monetary policies continue to placate the Dow Vigilantes by swelling the federal budget deficit and the money supply (Fig. 2, Fig. 3, and Fig. 4). A plunge in the dollar could revive inflation and unleash a plague of Bond Zombies.

It’s hard to get a clear signal from the financial markets since their price mechanisms have been so distorted by the Fed and the other major central banks. The one clear signal may be coming from the commodity markets. Consider the following:

(1) CRB raw industrials. The CRB raw industrials spot price index continues to signal rebounding global economic activity (Fig. 5). It is highly inversely correlated with the trade-weighted dollar. The rising CRB index is bullish for the Emerging Markets MSCI stock price index, the Australian and Canadian dollars, and the S&P 500 Materials sector. (See our Market Correlations: CRB Raw Industrials Spot Price Index.)

The CRB index is also highly correlated with expected inflation as measured by the yield spread between the 10-year nominal Treasury bond and the comparable TIPS (Fig. 6). This spread has rebounded from this year’s low of 0.50% on March 19 to a range of 1.6%-1.8% in recent weeks.

(2) Copper. The price of copper is one of the 13 components of the CRB raw industrials spot price index (Fig. 7). (Petroleum and lumber products are not included in the index.) The copper price has been leading the overall CRB index higher since this year’s bottom. On Monday, copper closed at the highest price since January 2, 2014. Driving the price of the red metal higher has been China’s M-PMI, which has recovered solidly over the past six months through November (Fig. 8).

(3) Copper/gold ratio. When I multiply the ratio of the nearby futures prices of copper to gold by 10, the resulting series has shown a remarkably close fit with the 10-year Treasury bond yield since 2004 (Fig. 9). The ratio currently suggests that the bond yield should be closer to 2.00% than to 1.00%. As I discussed on Monday in my Morning Briefing, the yield has remained under 1.00% since March 20, as the Fed has been buying Treasury notes and bonds faster than the Treasury has been issuing them:

“From the last week of February through the last week of October, the Fed’s holdings of Treasury securities increased $2.1 trillion as follows by maturities: One year or less ($421 billion), 1-10 years ($1,281 billion), and over 10 years ($351 billion) (Fig. 9). From the end of February to the end of October, the Treasury increased its outstanding marketable debt by $3.4 trillion as follows: bills ($2,420 billion), notes ($735 billion), and bonds ($284 billion) (Fig. 10). In other words, the Fed financed 62% of the Treasuries financing needs across all maturities, and purchased $613 billion more notes and bonds than were issued over that period!”

That’s the “Carrie trade.” As long as it continues, the Bond Vigilantes will remain buried.

(1) The July 27, 1983 issue of my weekly commentary was titled “Bond Investors Are the Economy’s Vigilantes.” I concluded: “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets. During the 1980s and 1990s, there were a few episodes when rising bond yields slowed the economy and put a lid on inflation.”

Tuesday, December 1, 2020

Comparative Roaring '20s

This should be the first and last holiday season requiring us all to socially distance from one another. Apparently, we will have a cornucopia of vaccines and treatments available for mass distribution early next year. If so, then 2020 may mark the beginning of the Roaring 2020s, as I've discussed in previous LinkedIn articles. Let’s compare the current situation to the one before and during the Roaring 1920s:

(1) World War I. Recall that the years leading up to the Roaring 1920s included World War I from July 28, 1914 through November 11, 1918. The total number of military and civilian casualties in World War I was about 40 million, with estimates ranging from around 15-22 million deaths and about 23 million wounded military personnel—ranking World War I among the deadliest conflicts in human history.

(2) Spanish flu. That was followed by the Spanish flu pandemic from February 1918 through April 1920. It infected 500 million people—about a third of the world's population at the time—in four successive waves. The death toll is typically estimated to have been somewhere between 17 million and 50 million, and possibly as high as 100 million, making it one of the deadliest pandemics in human history.

(3) Depression of 1920–21. There was a severe deflationary recession in the US, the UK, and other countries beginning 14 months after the end of World War I. It lasted from January 1920 to July 1921. How depressing! The Great War (as it was called back then) and the pandemic of 1918-20 killed between 32 million and 72 million people. That was followed by a global depression (as recessions were called back then). No one at the start of the decade could have anticipated the technology-led revolution of the Roaring 1920s or the resulting prosperity of that period. Thanksgiving during 1920 must have been extremely depressing indeed.

(4) The high-tech revolution of the 1920s. As I reviewed in my August 12 article, the 1920s was a decade of amazing technological innovations. Some of them sped up activities that were too slow when done by horses and automated activities that required lots of workers. Assembly lines required fewer workers, and their productivity increased. The revolution allowed for a greater division of labor. The focus was mostly on brawn.

The automobile produced on assembly lines revolutionized transportation. The bulldozer did the same for construction. The standard of living improved dramatically for everyone as electric grids provided clean, bright light without emitting smoke. Urban water networks supplied clean water, and sewer systems removed waste without the pungent odors of chamber pots and outhouses. Telephones allowed people to converse with distant friends. National food brands proliferated, as did restaurants. Department stores and mail order retailers provided goods to a rapidly growing consumer market. Penicillin was discovered.

(5) The trade wars of 2018-19. The 2020s were preceded by a trade war between the US and China. President Donald Trump started and escalated it during 2018 and 2019. The Biden administration is likely to deescalate the resulting Cold War. Nevertheless, as a consequence of both ongoing tensions between the two countries and the pandemic, manufacturers are likely to move more of their operations and supply chains to the US. That could be inflationary. More likely is that some of the technological innovations discussed below will boost productivity and reduce energy and transportation costs.

(6) The pandemic of 2020. So far, the Covid-19 virus has killed 1.5 million people worldwide including 276,000 in the US. That’s a terrible outcome, but nowhere near the Spanish flu’s lethal toll. The biotech revolution is likely to deliver effective vaccines against the Covid-19 virus this time.

(7) The high-tech revolution of the 2020s. Today’s “Great Disruption,” I like to call it, is increasingly about technology doing what the brain can do, but faster and with greater focus. Given that so many of the new technologies supplement or replace the brain, they lend themselves to many more applications than did the technologies of the past, which were mostly about replacing brawn. Today’s innovations produced by the IT industry are revolutionizing lots of other ones, including manufacturing, energy, transportation, healthcare, and education. My friends at BCA Research dubbed it the “BRAIN Revolution,” led by innovations in biotechnology, robotics, artificial intelligence, and nanotechnology. That’s clever, and it makes sense.

The current pandemic seems to be speeding up the pace at which these and other technologies are proliferating. I believe that productivity growth has been heading toward a secular rebound during the post-pandemic Roaring 2020s. Even before the Great Virus Crisis (GVC), companies had been moving to incorporate into their businesses a host of state-of-the-art technologies in the areas of computing, telecommunications, robotics, artificial intelligence, 3-D manufacturing, the Internet of Things, among others. The GVC is accelerating that trend as companies rethink how to do business ever more efficiently in the post-pandemic era. See my September 2 article titled “The Future Is Coming: The Technology Revolution of the Roaring 2020s.”

(8) One major difference. The one major difference between the 1920s and the early 2020s (post the November 3 election) is the political persuasion of the presidency. During the 1920s, the White House was occupied by two very conservative Republican presidents: Warren G. Harding (March 4, 1921–August 2, 1923) and Calvin Coolidge (August 2, 1923–March 4, 1929). Coolidge advocated smaller government and laissez-faire economics.

Andrew Mellon was secretary of the Treasury from March 9, 1921 through February 12, 1932. One of his achievements was the Revenue Act of 1926, which reduced the top marginal rate to 25%. In addition to cutting taxes on top earners, the act raised the personal exemption for federal income taxes, abolished the gift tax, reduced the estate tax rate, and repealed a provision that had required the public disclosure of federal income tax returns.

The incoming Biden administration has promised to raise numerous taxes including on corporations and on taxpayers earning more than $400,000 annually. I remind the incoming administration that trickle-down economics works both ways: Higher taxes on the rich and on corporations inevitably trickle down to everyone else.