With persistent inflation, war-induced energy price shocks, and rising geopolitical tensions gripping the global economy over the past four years, some of Wall Street’s most-respected names have repeatedly warned the U.S. could be headed for a repeat of the stagflationary 1970s.
Even JPMorgan Chase CEO Jamie Dimon has suggested on multiple occasions that stagflation could make a comeback, with his latest warning coming at AllianceBernstein’s Strategic Decisions conference just last week. Dimon didn’t outright predict a repeat of the toxic combination of high inflation and anemic economic growth that was last seen in the U.S. in the 1970s at the conference, but he said he believes the odds of a nightmare stagflationary scenario are “much higher” than most experts appreciate.
“I look at the amount of fiscal and monetary stimulus that has taken place over the last five years—it has been so extraordinary, how can you tell me it won’t lead to stagflation?”
“It might not,” he said. “But I, for one, am quite prepared for it.”
Now though, Henry Allen, a macro strategist at Deutsche Bank, is pushing back on the 1970s narrative. “In recent weeks, we’ve started to see increasing comparisons with the early 1950s and today,” he explained in a Tuesday note to clients.
Allen noted that both today’s economy and the economy of the 1950s featured a strong labor market, steadily rising stock prices, increasing geopolitical tensions, and a short-lived surge in inflation.
“Time will tell if the early-1950s offer a good parallel, but if these similarities do hold, there could be a lot of scope for optimism,” the strategist said. “The good news is that the early 1950s were a period of decent economic and productivity growth.”
Four similarities to the post-war 1950’s economic boom
1. An eerily familiar inflation wave
When most Americans think of the 1950s, they don’t think of inflation. The post-war era is often romanticized as a period of economic and social stability; it’s even been labeled the “Golden Age of Capitalism” by some. In many ways, this golden era economic narrative holds true, but just like the 2020s, the 1950s was also a decade of challenges—and they began with a wave of Consumer Price Index (CPI) inflation.
“U.S. inflation spiked from late-1950 into 1951. At its peak in February 1951, CPI inflation peaked at 9.4%,” Allen noted. “That’s a very similar peak to today, when CPI inflation rose to 9.1% in June 2022.”
After this initial surge of consumer prices in 1950 and 1951, caused in part by the start of the Korean War, inflation fell throughout the rest of the 1950s, however. It’s a pattern that is “a closer parallel” to the 2020s, than the 1970s, according to Allen. “So far, we haven’t seen the sort of persistence that occurred in the 1970s, when CPI inflation remained above 4% for almost a decade,” he said.
Instead, in the 2020s, after hitting its 9.1% peak in June 2022, inflation has fallen substantially, hitting 3.4% in April.
2. Historically low unemployment
The labor market was the powerhouse of the U.S. economy for much of the 1950s. The unemployment rate averaged roughly 4.5% during the decade, and hit a low of just 2.5% in 1953. Now, even with stubborn inflation, rising interest rates, and geopolitical tensions weighing on consumers and businesses, the 2020’s economy is walking a similar path, moving in on a more than 70-year-old labor market record.
Allen noted that if Friday’s jobs report shows the unemployment rate remained under 4% in May, it would mark the longest stretch of below-4% unemployment since the early 1950s, when the economy saw a 35-month period of sub-4% unemployment.
3. Rising markets
The stock market’s meteoric rise since 2020 is another undeniable parallel between the 1950s and the 2020s. Between January 1950 and the end of 1954, the S&P 500 more than doubled, rising 100 to 225, despite a brief recession caused partly by the decline in military spending following the end of the Korean war.
Similarly, between the beginning of 2020 and today, the S&P 500 has soared more than 62%, even after a brief, pandemic-induced drop in March 2020 and multiple wars abroad. And while the stock market’s performance in the 2020s hasn’t been as impressive as it was in the early 1950s, it definitely doesn’t look like the 1970s. Between January 1970 and the end of 1974, the S&P 500 sank 45%.
4. Geopolitical risk
Geopolitical tensions were a major feature of the 1950s, just like they are today, as the staunchly capitalist U.S. sought the “global containment” of communism after World War 2, while the Soviet Union attempted to spread its own ideology. This war of economic and political systems manifested in ongoing tensions between the world’s superpowers, a persistent threat of nuclear war, and even helped spark the Korean War.
It was a time of “heightened geopolitical risk,” Allen noted, explaining that “this was in the early phase of the Cold War, when there were major tensions between the U.S. and the Soviet Union, and those tensions were evident in several regions.”
Similarly, today, the global economy is facing a persistent threat from ongoing conflicts in Ukraine and Israel. These battles have routinely caused issues for businesses and consumers in recent years, precipitating a global oil and natural gas price spike in 2022, and spurring a shipping crisis in the Red Sea more recently.
Two key differences between the 1950’s and the 2020’s
Despite the many similarities between the 1950s and the 2020s, Allen noted that there are also a few key differences, and said “we shouldn’t exaggerate the comparison.”
First, the strategist pointed out that U.S. government debt is surging now, while it was heading in the other direction in the 1950s. “There was still a major deleveraging taking place after WWII, with the U.S. government debt burden falling substantially. That is very different to today’s environment, where the public debt-to-GDP ratio has been on an upward trend over recent decades,” he wrote.
To his point, after soaring to a peak of 119% in 1946 after World War 2, the U.S. debt-to-GDP ratio sank dramatically during the 1950s, from 85% at the beginning of the decade to just 53% by 1960.
On the other hand, during the fourth quarter of 2023, the U.S. debt-to-GDP ratio topped 121%, slightly above its post-World War 2 high. And the Congressional Budget Office expects that figure to rise to 166% by 2054.
The second key difference between the 1950s and the 2020s lies in birth rates. Allen noted that birth rates surged in the 1950s, leading to the “baby boomers” nickname of the generation that was born in that post-World War era.
“This was a very favorable trend economically, as it meant there was an expanding cohort of younger workers that would enter the labor force over subsequent decades,” he wrote. “By contrast today, birth rates have been declining and the U.S. population is aging.”
In 1955, the U.S. fertility rate—the number of children that would be born to a woman if she lived to the end of her childbearing years—was 3.42. Today, that number has been nearly cut in half to just 1.79.
Some experts also pointed to stubborn inflation and decelerating GDP growth as evidence that stagflation could be on its way earlier this year. CPI inflation has been stuck in a range between 3% and 3.5% for nearly a year now, and GDP growth sank from 3.4% in the fourth quarter of 2023 to just 1.6% in the first quarter of this year.
“I’m starting to get whiffs of stagflation, dare I say…I know that’s a dirty word in a lot of circles,” Steve Sosnick, chief strategist at Interactive Brokers, told Bloomberg when discussing these numbers in late April.
However, Bank of America economists came out against the Stagflation narrative in a May 16 note to clients, backing up the view of Deutsche Bank’s Allen. They argued the economy isn’t likely to slow soon, despite more persistent inflation, due to the strength of the U.S. consumer.
“After the miss on 1Q GDP growth and continued upside surprises on inflation, the “stagflation” narrative has resurfaced. We push back,” economist Aditya Bhava wrote, noting there is evidence of “robust” consumer demand in the economy, particularly in the services sector, that should prevent economic stagnation.
The key to avoiding 1970s-style stagflation is a productivity boom
For Allen, the key to avoiding 1970s-style stagflation is improving labor market productivity—and he believes the economy has the potential to do just that. U.S. labor market productivity has had a renaissance over the past year, rising 2.7% after a nearly two decade period of pain where annual productivity growth averaged just 1.5%.
“Indeed, there are reasons to believe that can continue,” Allen said. “Low unemployment is often a spur to productivity growth, because firms don’t have the ability to hire from a large group of unemployed workers. As such, this incentivises them to invest more in new technologies, and to help their existing staff become more productive.”
The Deutsche Bank strategist pointed to emerging technologies, including AI, as a potential catalyst for U.S. productivity growth as well, arguing “this suggests there could well be some upside risk to economic growth over the years ahead.”
Rising productivity could help combat inflation by reducing unit labor costs as well. “If this happens, then it becomes more likely we can avoid a period like the 1970s, when inflation was persistent,” Allen said.
Overall, the economy—and stock market—should perform well if we see a repeat of the 1950s, rather than the 1970s, according to Allen. But he also had a warning for investors: no era is exactly alike.
“Demographic trends are much less favorable, whilst the U.S. national debt is on an upward trajectory. So both those differences could present important headwinds to growth over the years ahead, which weren’t experienced in the early 1950s,” he wrote.
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Emmanuel Macron’s move to call snap elections has cast a shadow over the Paris Olympic Games, raising the possibility of political unrest and a far-right government in charge of the world’s biggest sporting event.
The far-right Rassemblement National (RN) is projected to become the biggest parliamentary party after the run-off vote on Sunday. While a hung parliament appears the most likely outcome, if the RN were to win a majority, its 28-year-old party chief Jordan Bardella could be prime minister when the Games open on July 26, with his team greeting top athletes and dignitaries from across the world.
The timing of Macron’s decision to dissolve parliament was “catastrophic for the Games”, said Pascal Boniface, head of Paris-based think-tank Iris and an expert on the politics of sport. “We are in the thickest of fog over the future.”
Pierre Rabadan, a senior official responsible for Olympics planning in the Paris mayoralty of Socialist Anne Hidalgo, told the Financial Times he was “stupefied” by Macron’s “irresponsible” decision.
While he said the main strategic decisions had already been made, the move had raised “pragmatic and operational questions”, including deploying mayoral staff and city police for both the elections and the Games.
“We had thought about all the possible scenarios, except for the dissolution of the Assembly,” added Rabadan, a former professional rugby player with Stade Français.
Security experts had already warned of big policing challenges for the opening ceremony, in which thousands of athletes will sail down the River Seine watched by around 300,000 spectators along the quays. Pressure on security services would further be aggravated if anti-RN protesters were to take to the streets, they said.
Rabadan said his main concern now was the image of France that a far-right government, with an anti-immigration and nativist policy platform, would present.
“The Games are about welcoming the entire world and showing that we are an open country,” Rabadan said. “That clearly goes completely against what the Rassemblement National wants.”
Hidalgo told France 2 on Tuesday that “the party would not be spoiled” by an RN government.
But dozens of athletes have voiced concerns about the elections. Prior to the first round, French football star and captain of the national team Kylian Mbappé called on the electorate to vote “against the extremists”, while almost 300 sportspeople, including Rabadan, signed a column in French sports publication L’Equipe opposing the RN.
“In my memory, I have never seen athletes engage to this extent in the political field,” said Boniface.
Macron’s sports minister Amélie Oudéa-Castera told journalists ahead of the first round that despite the extensive preparations for the Olympics, an RN majority would mean far-right politicians with no experience in national government would still have to make important decisions “in a geopolitical context that is difficult, delicate and tense”.
Bardella has said he would not change the officials running the Games.
Guy Drut, a former 110m hurdles Olympic champion and sports minister under President Jacques Chirac, and one of the few athletes to publicly back the RN campaign, told Le Monde: “There is no reason the Games would go badly under an RN government.”
Scattered protests were held against the RN after the first-round vote. Paris police commissioner Laurent Nuñez told France Inter that the authorities were ready for further unrest but that this would not interrupt the Games.
“We’re preparing for this type of protest and we will have an extremely large [presence] in the Greater Paris region of 45,000 officers to manage [disorder],” he said.
In a further potential risk to smooth running, four unions representing airport management staff have threatened to strike in pursuit of “a uniform and fair bonus” for working during the event. Police, air traffic controllers, rubbish collectors and train and bus staff have already been promised bonuses.
Despite his confidence that policing and organisation were well in hand, Rabadan lamented the impact of the elections on the build-up. “There is very, very strong enthusiasm and popular support,” he said. “But the president’s decision . . . has put a stop to that rise in excitement we were hoping for, so that’s really quite disappointing.”
Hong Kong Exchanges and Clearing celebrates the 24th anniversary of its listing on June 21, 2024.
China News Service | China News Service | Getty Images
BEIJING — The market for initial public offerings in Hong Kong is set to improve significantly over the next five years, starting in the second half of this year, George Chan, global IPO leader at EY, told CNBC in an interview Wednesday.
“I think it will take a couple years to go back to the peak [in 2021] but the trend is there,” Chan said. “I can see the light at the end of the tunnel.”
High U.S. interest rates, regulatory scrutiny, slower economic growth and U.S.-China tensions have constrained Greater China IPOs in the last three years.
EY said in a report that while the volume of IPOs and proceeds in the U.S. increased significantly in the first half of 2024 compared to the same period a year ago, mainland China and Hong Kong saw a sharp decline in listings.
Many of the macro trends are now starting to turn around, which can support more IPOs in Hong Kong, said Chan, who is based in Shanghai.
“We are seeing a reversing trend,” he told CNBC. “We are seeing more of these [U.S. dollar] funds, they are moving back to Hong Kong. The main reason is that Hong Kong has already factored in these uncertainties.”
The Hang Seng Index is up more than 5% year-to-date after four straight years of decline — which was the worst such losing streak in the history of the index, according to Wind Information.
“Our HK cap markets team is very busy and has a strong pipeline for H2. We expect to see many HKSE listings,” Marcia Ellis, global co-chair of private equity practice at Morrison Foerster in Hong Kong, said in an email Wednesday.
Many companies that were waiting for a listing in mainland China’s A share market have decided to switch to one in Hong Kong, she said. “Previously [China Securities Regulatory Commission] approval was slowing things down but recently our team has gotten CSRC approvals pretty quickly.”
Chan said another supportive factor for Hong Kong IPOs is that many of the companies listed in the market are based in mainland China, where economic growth is “quite satisfactory.”
He expects consumer companies could be among the near-term IPO beneficiaries.
“As the economy slowly recovers, a lot of people in China are willing to spend,” he said, noting that was especially the case in less developed parts of the country.
Official national-level data have showed that retail sales are growing more slowly in China — up by just 3.7% in May from a year ago versus growth of nearly 10% or more in prior years.
Also significant for global asset allocation, the U.S. Federal Reserve and other major central banks are pulling back from aggressive interest rate hikes. High rates have made Treasury bonds a more attractive investment for many institutions instead of IPOs.
“I would say if the interest rate can be further cut down, 1% maybe, that would have a significant effect on the IPO market,” Chan said.
Hong Kong IPOs raised $1.5 billion during the first half of the year, a 34% drop from a year ago, EY said in a report released late last month. Back in 2021 and 2020, the Hong Kong Stock Exchange saw nearly 100 or more IPOs a year raising tens of billions of dollars, according to the report.
In comparison, mainland China IPOs raised $4.6 billion in the first six months of 2024 — a drop of 85% from the year-ago period, according to EY.
Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, said during a conference last week that so far this year, the Hong Kong exchange has received 73 new listing applications — a 50% increase compared to the second half of last year. She is not related to EY’s George Chan.
“The pipeline is building up nicely,” she said, noting about 110 IPOs in total are in line for a Hong Kong listing. “All we need is a set of good market conditions so these things get to launch and price nicely,” she added.
Improving post-IPO performance
“What we need is a strong pipeline,” EY’s Chan said. “We need an interested investor with the money to invest, and we need a good aftermarket performance.”
Hong Kong IPO returns are improving. The average first-day return of new listings on the Hong Kong stock exchange in the first half of 2024 was 24%, far more than the average of 1% in the same period last year, according to EY.
“The aftermarket performance of Hong Kong IPOs has been doing quite good compared to the past five years,” Chan said. “These things added together are projecting an upward trend for the Hong Kong market [in the] next 5 years.”
Chan said he expects the number of deals to pick up in the second half of 2024.
He said those will likely be medium-sized — between 2 billion Hong Kong dollars to 5 billion Hong Kong dollars ($260 million to $640 million) — but added he expects better market momentum in 2025.
Slowing economic growth and geopolitical uncertainty have also weighed on early-stage investment into Chinese startups.
Total venture funding from foreign investors into Greater China deals plunged to $19 billion in 2023, down from $67 billion in 2021, according to Preqin, an alternative assets research firm.
U.S. investors have not participated in the largest deals in recent years, while investors from Greater China have remained involved, the firm said in a report last month.
U.S. IPO outlook
As for IPOs of China-based companies in the U.S., EY’s Chan said he expects current scrutiny on the listings to be “temporary,” although data security rules would remain a hurdle.
In early 2023, the China Securities Regulatory Commission formalized new rules that require domestic companies to comply with national security measures and the personal data protection law before going public overseas. A China-based company with more than 1 million users must pass Beijing’s cybersecurity review to list overseas.
“As time goes on, when people are more familiar with the Chinese [securities regulator] approval process and they are more become comfortable with geopolitical tensions, more of the large companies … would consider [the] U.S. market as their final destination,” Chan said.
“When the time comes I think the institutional investors would be interested in these sizeable Chinese companies, as they pretty much want to make money.”
He declined to comment on specific IPOs, and said certain high-profile listing plans are “isolated incidents.”
Chinese ride-hailing company Didi, which delisted from New York in 2021, has denied reports it plans to list in Hong Kong next year. Fast-fashion company Shein, which does most of its manufacturing in China, is trying to list in London following criticism in the U.S., according to a CNBC report.
The US Department of Veterans Affairs and an arm of the US State Department are among a growing list of Microsoft Corp. customers that have acknowledged they were impacted by a breach of the technology giant that was blamed on Russian state-sponsored hackers.
The US Agency for Global Media, part of the State Department that provides news and information in countries where the press is restricted, was notified “a couple months ago” by Microsoft that some of its data may have been stolen, a spokesperson said in an emailed statement. No security or personally identifiable sensitive data was compromised, the spokesperson said.
The agency is working closely with the Department of Homeland Security on the incident, the spokesperson said, declining to answer additional questions. A State Department spokesperson said, “We are aware that Microsoft is reaching out to agencies, both affected and unaffected, in the spirit of transparency.”
Microsoft disclosed in January that a Russian hacking group it calls Midnight Blizzard had accessed corporate email accounts and later warned that they were attempting to use secrets shared between the technology giant and its customers. The company has declined to identify the customers who were impacted.
“As our investigation continues, we have been reaching out to customers to notify them if they had corresponded with a Microsoft corporate email account that was accessed,” a Microsoft spokesperson said on Wednesday. “We will continue to coordinate, support and assist our customers in taking mitigating measures.”
In addition, the Department of Veterans Affairs was notified in March that it was impacted the Microsoft breach, officials for the agency said.
A one-second intrusion
The hackers used a single set of stolen credentials — found in the emails they accessed — to break into a test environment in the VA’s Microsoft Cloud account around January, the officials said, adding that the intrusion lasted for one second. Midnight Blizzard likely intended to check if the credentials were valid, presumably with the larger intention of breaching the VA’s network, the officials said.
The agency changed the exposed credentials, along with log-in details across their Microsoft environments, once they were notified of the intrusion, they said. After reviewing the emails that the hackers accessed, the VA determined that no additional credentials or sensitive email was taken, the officials said.
Terrence Hayes, the VA’s press secretary, said an investigation is continuing to determine any additional impact.
The Peace Corps was also contacted by Microsoft and notified about the Midnight Blizzard breach, according to a statement from its press office. “Based on this notification, Peace Corps technical staff were able to mitigate the vulnerability,” according to the agency. The Peace Corps declined further comment.
Bloomberg News asked other federal agencies for comment, and none of the others disclosed that they were impacted by Midnight Blizzard’s attack on Microsoft. Bloomberg previously reported that more than a dozen Texas state agencies and public universities were exposed by the Russian hack.
Midnight Blizzard, also known in cybersecurity circles as “Cozy Bear” and “APT29,” is part of Russia’s foreign intelligence service, according to US and UK authorities.
In April, US federal agencies were ordered to analyze emails, reset compromise passwords and work to secure Microsoft cloud accounts amid fears that Midnight Blizzard may have accessed correspondence. Microsoft has been notifying some customers in the months since then that their emails with the tech giant were accessed by the Russian hackers.
The Midnight Blizzard breach was one in a series of high-profile and damaging security failures at the Redmond, Washington-based technology company, which has drawn strong condemnation by the US government. Microsoft President Brad Smith appeared before Congress last month where he acknowledged security failures and vowed to improve the company’s operations.
