Below is Fitzwilson’s exclusive piece for KWN:

Fitzwilson:  “Younger investors might wonder why those of us who lived through the 1970’s regularly revert back to that decade for insights.  For one, it was when many of us launched our careers.  Most importantly, the investment and political environments with which we grapple today were largely born in the actions taken in that 10-year period.  We believe that it is crucial to understand how similar and yet how different the markets, politics and the economy were from the present if we are to navigate the the world of today successfully.

At the start of that decade, very few people had any significant wealth.... 

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“Wall Street was focused on serving that relatively small percent of the U.S. population that owned the vast bulk of wealth that had been accumulated by previous generations.  That wealth was held primarily in financial assets.  Post-World War II programs to expand home ownership had been successful, but a house was seen as an expense, not a wealth generating vehicle.  The Baby Boomers were just coming on the scene, so that their primary source of wealth was derived through after-tax savings from wages.

The 1970s turned the situation on its head.  The inflation of the 1970s caused wages to skyrocket for the middle class as inflation became ingrained in the economy.  At the same time, the mortgage payments relative to rising wages declined significantly.  Individuals could afford more expensive homes as their home equity increased and their incomes surged.

The losers were those with financial assets, stocks and fixed income.  What was occurring was a massive transfer of the accumulated wealth of the nation to the middle class as financial assets declined in value and incomes and home equity surged.  It made sense to accelerate any form of consumption, particularly on borrowed funds as the rates were fixed and prices were rapidly rising.  The majority of the population benefitted at the expense of the few that owned the traditional forms of wealth.

There was another transfer of wealth that also began in that decade.  This was triggered by the doubling and then redoubling of the price of oil.  This was not an inter-generational transfer of wealth within the United States, but a massive external transfer to the oil exporting countries.

As the decade drew to a close, the U.S. economy and the financial markets reached the end of the ability to deal with both.  Interest rates and inflation had reached levels where holders of financial assets went on strike through the so-called “Bond Vigilantes”.  Rising wages were no longer sufficient to cover rising interest rates and the cost of living in general.  Something had to give.

Struggling for a new direction for the Country and his presidency, President Jimmy Carter fired his entire cabinet and White House staff.  The Dollar tanked and gold soared to $300 per ounce.  In August of 1979, President Carter appointed Paul Volcker as Chairman of the Federal Reserve.  Volcker has been referred to as “Wall Street’s Choice”.  Wall Street was insisting on a Fed Chairman who would take bold steps, and was willing to suffer short-term pain in exchange for breaking the back of inflation.

Another immensely important development in the mid-1970s was the Employee Retirement Income Security Act, also known as ERISA.  ERISA imposed ominous penalties for those involved in the management of retirement pools where any form of violation of fiduciary responsibility could be proven. Prior to ERISA, the management of these pools was conducted by committees usually associated with the sponsoring companies. 

Post ERISA, that wealth wound up with large institutional managers based in the financial centers of the East Coast.  Such concentrations of savings generated enormous fees for Wall Street.  The promotion of new forms of savings such as IRA, Keoghs and 401K plans greatly enhanced the magnitude and concentration of these pools of capital.

How are things different in our time relative to the 1970s?  Of the two transfers of wealth in that decade, only the transfer of wealth to the oil exporting countries continues.  The inter-generational wealth transfer pendulum has swung in the other direction back to holders of traditional financial assets.  The middle class is being devastated as their wages stagnate.  Their primary form of wealth, home equity, has been greatly diminished and destroyed for many. 

Instead of accumulating vast sums in retirement pools, those pools are being systematically depleted.  The traditional safety nets for the middle class are rapidly disappearing as well as the prospects for income and employment.  New forms of safety nets emanating from the government are easing the pain, but those transfers are not sustainable long-term and are not conducive to a skilled workforce.

Our world and the dynamics of the global economy are very different from the 1970s.  A sea change cannot be far away.  Manipulated markets and data can only work for so long.  The important thing about last week’s unprecedented targeting of the oil, gold and silver markets is that those represent real assets that cannot be created in the virtual world of electrons.  The truth can be hidden for only so long.

Smart investors and those wanting to preserve the value of their money did the right thing last week in buying every ounce they could afford.  The depletion of supplies in the silver market is a critical piece of information.  Silver is affordable.  If more people are entering the market for precious metals, a further smash will truly be counterproductive to the objectives of those perpetrating the declines.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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