Presidential candidates were assassinated, the incumbent president withdrew from the election, and universities erupted in anti-war protests... This was the United States in 1968, followed by a decade of economic turmoil!

Is the current United States just a repeat of history?

In a live broadcast in June this year, Jeff Gundlach, the founder of DoubleLine and known as the "new bond king," compared the current global tension to the internal turmoil, labor strikes, political violence, and war of 1968.

Not only are the political and social situations similar, but the economic conditions are also remarkably alike, including rising trends in home sales, unemployment rates, and increasing government debt interest payments.

Gundlach believes that these data indicate that the U.S. economy is on the brink of a recession, just as there was a decade of economic turmoil after 1968.

The United States in 1968

1968 was the most turbulent year in U.S. history, also an election year, with political turmoil and social unrest.

On January 30, North Vietnam launched a sudden attack on South Vietnam with astonishing force, catching the U.S. off guard and changing the course of the Vietnam War, revealing that the "American victory" was a complete lie;

At the same time, the anti-war protest movement intensified, with a congresswoman from Montana leading about 5,000 women in a march in Washington to protest the Vietnam War;

Students occupied five buildings on the campus of Columbia University and kidnapped a dean, demanding that the school sever its ties with military research, and these protests were just the tip of the iceberg.

On March 31, then U.S. President Lyndon B. Johnson announced his withdrawal from the election due to health and party disagreements. This decision deeply shook the political landscape, as the U.S. became more divided on many issues, making the political situation even more chaotic.

On April 4, civil rights leader Martin Luther King Jr. was assassinated on the balcony of a motel in Memphis while participating in a sanitation workers' strike, escalating racial tensions.

On June 4, Robert F. Kennedy, who was gaining momentum in the presidential race, won the California primary but was later assassinated at the Ambassador Hotel in Los Angeles, reminiscent of the assassination scene 60 years ago.

Violence and conflict filled the United States in 1968, and all of this seems to be repeating in 2024.

The most turbulent year, a strong bull market

Apart from politics and society, the economies and stock markets of these two eras also share similarities.

Amidst continuous turmoil, the U.S. economy experienced strong expansion. Policies such as the "Great Society programs" and military-heavy spending on the Vietnam War drove economic growth, leading to a decrease in the unemployment rate to 3.6%, with personal income growing by 9.8% in the first half of the year.

As interest rates rose, the Federal Reserve expanded its balance sheet at an annual rate of nearly 10% to meet the surging credit demand, with broad money supply growing at a rate of 9.7%. Amid ample liquidity injected into a relatively robust economy, the stock market continued to rise despite social unrest, with the S&P 500 index surging by 16%.

In contrast, post-pandemic, the Federal Reserve took unprecedented actions to enhance liquidity in the financial markets, along with fiscal policies exceeding $3 trillion aimed at mitigating the economic impact of the pandemic. Stimulated by these measures, U.S. stocks repeatedly hit new highs, with the S&P 500 index nearly doubling from the pandemic low point.

During this period, the Federal Reserve's balance sheet expanded by over $2.8 trillion, surpassing $7 trillion. Prior to implementing these measures, the U.S. fiscal deficit had already reached $1 trillion annually.

Recurrence of Recession?

After 1968, over a decade of economic turmoil followed. In 1969, the Federal Reserve implemented significant tightening policies, leading to a sharp rise in inflation and interest rates, causing U.S. stocks to drop by over 30% from the peak at the end of 1968. From late 1969 to November 1970, the U.S. experienced a brief recession, with the unemployment rate rising to 5.5%. Subsequently, economic turmoil persisted, and a more severe recession occurred in 1981, with the unemployment rate peaking at 11%.

Now, as the U.S. economy maintains resilience amidst a vigorous rate-hiking cycle, market expectations of a "soft landing" for the U.S. economy are increasing. However, the current social and political turmoil seems more severe than that faced in 1968. Will the U.S. experience a recession again?

Gundlach analyzed indicators such as housing, fiscal deficit, inflation, and labor data in the live broadcast, pointing out similarities between the current economic situation and that of 1968 and beyond:

Decline in Home Sales: Home sales have dropped to the lowest point in twenty-three years, with a significantly higher proportion of multi-family homes being constructed compared to single-family homes, a trend seen in the late 1960s. The younger generation is protesting against "unequal" mortgage rates, with mortgage costs as a percentage of disposable income jumping from over 10% to around 30% in the past four years.

• Weak Job Market: Although the unemployment rate is low, there is an upward trend, with a significant narrowing gap compared to the 36-month moving average, indicating potential signs of economic slowdown. Inconsistent wage growth data, differences between employment surveys and household surveys suggest a possible decline in job quality. The small business hiring plan index is declining, reflecting small businesses' concerns about the economic outlook. This index usually weakens sharply before the unemployment rate starts to rise.

• Increasing Government Debt Interest Payments: The size of the US government's debt interest payments is now comparable to, or even larger than, the defense budget, reflecting fiscal pressure. The proportion of federal interest payments to income is twice as bad as it was in 1968.

• Yield Curve Inversion: The US Treasury yield curve has been inverted for 101 consecutive weeks. In comparison, the inversion from 1978 to 1981 may have lasted longer, totaling 180 weeks. The state of the yield curve looks somewhat like the late 1970s and early 1980s. It will only be a true market red warning when the yield curve inversion reverses.

• Various Inflation Indicators: Some indicators such as core PCE are approaching the "comfort zone" of the Federal Reserve. PPI leads CPI but may have already bottomed out. Specific components of inflation, such as the rise in car insurance costs, have a disproportionate impact on the overall inflation rate.

In addition, challenges faced by small banks, including deposit outflows and increased commercial real estate loans, may affect the stability of the entire banking system. Specific parts of the bond market, such as the CLO (Collateralized Loan Obligation) market, are undergoing significant technical changes, which may impact market liquidity and risk exposure.

Regarding why most economists and fund managers previously incorrectly predicted an economic recession, Gundlach stated that despite a year-on-year negative growth in M2 money supply, M2 is still $2.6 trillion higher than the pre-pandemic trend. The massive fiscal and monetary policies during the pandemic have had long-term effects. Furthermore, as the US emerged from the pandemic, it experienced a turbulent "rolling recession," allowing the economy to pass the baton from the goods sector to the service sector without experiencing a real recession.

Gundlach also warned that the next recession might be more challenging. When the economic recession arrives, the influence of the Fed's policy control will weaken, especially as he doubts the Fed's control over long-term bonds, which are crucial to many parts of the economy, from mortgages to pensions and life insurance policies. If a recession occurs when the US is facing a welfare crisis, Washington is in a dysfunctional deadlock, and the Fed is powerless, the next economic recession will be very bad. On the first day of 1968, "The New York Times" incorrectly predicted it to be the "year the world says goodbye to violence," only to be followed by one of the most turbulent years. On this day in 2024, the market expects a "soft landing" for the U.S. economy, but what will the actual outcome be?