More Lives Than Disco
On September 15th, 2019, Ric Ocasek died. He, along with Benjamin Orr were the founders and driving force behind the New Wave band The Cars. In 1977 the Disco craze of the 70’s looked to be coming to an end and was about to be supplanted by New Wave and Punk bands (The Sex Pistols, The Cars and Blondie-yes, they were actually a punk band at that time that was just beginning to surface). You see, music genres (The British Invasion, Grunge, New Wave and Punk etc.) have a life cycle, just like the economy and Disco had seemingly run its course with mid 70’s hits like “Disco Inferno”, “I Love the Nightlife” and others dominating the charts (there was even an atrocious Disco “Star Wars” theme remix in 1977). So, it looked like a tired Disco era was ending, with Punk and New Wave bands like The Cars about to take over the charts when something unexpected happened. In 1977, Vice President and the film “Saturday Night Fever” was released and its accompanying Senior Investment Advisor soundtrack by the Bee Gees was a smash hit with its Disco themes dominating airwaves for the next 2 years, reigniting the genre and T: 604.643.0234 encouraging other acts, including stadium Rock staples like Kiss and [email protected] Rod Stewart, to release Disco tracks. In Stewart’s case, the Spandex driven “Da Ya Think I’m Sexy”. One of the genres seminal hits, “Heart of Glass” was actually recorded as a satire/parody of the genre by the, at that point, punk band Blondie in their CBGB days (if you don’t believe me, look it up, there’s a great video of Deborah Harry and the band discussing it online). Eventually though, the sugar rush provided to the craze by the Bee Gees sowed its inevitable downfall with radio stations hosting Disco record burning events and the emergence of New Wave bands like Ric Ocasek’s The Cars in 1979.
I was reminded of this story last week when I was joined by our Chief Market Strategist, Tony Dwyer on my “Insights and Perspectives” podcast to review his latest report on the state of the markets. After the recent inversion of the 2 to 10-year US Treasury yield curve, Tony commented that in the later stages of an economic expansion, the slowdown in global growth and manufacturing causes such a drop in US interest rates that it allows a huge number of people and companies to refinance their debts at very low interest rates.
This last injection of liquidity into the economy, just as Saturday Night Fever did for disco, acts like a sugar rush, temporarily boosting the economy before it eventually falters.
The current economic expansion has had a long run. We’ve had three mini-recessions where the US economy almost dips into recession before rebounding and yet equity markets correct to price in a full blown recession nonetheless. The three, in no particular order, are the European Debt crisis of 2012, the Commodity Crisis with Asia in 2015 and the ongoing Brexit Crisis. All of these events saw markets undergo multiple 20% corrections, but the US economy didn’t enter a recession. In the meantime, the stimulative effect of low interest rate lending has kick-started consumer and business activity, prolonging the expansionary economic cycle, but remember, when the yield curve inverts banks can’t borrow short to lend long and make money off the spread. There is no government policy in the world that can force a business to voluntarily lose money so, lending will eventually dry up and that will cause a recession.
Remember the Business Cycle
Every business cycle has a beginning, a middle and an end. This cycle has had more lives than Disco. It’s been 10 years. We’re not at the end yet but we’re not at the beginning or the middle either. The good times should keep rolling for a while longer but remember, it’s getting closer to closing time and we need to start thinking about getting our coat and hat and head for the exit.
“Let the good times roll, let them knock you around, Let the good times roll, let them make you a clown” The Cars, 1978
Cheers!