Sudden increases in inflation destroy bull markets.

In 1972, investors believed the Nifty Fifty could never fail. Polaroid, Xerox (XRX), McDonald’s (MCD), Disney (DIS) – these stocks were all unstoppable. They were “one decision” stocks: a group of dominant growth companies that were growing so fast that could justify any price. The group traded at about 42x earnings, compared with roughly 19x for the S&P 500.

And then? The Nifty Fifty collapsed. The S&P 500 lost about 48% from its January 1973 peak to its October 1974 low.

I believe the artificial intelligence (“AI”) trade is approaching the same kind of reckoning. Rising materials and energy costs threaten project margins. Rising interest rates threaten financing. Expensive stocks leave investors with zero margin for error. Today looks more like 1972 every day.

Before the 1972 election, President Richard Nixon pressured Federal Reserve Chairman Arthur Burns to pursue expansionary monetary policy. Sound familiar? Current President Donald Trump tried to indict the last chairman! And last Wednesday, Trump demanded that interest rates fall to “1%, or less.” This from a man who has bankrupted every company he led with too much debt.

In 1972, Washington financed both the Vietnam War and the expansion of domestic programs instead of paying for them with current revenue. I’m sure you know the history: paying for guns and butter led to inflation. But back then federal deficits only equaled about 2% of the economy.

Today?