“The entrepreneurs of the baby boom generation entered the labor force between 1968 and 1982, and inflation skyrocketed.”

Inflation and innovation characterize the first season of the 80-year economic cycle. During this season an entrepreneurial generation enters the labor force for the first time and, due to their innovative thinking, we see a new economy begin to emerge.

The entry of these innovators into the labor force is very expensive because it forces employers to make an initial capital investment in office space, infrastructure and training. This expense is particularly noticeable because it is set against a backdrop of the decline in spending of the previous conformist generation. So while the benefit of this season is tremendous innovation that soon will produce an economic boom, the cost is high inflation.

The last example of this Inflation and Innovation season occurred between late 1968 and late 1982. The spending of the Bob Hope generation had peaked and begun to fall off, causing a wave of recessions in 1970, 1974-75, 1980 and 1982. To finance the entry into the labor force of this new generation of workers, inflation rates rose to their highest sustained levels in history. As these innovators created new companies, venture capital and startup activity accelerated. It peaked between 1979 and 1983, around the time that companies like Apple and Microsoft got their start or introduced key new products. As the chart below shows, small startup companies did extremely well by comparison with large corporations.

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“It’s the best time to invest in the small, nimble and innovative companies that will eventually dominate their markets.”

The lesson? Small companies dramatically outperform large companies in periods of innovation. Furthermore, commercial real estate booms as the demand for new office and industrial space rises in direct response to the massive influx of new employees into the work force. In fact, real estate in general is an excellent investment in this season because it is a leveraged hedge against rising inflation. The worst investment in this season, also due to rising inflation, is bonds.

Your best investment choices for the Inflation and Innovation season are:

• Small company stocks
• Real estate, especially commercial property
• Select international regions for stocks, like Japan in the 1970s
• Treasury bills and CDs
• Gold