Monday, November 19, 2012

Will 2013 Be 1937 Redux?

As Shakespeare said: “Comparisons are odorous.”

It is probably not the best idea to look to the past for lessons about the future. But, even if history never really repeats itself, it does offer hints into what may lie ahead.

While all left-leaning pundits and politicos have been cheering Barack Obama’s great victory in the election, another group of voters has not been quite so sanguine.

The people who vote with their money in the stock market have hit it hard over these past three weeks. Everyone’s favorite stock, Apple, has been down over 20% from its high.

As I write, the market is rallying, but do keep in mind that no market goes straight up or down. A bear market will use all manner of head fakes to separate you from your money.

A lot of people are hunkering down in the stock market because there’s nowhere else to go. Like people who had survived Hurricane Irene, they assume that they can survive the oncoming storm. Besides, bond yields are so low that stock dividends have become the only reliable source of income.

And yet, this makes investors especially vulnerable to market declines. More so since very few people, and certainly not the press, are alarmed about the dangers that might lie ahead.

Everyone is chattering about the fiscal cliff, but everyone seems to agree that it will be avoided. Few seem to recognize that any deal will be detrimental to the investment climate.

Whatever you think about the fiscal cliff, the Wall Street Journal reported this morning that business investment has already fallen off a cliff:

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.

Famed investor Jim Rogers has long been predicting that 2013 would be a bad year for stocks. It’s probably not a great idea to bet against Jim Rogers.

This morning Amity Shlaes, an authority on the Great Depression, author of the book, The Forgotten Man, suggested that 2013 was beginning to look a lot like 1937.

If Barack Obama is the second coming of Franklin Roosevelt and if his policies attempted to duplicate the success of the New Deal, why wouldn’t his second term look like FDR’s second term.

If you don’t recall, in 1937, the year after Franklin Roosevelt was re-elected for the first time, the stock market and the economy fell off a cliff.

FDR, like BHO had used massive government spending to gin up economic growth before the election and had ridden it to a great electoral victory. But, after the dust had settled FDR decided that it was time to start paying the bills.

Shlaes describes the results:

Will 2013 be 1937? This is the question many analysts are posing as the stock market has dropped after the U.S. election. On Nov. 16, they noted that industrial production, a crucial figure, dropped as well.

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

The drop wasn’t immediate in that case; it came in the first full year after the election. Industrial production plummeted by 34.5 percent. The Dow Jones Industrial Average dropped by half, from almost 200 in early 1937 to less than 100 at the end of March 1938.

It’s hard to imagine stock indexes dropping by half today, or unemployment rising past 15 percent, as they did in the “depression within the Depression.” But the parallels are visible enough to be worth tracing. They have to do with the danger of big government, and can be captured in a few categories.

It’s hard to imagine the markets dropping by a half today because the Federal Reserve has been willing to support them.

Yet, government expenditures as a percentage of GDP are much higher than normal. The twin pillars of Obama’s first term, Obamacare and Dodd-Frank have not yet been implemented. And FDR, like Obama was more than happy to try to solve it all by punishing the rich.

Let’s accept that it’s not going to be the same. That might mean that it won’t be so bad. But that might also mean that it could be worse. 

1 comment:

Anonymous said...

Business and economic pundits seem to depend as much as politics on fantasy narratives, and which prophecies are self-full filling will never be clear. I wish I could figure what vision of the future is possible. What is clear is that Obama or Romney both will enable borrowing and money printing to any and every Siren call of economic growth, hoping 1% succeeds, and so smart business is now like a flock of vultures, circling for the alpha predators to decide which market they want to eat next. My own thought is Obama should be telling the middle class to not spend their surpluses, but triage their debt, and downscale before the next crisis and vulture meal, so it won't be them.