What do our current capital markets have in common with those of 1937?
By Kevin Startt
There has been much discussion about what period in the past our current capital markets most resemble. Is it 1987, a period of rising rates in the spring, currency misstatements and a giant controversial tax act that led to a crash in October? Is it 1973-1974, where the resignation of a president, a tripling of oil prices and impending inflation led to the final sell-off of a long-term secular bear market? Or is it 1907, where one central banker, J.P. Morgan, saved the market, and Baron Rothschild coined the term “buy when there is blood in the streets”. Are we another Japan, dealing with longer deflation, or the bubble-ridden U.S. market in 2000?
For me, it looks starkly like 1937. Bernanke’s penchant to avoid one of the major mistakes of the Great Depression led him to pursue a policy of loose money to avoid the mistakes of 1929-1932, which was a tightening-credit environment. Investors tend to forget the fact that the Smoot-Hawley Tariff in 1930 precipitated the whole crisis and the Great Depression.
As major industrial countries pursue a “beggar thy neighbor” policy by weakening their currencies to stimulate trade, we are on the cusp of another major trade war where China stands positioned to play and win because of gargantuan U.S. debt.
See also: A modern-day depression: The current secular market cycle mirrors one from the past
In 1932, federal and state taxes, along with excise taxes, went through the roof. During the mid-30s, the estate tax rates went up to 70 percent and personal income taxes were raised to 79 percent on top incomes — a stifling 216 percent increase in four years! Yet the stock market staged one of its greatest rallies in history from 1933-1937. Meanwhile, Hitler began marching across Europe as the Central Bank in the U.S. began printing money but disallowed savers and investors from cashing bank deposits into gold. This pushed gold prices down as other soft commodities soared from the dust bowl across the heartland of America. In 1937, Treasury Secretary Robert Morgenthau resigned, as unemployment went back up to 17.5 percent, declaring the New Deal had failed.
In recent months, Israel, our major ally in the Middle East, became surrounded again. Inflation rose, and wages became stagnant. And yet the stock market rolled on and went up more than 140 percent on the Dow, closing in on a record for the broad market S&P 500. Once again, taxes on the tax-deferred buildup of life insurance were on the table as we approached the next milestone in the fiscal crisis.
Savers and investors are slowly coming back into the market, but even with retail mutual fund investors pouring $20 billion into equity funds, this is only 4 percent of the withdrawals from these same funds over the last five years, according to the Investment Company Institute. My guess, is that the retail investor will arrive just in time, as he did in 1919, 1937, 1933 and 2013 — right at the top of the roller coaster with the lights off and no idea of when the next bubble will burst. Instead, the retail investor should be seeking out a safe money specialist or retirement income planner who can allow him to hedge newfound gains in bonds and stocks, preserve principal, earn tax advantages and not lose his livelihood.