Principles of the Stock Market : Depression

Watch One Particular Stock Market Guru!

Richard Schwartz — Fri, 14 Aug 2009 13:36:00 GMT

AN HISTORIC GURU VIEW. Written Friday morning, August 14^th, 2009.

Being in and around the stock market for the last 35 years -- I can’t believe it’s been that long! -- I’ve seen market gurus burn hot and cold. In my early years I was in more of a daze, doing ancillary brokerage jobs rather than following the stock market closely, just trying to figure out the whole brokerage industry. What a stock broker did, etc. Did I want to be one? Would I be recommending my own stuff? And again not being in New York city, the epicenter of finance, I was on the outside looking in. Even today that’s ones largest hurdle. So anyone wanting into the business I’d advise going where the action is, New York or another financial center like London. If not New York or London are not for you, find a big firm, say a big mutual fund family and get to its headquarters, be it in Boston or Singapore, etc. Anyway, back to point.

Granville & More. I’ve seen Joe Granville burn hot (and drop his pants to show stock quotes on his boxers and walk on water on a hidden board) and turn ice cold in popularity and heard about Jim Dines. I used to follow that curly haired woman guru, yes, that image is bringing her name back, Elaine Garzarelli. For many years I read Richard Russell, one of the deans of newsletter writers and whom I modeled my own letter after, took sample letters to numerous letter writers including Ned Davis, Dan Sullivan, Harry Schultz, Norman Fosback, Lou Navellier, .Marty Zweig, Stan Weinstein and unearthed Ted Warren’s one book (one of my favorites) and read everything I could find. I like William O’Neal’s approach and regular readers know I use and recommend his paper and its IBD 100 list. Having an economics background I gravitated to Ed Hyman’s work and read a number of economist A. Gary Shilling’s books. And read John Naisbitt’s Megatrends series with his long range projections. I’ve read and studied all the Dow theorists from Dow to Hamilton to Rhea to E. George Schaefer to Russell. I continue to read many new guys too, Alexander Elder, “Trader Vic” Sperandeo and on and on. Etc., etc. etc. Many unknown letter writers too. I really could throw a ton of names around if I sat down and reviewed my stock market library and mine and other’s old market letters. So I’ve seen many gurus come and go and burn hot and cold. But one who I continue to admire and track is Bob Prechter of Elliott Wave fame who was the #1 guru way back when. He was a major market mover like Joe Granville. While he uses charts -- which Wall Street loves to disdain, I think that’s mainstream Wall Street spinning a veil and case on the public to justify their big bucks, they all surreptitiously use ‘em -- Mr. Prechter also is now ties market swings to societal mood changes (which makes good sense to me). And is in the process of attempting to add and formalize to current investment analysis the concept of tying stock market trends to mood shifts. “Go for it Bob!”

SCHWARTZ RECOMMENDATION: TRACK MR. PRECHTER GOING FORWARD!

Anyway, I have to strongly recommend keeping one eye peeled on what Mr. Prechter is advising right now. Especially now! I’ve related the histories of Granville and Dines going terribly wrong in this letter, getting stubbornly bearish right at major market bottoms, so I realize the danger now for Prechter in remaining so adamantly bearish but I can’t fault his analysis, what he’s saying and my 35 years in the business tells me to not pooh-pooh his foresight. After reading everyone I can and adding in own my market intuition formed over those 35 years in and around the stock market, I’d say he’s on track. So I’m with him and the other bears, Jim Rogers, Marc Faber, Gary Shilling, the Comstock guys and others out there, still recommending extreme caution going forward. Remember us outsiders were bearish but correct at the July through October 2007 bull market peak while most of those bullish today were also bullish back then and missed that major top completely. Amazing! I mean even after the subprime disaster unfolding ahead became plain in August 2007 and on the head fake rally to new highs in October 2007 they remained Pollyannaishly [sic] blinded. (And no, for all you individual investor skeptics out there about Mr. Prechter’s work, and I know there’s a lot by reading the responses and comments now added at the end of most all Internet carried research, no I’m not a shill for Prechter. Never met, emailed or corresponded with him at all.)

So, yes, play this rally which will likely run longer than most bears think, but stay near the exit; somehow!

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Stocks Have Risen When The Economy Is Down

Richard Schwartz — Mon, 03 Aug 2009 14:49:00 GMT

THE BIG PICTURE

The key thought: History shows the economy can be bad and the stock market good! Understanding that one idea is key to making a logical decision about the stock market here. I tried to get this across at Elizabeth’s 9^th birthday party to the family Saturday. The stock market is climbing its “wall of worry.”

THE SITUATION. My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before. In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937. So, yes, there can exist a great disparity between the stock market and the economy. This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity. I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing. Helped today, because over our history our capitalistic system has grown so large and diverse. In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so. If, from time to time, when capitalism gets in a bind, it gets jumpstarted. Or gets the table reset when it knocked awry. Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America. Just meaning that while construction and manufacturing are down, maybe technology and the media are up. Or while Michigan is down, Tennessee is up. Or while big business suffers, smaller businesses spring up. I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode. Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits. Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter. Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times. Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event. Schwartz View: My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself. That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us. As I see it that’s investor’s biggest bugaboo now. We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist. Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009. But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007. To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us. In other words, to separate the stock market from the economy. It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem. We all need to overcome our fears to make money during this full cycle. Easier said than done!

THE ECONOMY

The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy. Thanks to our government learning from our past travails and understanding its role. President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.” Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months. Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers. Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward. And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such. While at the same time smartly tackling our long term deeply entrenched and ignored major issues and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders. Such as taking the lead in going green as the “clunkers for cash” program epitomizes. Americans really want to do their part and this program is providing one capitalistic way to do so. Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism. I gotta love it! Schwartz View: So, we’re back on the right track in lots of ways and I’m delighted. But don’t get complacent. Please keep reading!

Please email me at RichardStk@aol.com for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

The Great Recession Unfolds This Way

Richard Schwartz — Tue, 28 Jul 2009 18:16:00 GMT

SCHWARTZ RECESSION CONCLUSION. Tuesday, July 28^th, 2009.

Ok, after much consideration, here’s my conclusion as to what unfolds going forward. The economy struggles through but survives the next few years. About 20% of Americans have a very, very difficult time out of work and out of hope but the other 80% make out all right. Similar to the 1930s when those with a job managed. Today the US economy is so deep and varied, meaning there is so much diversification, that there will be areas of growth and even prosperity along with much despair. The stock market, in its infinite wisdom and with its amazing discounting faculty, based on the government having prevented an all out total collapse, sees this and settles down. And this mini bull market lasts and lasts confounding the adamant bears. But somewhere along the line we get a recession within this Great Recession, just like hit America in the 1930s when we got a “depression within the depression” after a five year hiatus and stock market run up, which hit in 1937-1938 when the market crashed big time. This time it will be a recession within a recession because of all the safety nets put in place after and as a result of the Great Depression of the 1930s. What will cause this second down turn will be the other 80% of Americans retrenching. I mean the 80% of Americans who are monitoring today’s troubles but not being directly affected by today’s high and rising unemployment are continuing their current lifestyles, meaning continuing their current over spending habits without (m)any changes today. I see this going on all around me. People still working aren’t cutting back much, it’s only those rich and not so rich alike who have been struck head-on by today’s sudden economic downturn, who have been FORCED to cut back. The other 80% while being a bit more cautious are continuing their too abundant lifestyles. Myself I’m not exactly sure what will cause this second and more all-encompassing retrenchment but I believe it does lie ahead. Likely some “Black Swan” event, some unpredictable sudden shock. But the domino, rippling outward series of cutbacks now working their way through America will be partially to blame, having weakened the foundation. I must say driving through the village of New Paltz, NY this morning, probably the most vivacious and bustling town in the Catskills or mid-Hudson River valley region partially buoyed by its SUNY college, I saw more 'For Sale' and 'For Rent' and 'For Lease' signs than ever before in my ten year history living here. Ironically it’s the old paradox of thrift which may get us over time. Meaning savings is good for the individual but bad for the overall economy. For more, agree or disagree, email me at RichardStk@aol.com for a sample of my daily "learning, teaching, always evolving stock market letter and advisory service."

To Stimulate Or Not To Stimulate The US Economy

Richard Schwartz — Thu, 05 Mar 2009 19:29:00 GMT

ANTI-Stimulus Protest Demonstrations; Say What?

That’s a big global fear surrounding this global economic slump. History shows economic debacles like this breed unrest, anger, frustration among those losing their jobs, etc. and thus protest demonstrations. If one watches www.worldfocus.com or any other news global news show, you’ll see violent protests happening globally. In Eastern Europe as one example. In China too and especially. China’s government’s big fear, knowing it’s own history, is protests which bring down the government there. Making the upturn in global protests there and elsewhere important for all investors to track.

Yesterday’s Investor’s Business Daily (IBD) newspaper had a front page article reporting that anti-stimulus demonstrations have occurred in 35 American cities. Yes, these are small demonstrations so far, 100 or 200 people and organized by interest groups, but maybe they will grow in size after IBD gave them face time, i.e. publicity -- I hadn’t even heard about these protests at all until yesterday -- and also gave them such a nationalistic and catchy name: “Nationwide Tea Parties.” I read where these events are being organized by those groups who sarcastically say we should: “Legalize Capitalism!” Or who believe: “The best government, governs least.” And those who sardonically and exaggeratedly say: “No to socialism!” And are epitomized by one protestor’s sign which read: “Your mortgage is not my problem!”

Obviously US government stimulus spending to try to keep this weakened economy from getting worse is anathema to those who believe in the strict Austrian school of economics. That economic school says things just get screwed up terribly whenever the government gets involved. And who knows, maybe doing nothing, to try to shorten this downturn, was indeed the right move. But as I see it it’s too late now; we’re already committed. I’ve given up opining on what were the right and wrong roads to follow but let me also report there are a lot of other angry people in America today, those that say they are tired of lavish retreats and concerts, tired of private jets, tried of companies paying out huge bonuses with or without government money. Regular readers know I’ve been angry and pounding the table for many years about these excesses. So maybe we do or will have class warfare, that is if these anti-stimulus demonstrations get larger and cause more of a divide among all kinds of angry Americans.

Schwartz View: But as I see it, we’re now committed to this “bail out” path, we got committed a year ago when we bailed out the first company, Bear Stearns or whoever came first. This far along this path I can’t foresee us stopping now. Plus it only makes common sense for any government to try to stimulate the economy when the two other major sources of normal demand, consumer spending and business investment, are in total hunker down mode. The even bigger picture, as I see things from up on the mountaintop looking down at the valley and what’s happening, is that these demonstrations by those who say your problem is not my problem, are the last desperate efforts by those who still believe in the “me first” path America has been on for roughly three decades now. As I see it, the results of the recent US presidential election announced that the majority of Americans want big change in America, a change which returns the America Dream to the average working person once again and returns us to a more level playing field. And that means, even though there is some opposition, that America has now crossed the Rubicon, so to speak. Meaning we’ve just begun a 10-year or so cycle which puts public interest over private interest. History shows we do swing back and forth from longer periods, or about 20 years, of letting capitalism run unchecked and America showing strong economic growth as a result to shorter periods of about 10 years or so where we put the unfortunate and forgotten Americans first, which yes, also means slower economic growth as a result. (Please read Arthur Schlesinger Jr.’s THE CYCLES OF AMERICAN HISTORY if you’d like more on this repetitive cycle.) All signs that I can detect today tell me that America is going to level the playing field, get rid of the excesses, the corruption and scamming of the system, in general just the overall greed which always naturally arises from allowing capitalism unchecked to run for too darn long. Again, I’m just observing what I see happening not opining whether it’s right or not. As for investment implications, for now stay hunkered down, practice extreme patience and proper money management while out waiting this Papa Bear market.

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Good trading, speculating and investing!

Monday Weekly Strategy

Richard Schwartz — Mon, 22 Dec 2008 14:37:00 GMT

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Monday, December 22^nd, 2008: So here it is, last letter ‘till Monday, January 5^th, as Lucy & I fly off to the white sand, warm blue waters of the Caribbean, maybe on a last hurrah (if the economy keeps sliding). I’m taking Cycles of American History & Rethinking the Great Depression books. Our routine is: Go to the beach, play backgammon, read & go out to dinner. Day after day. Warm our bones & work on new tans.

THE BIG PICTURE

Friday I saw John Bogle, who has been on Wall Street for 50 years and who created the first index fund, the Vanguard 500 Index Fund back in 1975, say investment bankers and bankers generally owe the country a huge apology (which I doubt we ever get). Their imprudent speculations and greed for massive fees from too complex speculations led to today’s financial sector problems, problems which have now fed out to the real economy hurting innocent, hard working, everyday Americans. Mr. Bogle says greed has even spread out to our whole economy, that we’ve morphed into in a “me first” society and it’s something we have to seriously take a look at. Thus capitalism, allowing markets to work unfettered of regulation and based on trust and trusting, has now been “deeply discredited.” Even the underpinnings of capitalism have changed radically. We’re no longer an ownership society whereby individual stockholders used to select and then hold 92% of all common shares; institutions 8%. Now institutions control 75% of shares through huge sums entrusted to them by others and have not invested prudently. Again, because of the incredible fees they got for investing. Mr. Bogle says they sure wouldn’t manage their own monies so recklessly. These institutions were supposed to be wiser than individuals but, again, it’s not their money. Supporting Mr. Bogle’s view is the revelation that 29 of the 30 largest losers in the Bernie Madoff Ponzi scheme scandal were institutions whereby just one of these fund of fund companies was paid $160 million in 2007 alone for recommending the Madoff “hedge fund.” In other words, where was the fiduciary responsibility, the prudency, the probity expected when we entrust institutions to manage 75% of our investments? Schwartz View: Regular readers know I’ve been distressed and pounding the table about a number of these societal issues for years. About capitalism running amuck, culminating its 30-year trend toward widening the gap between it and its counterpart, democracy, with President Bush’s skewed one way Texas twang policy saying the be all and end all is that “bidness is bidness” and thus stifling regulation. And about society becoming so uncivilized, we ended up booing our own hometown, beloved sports teams! So while no one wants to live through what may come next in the economy, I have to say America has finally woken up, albeit after the nightmare it usually takes to precipitate major change, and that we are now started down a long and arduous path, but one finally pointed in the right direction again. As one example, we’ve even started to SAVE once again; amazing! So, for myself, I guess sort of a contrary indicator in recent years, I’m becoming more optimistic and bullish on our future. Finally! “Go America Go!”

THE ECONOMY

It became apparent that the US economy was suddenly falling-off-a-cliff right after Lehman Brothers became the one firm chosen NOT to be bailed out by the Federal Reserve and US Treasury Department. (Looked back upon as a colossal mistake in strategy I’ve read.) Lehman’s bankruptcy rippled out far and wide and led directly to losses in some money market funds, a “breaking of the buck,” and thus then to a total loss of confidence. Now, by all accounts, the economy is in total free fall. This sudden screeching halt in US business activity has caused the same in our global trading partners and most everywhere I look is now in corresponding economic free fall. You extrapolate it for yourselves from here. One view I’m pondering is that many times sharp declines lead to the second leg of a V-move, back up, and we’re overdue. Maybe stocks, with their recent unwillingness to keep going lower on bad news, means Mr. Market (the consensus of large investors) sees some end out there to the economic free fall. Still, we’d have to see some economic revival to expect a sustained V snapback in stocks. For now, I see 2009 providing a steady stream of bad news every time we look up. Just like in the second year of the last Papa Bear bear market, back in 1974, a continuing stream of bad news back then ultimately overwhelmed all attempts to rally until the final months of that year. Schwartz View: The consensus I’m hearing is that this sudden, fall-off-the-cliff global economic contraction is NOT going to lead to a repeat of the depression-spawned 1930s starting with its four-year long period of contraction followed by its anemic recovery, a.k.a. the Great Depression. I hate to follow any consensus especially when this one’s been so wrong for so long. But my own history look backs and studies by Federal Reserve Bank Chairman Ben Bernanke, an expert on what went wrong in the 1930s, turning a recession into a depression, show that we raised taxes, cut spending and blocked global trade, just the wrong policies. So I sure don’t expect any exact repeat of those failed policies. Leading me to think out of the box and that maybe today’s Fed policy of battling a deflationary depression is also implementing incorrect strategy. How about worrying against runaway inflation spawning from all the money the US and now the world has and is still throwing at this economic slump? Just the problems we worried about in the early 1930s but didn’t occur. You know the old saying, people fight the wrong war, the old war, because that’s what’s still fresh in their minds. Thus, summing up, maybe we can’t expect much creativeness from the Fed pointing in the less obvious direction of battling inflation since they are entrusted with getting us through hard times. They will naturally, after learning certain lessons from the 1930s well, not break much new ground. One reason being that if their policies didn’t work, they would be heavily criticized for experimenting. Thus while everyone pooh-poohs an inflation problem, I still worry about one. Seems like the consensus, which may be correct, among the minority expecting and talking about an inflation problem, doesn’t expect one until 2010 at the earliest. Keeps me thinking about that quote I printed here back on Friday, December 5^th, from Sir John Templeton: “It’s impossible to produce a superior performance unless you do something different from the majority.”

THE STOCK MARKET

Maybe we’ve started off on a new, lasting stock market rally as many now say. Maybe the November 20^th closing low and November 21^st intraday low did end this bear market or at least this phase of it and start us up and on a new mini bull market. But I don’t think we can determine that from these final days of stock market trading this year. This jig jag, saw-tooth modest rally we’ve had in December – the Dow remains down -2.8% this month, but up +13.6% from its closing low on November 20^th – still looks like just a time killer rally to me after stocks fell -6% in September, -14% in October and another -5% in November. So while I’m off on my annual winter beach vacation, I’m leaving my managed portfolios hedged with a slight long bias, still with my modest overall about 20% or less market exposure which I’ve carried since late last year. You remember late last year? At least as a lesson learned for the future, if for no other reason. After the stock market rallied back from its original car wreck in July, in what amounted to a head fake, false move, dead cat bounce and pretty obvious sucker’s rally, and a failed break out to new highs by the Dow and S&P (while the rest of the stock market refused to confirm).

Anyway, last week I ended the letter by noting that psychologically we should rally since bad news couldn’t drive prices down in recent days. Technically we had what could prove to be two months of base building everywhere I looked on the charts (but bases which could easily prove false). Fundamentally we even finally had low enough market valuations, like P/E ratios, to support a rally as well. But how about a catalyst? Well, let me offer up: (1) much lower gasoline prices which keeps our wallets and purses fuller and healthier, and (2) the good feelings anyone watching our president-elect making non-partisan, non-political, non-ideological selections for his cabinet, should feel. There may be a wellspring of good feeling, a sort of honeymoon psychological effect on investors, business, consumers and most all of us as we hope our new president can perform miracles. Schwartz View: Unfortunately no one man is going to remake America overnight. So, while keeping an open mind and watching all unfolding developments, for now I’ll back history which says this “worst financial crisis since the Great Depression” has to lead to an extended Papa Bear market, one which lasts at least a couple of years. Not just for one year, where we stand today.

PORTFOLIO STRATEGY

I hate to follow or even agree with some of what I’m hearing about going forward strategy, especially if such is espoused by those who were so wrong all this year. I’m speaking specifically about Bob Doll, now at BlackRock as their “Trillion Dollar” fund manager. I don’t want to pick on anyone but since he’s been leading the charge forward as stock markets collapse and getting all the face time doing such, I guess I have to. I start off very skeptical because my belief is that these big money managers are not going to get on TV and recommend anything before they and their clients get first crack at their thinking, ideas and recommendations and position themselves accordingly. I already wrote awhile back many old stock market books talk extensively about how big money always used to try to sucker the little investors. The age old technical Wall Street term “distribution” implied big guys needed little guys to unload their big positions on to when they foresaw a bear market ahead and thus put on a bullish face. It took much time to unload huge positions these large investors stockpiled so much frenzied excitement about the stock market had to be built up as big money sold. What better way today than Bob Doll coming on CNBC ubiquitously and always saying we are now in a bottoming process. He said that back in March and those who followed him are much the worst after the October panic crash. Anyway, that’s all secondary, although supporting, my main point. My main point is that Mr. Doll now says next year is going to be a good one for those taking on risk, not for those playing it safe. Again sounds good to me, at least at first blush. We all know what goes down the most generally can bounce tremendously when psychology changes. But do we really want to buy really risky investments in just the early part of the second year of a big, bad bear market? I say no. Bear markets of this size and scope historically have taken a lot longer than one year to work through.

Net, net, probably Mr. Doll will be proven correct about taking on risk, if one doesn’t factor in any time period. I’d guess risky asset classes will move fast when this bear market ultimately does end but do I really believe its going to end soon? No. And if we do have a 2009 mini bull market, say because stocks have fallen so much, then I’m not going to count on Bob and other institutional investors to tell me and us exactly when to get back out. No, starting off next year next week, I’d suggest still playing our cards close to the vest. Yes, play modestly for a continuing rally but look at it for now as just a bear market rally.

Happy Holidays & Happy New Year!

Richard

1930s Parallels Keep Popping Up

Richard Schwartz — Thu, 20 Nov 2008 18:49:00 GMT

REVIEWING THE 1930s. The Principle of Knowing History. Let me get down on paper a bit about President Hoover (1928 to 1932) and President Roosevelt and the 1930s after nearly finishing up THE FORGOTTEN MAN (2007) by Amity Shlaes. Again, let me recommend you get yourself a copy as today’s happenings keep looking more & more like a redux. I’m still thinking about taking this book to the beach over the Christmas holidays. It’s entertaining reading. One back cover reviewer compared Shlaes to Frederick Lewis Allen and his wonderful early 1900 histories (which I loved and heartily recommend; ‘Only Yesterday,’ ‘Since Yesterday,’ ‘The Big Change’). Shlaes’ history of the Great Depression starts after President Coolidge, a hands off US president gave way to President Hoover, of the same party, who turned out to be much more hands on. This flies in the face of the old belief that Hoover was hands off.

Late 1920s. President Hoover was elected in 1928 and for his first year the economy and stock market was copasetic. But after the October 1929 terrible market crash, it was up to Hoover to decide how to proceed. To understand Hoover, we can go back to when he was Commerce Secretary and wrote a book entitled American Individualism although the name wasn’t appropriate, according to Shlaes: “Hoover rejected the old brand of absolute individualism and distained laissez-faire economics as ‘theoretical and emotional’.” So, when the crisis hit, President Hoover went right to work. First, he made very clear he was for regulation. Hoover believed in government help and loved standards, efficiency and organization and had done much in the middle 1920s to install such across America. But now, upon President Hoover getting a confidential report from the Fed that the market “readjustment” was going to last, and after asking himself a question he later wrote down: “The primary question at once arose as to whether the President and the federal government should undertake to mitigate and to remedy the evils,” Hoover concluded, yes, action was needed. President Hoover from the crash until President Roosevelt took over in March 1933 pushed for “expanded public buildings programs, requested a national system of cooperation among the states on public works programs, proposed expansion of the merchant marine, regulation of the new inter-State electric power system, consolidation of the railroads, development of public health services and departmental reorganization.”

In general terms, Hoover: (1) intervened in business, starting by calling business leaders to Washington and told them to keep up business as usual and to keep wages up, not allowing any free market cleansing, (2) signed one of the largest tariff bills in US history, which caused less trade and thus further contraction and (3) publicly assailed the stock market. All moves which backfired because they also caused a loss of confidence. Retired President Coolidge, the hands off president, railed against Hoover’s moves, calling them “socialistic notions of government.” Right up until President Roosevelt replaced Hoover in early 1933, Hoover continued using the government to try to make things better. In June 1931, for example, Hoover announced a moratorium on German debt repayment. And then created the Reconstruction Finance Corporation to help banks and homeowners. Finally Hoover signed a big tax increase, the Revenue Act of 1932, because of his fear an unbalanced budget would cause a run on the dollar. During the interregnum between Roosevelt’s election in November 1932 and his inauguration in March 1933, Hoover even wrote to Roosevelt trying to get him to sign off on special war powers to handle the emergency, and a bank holiday. Roosevelt said no, even though upon taking office, he followed many of Hoover’s beginnings.

March 1933. Upon entering office, President Roosevelt showed he would try anything. He knew people wanted action and that this was a rare opportunity for change. Plus he just enjoyed activity, of any sort. I can imagine how activity uplifted him, he wore these heavy metal leg things, for his polio. He was inaugurated in March 1933 when their was prevalent despair and unemployment had soared to about 17% Thus from March 1933 on he tried whatever struck his fancy. Plus he had a group of advisors called the “brain trusters.” Whatever they proposed, Roosevelt went with. The Hundred Days this period was called as President Roosevelt legislated galore. People hear that arts flourished during the Depression but now I know why. President Roosevelt (FDR) spent big money on them. He hired artists and had them paint murals--we have some in local post offices here near Roosevelt’s Hudson River home. He hired movie people and had propaganda firms made, burnishing the image of his actions, action which became known as the New Deal. Basically the New Deal was trying to help certain constituencies which Roosevelt chose. Essentially, the middle class or “everyman” or common man. And policies against the rich (even though Roosevelt was one of those). FDR started passing law after law seeing what worked. Lots of his laws were later thrown out, in the latter 1930s by the Supreme Court (which he then attacked by trying to “pack” the court, increasing the number of justices to decrease their vote importance). But the people knew Roosevelt was using government to help them for once. So he kept garnering support in spite of his arbitrary, sort of kingly behavior. Maybe because he was also able to charm his way through most any siutation.

SCHWARTZ SUMMING UP. Out of time this morning, so let me just summarize. Both President Hoover and President Roosevelt put government to work to stimulate the economy after the 1929 stock market crash. We still debate today whether that was the right move or not. Today our US government is following a similar path after a similar crisis. But the law of unintended consequences may again come into play; government may end up making things worse and thus cause a lackluster economy to last and last instead of allowing the natural process of the free market to clean out the old and bad and bring in the new. Still, if you were US president, what would you do? Be an ideologue? Sit back and stay out of the way? Doubtful since you’d be viciously attacked by the media and others to do something. As very interested bystanders, all the individual investor can do is sit back and watch developments and place them in historic perspective. Then plan out strategy. As of now, please just stay hunkered down and out of harm’s way as much as possible.

Ho Hum, Another Bear Market Summer Day

Richard Schwartz — Fri, 20 Jun 2008 14:08:00 GMT

UPDATE ON THE STOCK MARKET. Witten Friday, June 20th, 2008: 6:30 a.m.

Looked to me like yesterday’s stock market rally was a knee-jerk reaction to China announcing it was going to raise oil prices by 17%. Crude dove on the news while stocks jumped. But if one thinks it through, is China raising oil prices really such good news? The bullish knee-jerk was that higher prices for gasoline in China will mean lower overall oil demand from China and that will reduce oil prices globally. As we’ve been hearing a lot lately that it’s government subsidized gas prices in China, India and many other developing countries that isn’t allowing crude demand destruction to occur and thus lower global crude prices. I mean Americans drove 30 billion fewer miles from November through April and that hasn’t lowered prices. The bullish train of thought continues that if the world gets lower oil prices, everything will improve. But, with further thought, if gasoline prices go up in China, won’t that cause demands from Chinese workers for higher wages? I mean the very last thing that the current communist Chinese leadership wants is any revolution from the Chinese people. Already, super big picture investor and Chinese advocate Jim Rogers says its inevitable that China’s government will go capitalistic over time, what with the Chinese people getting a taste of free markets for the last decade or so and realizing that free markets are the pathway to future wealth. Remember: “To be rich is glorious,” is the Chinese people’s new mantra. Hm? … and won’t higher Chinese wages mean higher Chinese export prices, thus higher import prices for us here in the US since we import tons and tons of stuff from China? And thus higher consumer goods prices intensifying the already ongoing and tightening squeeze on US consumers? We’ve had stagnant wages for many, many years with no light at the end of that tunnel and now we’re seeing higher prices for just about everything; food, fuel, health care, taxes, etc. Guess the still entrenched bulls figure lower crude will lead to lower gasoline, diesel, heating oil, and food too, eventually. And since the trend is the thing in the stock market, meaning the markets start discounting immediately upon seeing a new trend emerge, stocks rose yesterday. Still, is a gas hike in China really going to bring down global energy prices? I mean China already raised gas prices late last year and that didn’t bring prices lower. And we now live in a very globally competitive world as all countries and regions want to secure their energy and other needed mineral futures. And food futures too now after the recent global rice shortage has exposed the fallacy that it’s ok to depend on other countries for food staples. Anyway, the first thought was that lower oil is good for stocks and thus the stock market got stronger as the afternoon proceeded, led by lower energy beneficiaries such as the Dow Transports. But while I turned bullish on the Transports back in late March, after technically it broke three fan lines and formed a Head & Shoulders Bottom, I’m now bearish on the group after the two-month dead cat rally ended and the transports formed a bearish, rarely seen Broadening Top, an indication of loss of intelligent sponsorship and leadership. Thus I would certainly use yesterday’s nice bounce back in the trannies to get out if you haven’t already. And, for aggressive traders, if you can find a way to short the transports, I’d do so in a small way now. Schwartz View: Again, yesterday seems like just another bounce in a larger bear market environment, caused by entrenched bulls who refuse to admit the primary trend has now changed and is now pointed downward. The problem with this bullishness -- investors refusing to admit they are wrong, a terrible habit in the stock market! -- is that it indicates we’re still in the early stages of this bear market. Again, safely position yourselves and, unless you’re a trader, take the summer off. Of course, keep reading my letters. Why? Well, let’s see, to improve your knowledge base of how the stock market works and to make sure you don’t miss the opportunity to get back in. Bear markets do have endings. The last Mama Bear market, 2000-2002, ran for slightly less than two years with the most damage coming in the 2^nd year. The last Papa Bear market, in 1973-1974 ran for two years. And that very famous big bad Papa Bear market, which this one is looking more & more like, ran from 1929-1932, or just under three years. So all bad times do pass.