"The free market experiment is over.."
“Global stock markets could be heading for a Japan-style bear market lasting decades, says the hedge fund manager credited with spotting the “London Whale” derivatives trader a decade ago.
“Boaz Weinstein, whose New York-based Saba Capital was one of the world’s top-performing hedge funds in the market turmoil of 2020, said that the unwinding of central banks’ vast stimulus programmes in an effort to combat high inflation could lead to “doldrum” markets for a prolonged period.
“I’m very pessimistic. There isn’t a rainbow at the end of all this,” Weinstein told the Financial Times. “[Quantitative tightening] is going to be a real headwind for investors.”
“There’s no reason that this difficult [economic] period will only last two to three quarters [and] . . . no reason to think we’ll have a soft landing or a shallow recession,” he added.”
In 1932, a Saturday Evening Post reporter asked John Maynard Keynes if there had ever been anything like the Great Depression. Keynes replied, “Yes. It was called the Dark Ages and it lasted 400 years.”
First came the Crash. Tuesday October 29, 1929 would become what JK Galbraith called “the most devastating day in the history of the New York stock market, and perhaps the most devastating day in the history of markets”. As soon as the market opened, it was overwhelmed by a tsunami of selling that never abated. The stock of White Sewing Machine Company, for example, which had reached a high of $48 during previous months, had closed the day before at $11. During that Tuesday, an enterprising trader put in a bid for stock at one dollar a share. Given the absence of any competing bids, the order was filled. Despite widespread hopes for “organized support”, the market kept on falling.
The US economy then joined it. By the time Franklin Delano Roosevelt took office as President in March 1933, there were at least 15 million unemployed in the United States. Perhaps a quarter of the country was out of work. It may even have been a third. Roosevelt was well aware of the gravity of the situation. The very existence of the republic hung in the balance. Shortly after becoming President, Roosevelt took in a visitor who said to him, “Mr.
President, you’re either gonna be our greatest president, or you’re gonna be our worst president.” Roosevelt responded, “No, if, if I fail, I’ll be our last president..”
What subsequently happened remains a bone of contention for economists to this day. In the view of Keynesians, FDR then successfully applied all the resources of the state to drag the economy back into health. (This was certainly the version this correspondent was taught at school.) Between 1934 and 1936, Roosevelt’s ‘New Deal’ would create all sorts of programmes to put the unemployed back in work: the Federal Emergency Relief Administration, the Civilian Conservation Corps, the Tennessee Valley Authority.. To Keynesian economists, these ‘alphabet agencies’ played their part in saving the US economy from oblivion.
To sceptics of Keynesian stimulus who are sympathetic with the rival “classical” or “Austrian” economic school, however (and we count ourselves among their number), all these ‘make work’ schemes merely perpetuated the Depression. To reiterate, Austrian economics, at least as we understand it, venerates three things in particular above all others: sound money; the small state; and libertarian principles. If Austrians hate anything, it’s the Big State.
To the “Austrian” writer Murray Rothbard, for example, the very intervention so urgently called for back in the 1930s – and today – actually extends and amplifies a business depression:
If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt ? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure. If, in fact, we list logically the various ways that government could hamper market adjustment, we will find that we have precisely listed the favourite “anti-depression” arsenal of government policy.
Rothbard, in his magnum opus ‘America’s Great Depression’, lists half a dozen ways in which government intervention hobbles the adjustment process. We might today call them ‘how to ensure a zombie economy’, namely:
Covering similar ground, we recommend one of the best financial histories we have ever read, Forty centuries of wage and price controls, which you can download for free here.
The debate is fascinating because there are clearly echoes of FDR in the interventionist policies inflicted on the economy and in particular the financial markets since Lehman Brothers blew itself up back in 2008 – and more recently in the governmental responses to the lockdowns that governments themselves triggered. The world has had its own more recent versions of FDR’s various alphabet agencies, not the least of which has been four separate iterations of quantitative easing, or QE. We’ve had bailouts for homeowners, bailouts for Wall Street, and bailouts for automakers. We’ve had the Emergency Economic Stabilization Act of 2008 (also known as TARP), the American Recovery and Reinvestment Act of 2009, and Operation Twist. Closer to home we’ve had bailouts for big businesses, small businesses and even start-ups. And now MMT, Modern Monetary Theory, has effectively been let loose upon the world in the metastasis of the largest monetary experiment in history. And there have been growing calls for some form of UBI (Universal Basic Income) and – from amongst the technocrats like Britain’s new Prime Minister, Rishi Sunak, there have been calls for CBDC (Central Bank Digital Currency). The list goes on..
Was all this intervention successful ? Will it be ? History, we suggest, will not be kind to the modern neo-Keynesians. There’s a line we heard from a Japanese equity manager back in 2000, which haunts us to this day: “Japan has been the dress rehearsal, and the rest of the world will be the main event.” That struck us as an absurd thing to say 20 years ago. It doesn’t seem so ludicrous today.
In any event, the US economy did finally recover from the slump of the 1930s. But it was arguably the war effort, rather than any ‘New Deal’ policy, that conclusively lifted the US out of the Great Depression.
The statistics relating to the Second World War are incredible.
In 1941, for example, more than 3 million cars were manufactured in the United States. But so dominant was the conversion of factories to armaments production from that point onward under Roosevelt’s direction, that only 139 more would be made during the entire war.
Instead, Chrysler made fuselages; General Motors made airplane engines, guns, jeeps and tanks. And the Ford Motor Company, at its Willow Run plant in Ypsilanti, Michigan, made the B-24 Liberator long-range bomber.
What Ford achieved at Willow Run comes close to being an industrial miracle.
The average Ford car had some 15,000 parts. The B-24 Liberator had 1,550,000 parts. And at Willow Run, one came off the production line every 63 minutes.
The Second World War was won, then, not on the battlefields of France, but in the factories of Chrysler, General Motors and Ford. The war against the Deep State, on the other hand.. will it ever be definitively won ?
There are, of course, some key differences between the Great Depression of the 1930s, and the Great Depression of 2020 – ..? The 1930s Depression came about, we would submit, as a result of a surplus of animal spirits – resulting in the Crash of 1929 – followed by government intervention that exacerbated the economic misery by prolonging it, rather than simply letting the markets clear.
The Great Depression of 2020 – ..?, however, came about as a direct result of mass government intervention in the first place – by throwing half the world into lockdown and throwing the entire world economy into the freezer.
Soon into the lockdowns of 2020, it became clear that we had entered a brave new world in which the normal rules of business no longer applied. Bear in mind what the billionaire entrepreneur Chamath Palihapitiya said when interviewed by Anthony Pompliano in April 2020:
“Just put yourself into the mindset of any company.. Pick a great company that you’ve admired.. So I’ll pick one that I’ve admired for a very long time, for good reason: Workday. That’s a company that’s basically 10x’d their market cap. in the six or seven years they’ve been public, trading at an incredible valuation – cheap, now.. this is not to pick on Workday, but it’s a perfect example of what other companies will go through because I think this one of the best positioned companies.. They were – before all of this craziness – going to companies, the global 1,000, and basically saying: you need to upgrade two big parts of your legacy infrastructure – human resources management, and how you actually count all of the money you make, your general ledger.. The first product would compete against PeopleSoft, the second product competes against Oracle Financials.. Now you put yourself into Workday for a second and ask yourself: who are their customers today, April 1st 2020 ? Well, whatever segments of their revenue came from oil and gas just went to zero. Oil is at $18 or $19 a barrel.. there are a lot of very smart people that are telling you now that oil probably gets to $15 if not $10 a barrel.. some could go to zero. You’ve had the tar sands effectively trade to zero in Canada. You’ve had your first bankruptcy filing this morning when we woke up which was a multi-billion dollar company in the Bakken Shale in North Dakota.. So if you’re an oil and gas company you’re no longer thinking about your general ledger because you have no revenue, and you’re no longer thinking about upgrading your HR software because you may not have any employees, right ? So that whole segment stops buying. If you’re an airline company or a transportation and logistics company, that whole segment has stopped buying. If you’re a hospitality business that whole segment has stopped buying. If you’re in the banking sector that whole segment has stopped buying.. Now, this is for one of the best-run companies in the world..”
Prior to Covid-19, we had never seen anything like this before. The Great Depression was a historical accident. The Depression of 2020 – ..?, on the other hand, amounts to a deliberate and direct outcome of government policy. It is difficult to see how governments fatally compromised by a commitment to overarching socialist control can simultaneously be the solution to the world’s economic problems. In a now notorious – and quickly deleted – tweet, the UK Tory MP Tobias Elwood remarked on October 21st that:
“The free mkt experiment is over – it’s been a low point in our Party’s great history. The reset begins. Time for centrist, stable, fiscally responsible Government offering credible domestic & international leadership. Honoured to be the 100th Tory MP to support #Ready4Rishi” [Emphasis ours.]
The free market experiment may not be over, but the Conservative Party’s reputation for sound economic oversight clearly is. Alasdair Macleod of Goldmoney:
“This sad outcome is enough to turn frustrated libertarians into anarchists, wishing for a collapse of the whole rotten system — the sooner the better. Fortunately, or unfortunately, the increasing progression of statist control and suppression of free markets has nearly run its course. A financial crisis of humungous proportions is lurking in the wings, which in this analyst’s opinion has a fair chance of wiping out all rapacious states’ income entirely by collapsing their fiat currencies. For with their authoritarianism, they have bred economic and catallactic ignorance, which will certainly lead to their destruction.
“As Ludwig von Mises put it in an essay entitled A Critique of Interventionism written in 1930,
“Only the naive inflationists could believe that government could enrich mankind through fiat money. Government cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make him poorer. “
“Besides his close attention to valid economic theory, the authority for Mises’ thesis came from his experience in the post-war years, when he witnessed at first-hand the economics and politics of the Austrian hyperinflation, closely followed by that of Germany. In the century since, we have forgotten the lesson. So too, it appears, have the Austrian and German people whose forebears suffered catastrophic destruction of their wealth. Furthermore, it is almost certain that when the currency collapse becomes fact will we be ignorant of the follow-on consequences so vividly described in Hayek’s The Road to Serfdom. It chronicled the likely political developments that follow a government’s impoverishment of the masses by inflation.
“But we can only consider one thing at a time. Borne out of statist ignorance and intellectual arrogance, today’s disregard by governments for the rights and individual freedoms of their peoples is responsible for the economic and catallactic crisis now before us. Our political leaders, hiding their coordinated attack on everyone’s freedom, are beginning to realise that their tenure is ending in crisis. Like those of a car whose brakes have suddenly failed while dashing downhill, the levers of power no longer function.
“Arranging a reset is increasingly talked about. The current bankrupt system is expected to be replaced with another, allowing the political and bureaucratic classes to retain their power and control. In their new reset, they are even planning to take total control of bank credit away from commercial banks by the introduction of central bank digital currencies. They say a CBDC will be used to control and direct our spending for greater economic effect. Those of us in the authorities’ favour will get more state credit, while those who are not, such as those suspected of tax evasion, will be denied it. Some say we will be chipped like dogs and traced through our actions. If this seems extreme, these plans are echoed by the World Economic Forum, one of which’s acolytes told us we will own nothing and be happy.
“We must dismiss these utopian fantasies of socialising interventionist politicians seeking to jump ship from their current failing system. They lack the ideological pull of Marxism, required to persuade the intelligentsia and the middle classes. They will never overcome nationalism, never get their long-suffering populaces to support them. Instead, they only inspire conspiracy theories.
“The current political system mixes socialist intentions with interventionist policies. But as policies they differ distinctly. Socialism seeks to achieve its ends by seizing command of the factors of production: that’s what Marx intended. But western governments currently do not intend to nationalise swathes of industry. Instead, they wish to regulate them, leaving possession of property in private hands. It is interventionism that has killed off free markets.”
By way of investment strategy, we eschew exposure to the dead hand of the Big State almost completely. We endeavour to minimize or eliminate altogether allocations to unbacked fiat currency, and we choose instead to focus on investments in the productive economy, ideally shares in unindebted but highly cash-generative businesses run by principled, shareholder-friendly entrepreneurs, especially when those shares can be purchased at a meaningful discount to any objective assessment of their inherent worth. We value uncorrelated investments, notably in systematic trend-following funds that have already proven their worth this year. And we attach a premium to real assets and to commodities businesses with the same ‘value’ attributes already cited. We avoid politicians’ promises, in other words, and seek shelter in the tangible, the valuable, the defensible, and the real.
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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