This is an incredibly true statement, even though it is a misquotation of the original text written by George Santayana, who, in his Reason in Common Sense, The Life of Reason, Vol.1, wrote “Those who cannot remember the past are condemned to repeat it.”
In the financial debacle of late 2008 through spring of 2009, we avoided a depression similar to what occurred in 1932 (i.e., Great Depression). However, now that we are out of the woods “economically speaking,” are we on track to see an economic relapse like 1938? The following chart is from today’s Wall Street Journal from an article titled, “Why This Isn’t Like 1938 – At Least Not Yet”
Let’s consider the following similarities and differences. In 1937 the U.S. economy was in a strong recovery. However, at the time the political powers that be in D.C. took this for granted and enacted various new policies (social security was just one of them) and consumers faced new taxes to pay for them. In addition, the Federal Reserve raised reserve requirements for banks, which tightened credit and making it much harder for individuals and businesses to obtain credit. Also during this period the administration took on a very anti-business attitude and imposed a slew of regulation.
Granted, excessive borrowing, speculation and overindulgence by some individuals, investors and businesses caused the Great Depression, and action was needed to correct these abuses. However, some of the actions taken (as previously listed above) were not helpful and actually caused the U.S. economy and stock market to collapse.
For those who may not agree, consider this analogy. You live in a small village in an emerging country. You have a load of wood that you are hauling into town to sell, and your mule is pulling is the cart up the final and steepest hill of your trek. Midway up the hill your mule starts to struggle. Now what do you do?
A. You could stop and let the animal rest, actually grab the reigns and help the animal pull the cart up the hill or remove some wood from the cart and make a second trip with a lighter load.
B. You add more wood to the cart and begin whipping the poor animal to encourage it to finish the trek.
In my opinion, option A is similar to lower taxes, offering economic incentives or reducing interest rates to help revive an economy. However, option B is analogous to raising taxes, increasing regulations and putting policies in place that make it harder for individuals and businesses. I would consider the second scenario tantamount to animal abuse, because you are punishing an innocent animal, breaking its spirit and possibly inflicting permanent injury. Then the same can be said for the vast, vast majority of individuals and businesses that will be harmed by all the current actions being considered by our elected officials.
When anyone advocates punishing businesses or the “wealthy” via higher taxes and more regulation, then be prepared to surrender part of your IRA, 401(k), pension plan, investment or college savings. You cannot expect to earn reasonable, let alone increasing investment returns when the government is taking a larger share of the profits via higher taxes and putting costly policies or regulations in place. That being said, does it mean we need no regulation and criminal actions should go unpunished, absolutely not!
There are several positives that make me believe that we can easily not repeat history.
- Historically low lending rates.
- Record levels of cash available for investment.
- Considerably lower top tax rates (for the higher income brackets) than those of in the 1930s.
- Incredible technological advances and business innovations.
- Much more open and freer trading practices.
- An increasing number of middle class in emerging economies like China, India, Brazil, etc.
- Hopefully, a return of frugality and common sense based upon the lessons we learned from the excessive borrowing and spending of the past decade.
Overall, I continue to be cautiously optimistic based upon all that I read and hear. However, I do get a case of “economic” indigestion based upon the continued mantra for the need of higher income taxes and more government involvement. Currently, the International Monetary Fund and various European Union leaders are actually taking much more prudent, business-like or capitalistic approaches to solving their economic problems than we are.
I believe that the current investment climate (i.e., stock and bond markets) offers some good values, if U.S. policymakers don’t take what I consider to be a more restrictive policy.
Think of it this way. I am that villager in the prior example, and I am facing a “business- friendly” environment. As such, I may borrow money or bring on investors so I can buy another or several mules and hire workers to load the wood to take into town. This is economic boon for all involved – more people are employed, more sales resulting in more taxes being paid and profits being shared with the investors. However, if I am concerned or believe the economic landscape is “hostile” toward my business, then I will not consider any expansion and may actually work the mule even harder to earn the same net income, and as a result I may end up killing it and going out of business. In this scenario, no more income taxes are being collected by the government.
As an investor, you need to seriously consider which economic environment you would rather face with your money. Do we learn from history and take appropriate and reasonable actions as a nation or do we ignore it and let the chips fall where they may?
Nice rebound!
Many consider the recent uptick in the U.S. and overseas stock markets a reaction to the overly pessimistic tone that occurred over the last several weeks. Does this mean it is bull market going forward? Not necessarily, it just means that the overly pessimistic tone lead to some bargain hunters nibbling at stocks. As a matter of fact, corporate insiders increased their buying last week. The coming earnings releases for the second quarter and companies’ outlooks for the remainder of this year will be the deciding factor for what the market does in the near term. I believe that there are enough negative opinions regarding the global stock markets and economies, that a roaring bull market is not in the cards. At best, I think we may see a very gradual recovery with starts and stops along the way.
Quotes
“It takes two seconds to tell the truth and it costs nothing. A lie takes time and it costs everything.”
Randi Rhodes, talk show host
“The stupid neither forgive nor forget; the naive forgive and forget; the wise forgive but do not forget.”
Thomas Szasz, psychiatrist and academic
“There is a growing sentiment in America that regular saving should be ignored-that the government will take care of people and give them security when they get beyond a certain age or become old and unable to work, but it must be borne in mind that the people who earn and do save, take care of the government! Were it not for the thrifty and the willing workers, the government would be in a bad way.”
George Mathews Adams, newspaper columnist
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
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