A history lesson from the 1920s economic boom
by Jared Dillian via MauldinEconomics.com,
I think a lot about history. Thomas Carlyle, the Scottish philosopher, said, “The happiest hours of mankind are recorded on the blank pages of history.” It’s true.
Remember studying US history in high school? You learned all about Woodrow Wilson and World War I. Then you learned about FDR and World War II, but you skipped over the Republican Harding/Coolidge/Hoover era in between.
What happened in the Republican dominated 1920s, anyway?
Only the biggest economic boom in the history of the US, coupled with massive technological progress and improvements in standard of living. The best time ever.
You might think people would want to study the conditions that led to that prosperity, so it can be repeated.
So what was it? Why were things so good?
Faced with a huge Woodrow Wilson induced postwar recession in 1920–1921 (really, a depression), the Harding administration’s response was to do… nothing! Literally nothing.
“That government is best which governs least.”
And so—it was the fastest and sharpest recovery in modern history. I forget the exact statistics, but unemployment dropped from 11-something % to 2-something % in a matter of a few years. And yet Wilson and FDR are considered to be the “great” presidents.
The happiest hours of mankind are recorded on the blank pages of history.
As you know, the pages of history are not very blank right now. We live in interesting times.
Thanks to government intervention, nothing is at fair value
I think the first step is to acknowledge that these are not normal financial conditions. Far from it.
Normal financial conditions are when:
Interest rates are at 6%.
You can reasonably save for the future in a bank account.
Stocks are neither rich nor cheap.
Bonds aren’t trading at 160 or 180 or 200 cents on the dollar.
And dozens, if not hundreds, of startup companies aren’t valued at more than a billion dollars.
Nothing today is normal.
The reason it isn’t normal is because this—all of this—is the result of the accumulation of every government intervention in the last 30 years, and especially since 2009. That is the reason why we are here today.
Professional investors complain about this all the time, about the distortions, that they can’t do their job of finding undervalued assets and waiting for them to return to fair value. Nothing is at fair value.
What few of these professional investors have realized is that you have to adapt or lose assets and shut down your fund. If everything is distorted, you have to front-run the distortions.
Unpleasant, but that is the reality of the situation.