At this week’s Bygone Relics show we tried to be optimistic. Do you think we succeeded in doing so?
Let me first tell you a story about a dumpy looking little Mexican boy that grew up to launch Fernando mania: Fernando Valenzuela didn’t look like an athlete, he had a weird wind up, before throwing the ball to the plate he would glance skyward, perhaps using his parietal eye or breathing out of his eyelids like the lava lizards of the Galapagos Islands. Regardless of which, he started off the 1981 season by going 8-0 with 5 complete games and a 0.50 era for the Los Angeles Dodgers. In Hispanic rich southern California, the craziness “Fernando-mania” was in full bloom. They played Abba’s hit Fernando and they would pack the ballpark and sing and dance and it was joyous. The Dodgers would go on to win the World Series that year and Fernando would become the only player in history to win the rookie of the year and the Cy Young in the same season. It was exuberance in Los Angeles in 1981, but like all exuberances it wouldn’t last. Fernando would never again be as good although he carved out a nice career, but for that small window of time everything seemed perfect. That small window of time looking back actually stretched across a summer and into a fall. During the summer of 1981, it seemed like it would last forever. But in a moment, it was gone.
1981 also marked the end of the terrible inflation as the economy was thrown into recession by Paul Volcker as he wrestled inflation to the ground with sky high interest rates. But it was the beginning of something as sure as 1982 was the end of -. It was the beginning of the longest stock, bond, and real estate bubble in history. Let’s look at history first. During World War I and immediately after the US experienced 18.5% annualized inflation up through 1920. If we look at our chart from last week on Market Trends, I’ll attach the link, we can see that the Dow Jones bottomed in the summer of 1921. For the next 8 years, the country was exuberant. The Roaring 20s were Fernando-mania across the nation. Times were good, credit was easy, margin was plentiful and people traded stocks as an occupation making huge sums of money. Buy on the margin for there was no SEC and people did. They became wealthy and they lived opulently. They showed off their wealth on Instagram and TikTok. They did so because the newspaper was the social media of the day. They took pictures of their houses and their parties and people talked about how it would be to be wealthy and the whole country tried to take shortcuts to get there. The wealthy threw great parties and everybody wanted to attend, but to most of the public their only peek into this lavish lifestyle was through the newspapers. In 1921 the Dow Jones was 1150 and 8 years later it had gone up nearly 500% to 6,700 inflation adjusted points. You see no one thought the market would ever go down. Cover up your chart at 4,000, then 5,000, then 6,000 and you see complete exuberance, complete euphoria, complete naivete that the market would ever correct itself back to being a place to value companies and their future returns instead of a casino that offered rich wealth. The Roaring 20s generation had to learn that lesson for themselves because as we talked last week it was 30 years before the market would again take out those highs. Many owners of stock lost everything. Some committed suicide by jumping out of windows, others died more privately by gunshot wound at home too proud to face their lives after realizing their foolishness, and others lived through the Great Depression. Many of the nouve riche forced to stand in lines hoping to get called to work for manual labor for the day. Humble pie was served but there was often no other food being served as many people barely survived starving to death. It was one of the lowest moments in our nation’s history.
I just told you that the stock market went up 500%. It doesn’t get more positive than that… Joseph Kennedy got out of the stock market just before the crash and his family has been rich and wealthy ever since. He was one of the richest and most powerful men in America. There is even a great grandson RFK Jr. that is running for president this very year. He is a direct descendant of this great dynasty formed out of the exuberance of the 1920s, and the bootlegging but that is a story for another day.
You see what made the Great Depression unusual was that it lasted so long. We have covered other depressions that preceded it, but by 1932 when the Dow Jones bottomed normally the country would recover, but you see the government had gotten itself a bigger piece of the economy by then. Programs, taxes, the Federal Reserve all clogged up the works and the depression lasted almost 10 years and then the war drug us out of it finally. Without the war, things might have been very different. We have talked about how the government seized the citizens’ gold, the banks took their farms, and the government spent money and started programs that seemed innocent but today are an anchor around our country’s neck. It took 30 years but gradually the DOW recovered and made new highs. From 1932 lows of 1,000 to 9,000 in 1966. That’s an 800% return if you had bought at the bottom and had the good sense to sell in ’65. Well even in 1968 the Dow Jones was still over 8,000 when Joseph Kennedy lost the second of his two sons to assassination, RFK Jr’s father Bobby. But the foolish spending of his uncle, president JFK and literally the most powerful man in the world, and Lyndon Johnson would start the ball rolling downhill until it bottomed in 1982. Waves of inflation crushed businesses in the 1970’s, companies were forced to move businesses overseas to be competitive, and the gold standard of the world was broken and the fiat dollar was the currency du jour.
Just after Fernando-mania had celebrated its championship another mania began quietly. In October of 1981, the 30-year treasury bond yielded over 14%. By June of 2020, it yielded 1.47%. Bonds are valued in an inverse of their yield so look at it this way 1.47 to 14%, that’s about 900% return. It’s not exactly the math, but a huge bull market has run in bonds is good enough for our investigation today.
DQYDJ has a chart and I will include the link that shows average home prices in 1982 being $62,200 and that nominal price today is almost $400k, almost 600% increase.
Stock prices bottomed in 1982 in the Dow Jones at almost 2,700 and today they are at 35,000. That is almost 1100% return in a little longer time period 41 years.
What have we learned in the last two weeks? After huge periods of Fernando mania like exuberance the Kennedys become powerful and the stock market sells off for 30 years. Joe Biden is semi senile, Kamala Harris is a disaster, and the Republican party can’t decide if they want Donald Trump, who lost to Joe Biden or another character, but in the meantime Robert Kennedy is getting more powerful by the day. That is our first signal and one to watch! I am only being semi-facetious regarding the Kennedys and not at all about the senility of Joe Biden or the exuberance of the financial markets- stocks, bonds, and real estate. Do you think history is not going to repeat itself?
In fact, I would say that it has already been tried. In 2008, without government involvement and spending we would have likely fallen into a depression. The financial markets and banks would have crashed, and it would have been very difficult for a while. But our politicians are smart, no I didn’t mean that they are a dumb bunch of horses’ asses, but in regard to politics they are smart. When the economy crashed in 1929, Herbert Hoover got it pinned on him and the Hoovervilles homeless camps named after him. FDR came along and hung the economy around his neck and won the next 4 presidential elections and the Democrats won an entire generation of voters. In the spending 60’s JFK and Johnson got the inflation tied around their neck by Nixon and the Republicans carried the presidency for most of the next 20 years except for an inept interlude of Jimmy Carter due to Nixon’s bumbling of Watergate.
So when the economy started to falter at the end of George W Bush’s term, in part because of his spending, the Republicans were all too happy to pin it on Obama. Obama realized that he was one and done if he couldn’t spin it and put it on the Republicans. So together they compromised and put it on the people. That’s right, they bailed out the big banks, and insurance, and the big businesses bought off the politicians. The bankers got their bonuses and got to resume their game a couple years later. Ben Bernanke got a Nobel Prize for bailing out the banks. Nancy Pelosi got Hank Paulson to literally go down on one knee and kiss the ring and beg her for $800 billion or the banks would go broke by the end of the weekend. That’s right, in Sept of 2008 Paulsen begged Pelosi to let the federal government bailout the banks or it was all over. These power-hungry politicians agreed. George W Bush is worth about $50 million, but he came from money. Obama has $100 million and lives on Martha’s Vineyard, Pelosi is worth $100 million, and her husband is the greatest stock trader in the world including Warren Buffet. Ben Bernanke won a Nobel prize for Economics. Henry Paulsen, who came from Goldman Sachs bank, is worth about $700 million. The other two politicians have had salaries of about 2-300k for years so I am not sure how they got their wealth. But my point is that they have all stayed in power. No party went away for 20 years. They shirked it onto the American taxpayer. Ready for one last chart? The st Louis Fed has a chart of total public debt and it was less than $1 trillion during Fernando- mania in 1981, it was $9 T when George W Bush left office a gain of 800%, and it is now at $32T, a gain of 3100%. We should have crashed decades ago, but the government in charge didn’t want to become Hoovervilles. They printed the money and didn’t let us take our 30 years of medicine. We never got humbled the way the people in the depression did, the way the people did in the inflation did, we got a cliff notes version and they printed money. X’s and O’s in some phony federal ledger and all the pain went away. I do not believe in pain avoidance. I believe the rest of the world noticed and since 2014 haven’t been buying our debt. They know we can’t pay back $32 trillion and just next month Aug 24, the Brics are scheduled to meet and roll out their currency. I’m not sure that Brics will be a sign of a 30 year reversal or even the appearance of a Kennedy, but I do know this: the bigger they are the harder they fall. Folks, this is the biggest bubble in the history of the world, and I am positive we will have to take our medicine in some form or other. Remember Joseph Kennedy Sr. and make sure the piano doesn’t fall on your head.
Sincerely Yours,
C Thomas Printer
On this date in history
67 years ago to be exact, the Suez Canal was seized and nationalized by Egyption President Gamal Abdel Nasser.
This week’s thought experiment
What would you do if you were President of the United States and there is a financial crisis. Would you let it fail and risk depression and Hooverville camps of homeless Americans or would you let Congress and the Fed print the money and bail out the rich folks? George W Bush answered this question and specifically said Hoovervilles weren’t happening during his presidency. That also marked the end of the Republicans as a conservative party.
Also born on this date
The founder of the school of analytical psychology Carl Jung.
Resources
One hundred years of price change: the Consumer Price Index and the American inflation experience
Historical US Home Prices: Monthly Median from 1953-2023