“Katie and Jim DiGangi, who run a dairy farm in Wisconsin, have spent the last several weeks dumping as much as 20,000 gallons of milk a day. In California, Jack Vessey, a lettuce and leafy green farmer, has destroyed 350 acres of his crop by ploughing his tractor through unharvested fields.
“The two farms are almost 2,000 miles apart but both have become examples of the damage done by the coronavirus outbreak to the complex supply chains that bring food from farms to tables in the US.
“As restaurants, hotels and schools have closed, farmers and ranchers who supplied them have lost customers. But redirecting their production to grocery stores has proved difficult because of the differing demands of commercial food operations and people cooking in their kitchens.
“The result has been scenes out of the Great Depression: farmers destroying their products as Americans line up by the thousands outside food banks. While officials maintain there is no immediate threat of food shortages, no one is sure how long it will take to re-engineer supply chains so more food can reach stores and farmers can earn their keep.
“We haven’t seen anything like this in our lifetime,” said Mr DiGangi, a seventh-generation dairy farmer. “It’s obviously uncharted territory for everyone.”
- ‘US farmers destroy produce as supply chain hits problems’, by Aime Williams, The Financial Times, 23rd April 2020.
Get your Free
financial review
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. The tragedy of our time is that we have none of those three attributes at large in our society today. Whether under Kamala or Starmer, the Big State threatens to crowd out and squash the genuinely productive private sector.
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:
- Prevent or delay liquidation. Continue lending money to shaky businesses that under a more normal economic regime would fail. Call on the banks to lend further.
- Inflate. The process of further inflation blocks the necessary fall in prices. This, in turn, delays the adjustment process and prolongs the depression. An expansion of credit creates even more ‘malinvestments’ which will need to be liquidated at some point in the future. A policy of easy money prevents the market from doing what it wants to do, namely raise the cost of capital.
- Keep wage rates up. Maintaining wage rates at artificially high levels ensures mass unemployment. The economy, and the unemployed, would be better off by scrapping minimum wage legislation altogether, allowing businesses to hire with impunity. In a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates are actually higher than they were before the depression began. Given falling business demand, the unemployment problem is aggravated.
- Keep prices up. Maintaining prices above their free market levels creates surpluses that cannot be sold. Price controls prevent any return to prosperity.
- Stimulate consumption and discourage saving. More saving and less consumption would aid recovery. More consumption and less saving aggravates the shortage of saved capital even further. Any increase of taxes and government spending discourages saving and investment, but stimulates consumption, since government spending is all consumption. Any increase in the relative size of government in the economy heightens the rate of consumption and prolongs the depression.
- Subsidize unemployment..
(Covering similar ground, we recommend one of the best financial histories you will 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 international governmental response to the confected Covid, climate change and net zero ‘crises’. We’ve had our 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). The list goes on..
Was this intervention successful ? Will it be ? History, we suggest, will not be kind to the modern neo-Keynesians. Again, 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 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. Governments don’t win wars. People and companies do.
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.
The ‘recovery’ since 2020 has been anything but smooth. The risks to stock markets remain underappreciated. Bear in mind what the billionaire entrepreneur Chamath Palihapitiya said when interviewed by Anthony Pompliano at the height of the ‘pandemic’:
“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..”
We have 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 horribly misguided government policies – against health, energy and our weather.
Politicians clearly have plenty of tough choices ahead of them in a world groaning under the now unpayable burden of sovereign debt. One might also suggest that a comparable burden is the weight of expectations carried by naïve and economically neophyte voters.
Investors also have tough choices. But we think the solutions are clear. Given the extent of the debt load and our views of the likely inflationary outlook, we don’t consider it prudent to support any western state by buying its debt. Avoid overmuch counterparty / inflation / government sequestration risk by keeping cash balances modest. It is still not too late to create what may yet become generational wealth by participating in what still remains a largely ‘stealth’ rally by the monetary metals, gold and silver. As the Irish playwright George Bernard Shaw once remarked,
“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”
Or as the former Conservative MEP Daniel Hannan tweeted more recently,
“[Then Labour Chancellor] Gordon Brown sold half the UK gold reserves for $275 an ounce.
Today, 25 years later, gold has reached $2650 an ounce. What was that about a black hole ?”
………….
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:
Get your Free
financial review
…………
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: info@pricevaluepartners.com.
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.
“Katie and Jim DiGangi, who run a dairy farm in Wisconsin, have spent the last several weeks dumping as much as 20,000 gallons of milk a day. In California, Jack Vessey, a lettuce and leafy green farmer, has destroyed 350 acres of his crop by ploughing his tractor through unharvested fields.
“The two farms are almost 2,000 miles apart but both have become examples of the damage done by the coronavirus outbreak to the complex supply chains that bring food from farms to tables in the US.
“As restaurants, hotels and schools have closed, farmers and ranchers who supplied them have lost customers. But redirecting their production to grocery stores has proved difficult because of the differing demands of commercial food operations and people cooking in their kitchens.
“The result has been scenes out of the Great Depression: farmers destroying their products as Americans line up by the thousands outside food banks. While officials maintain there is no immediate threat of food shortages, no one is sure how long it will take to re-engineer supply chains so more food can reach stores and farmers can earn their keep.
“We haven’t seen anything like this in our lifetime,” said Mr DiGangi, a seventh-generation dairy farmer. “It’s obviously uncharted territory for everyone.”
Get your Free
financial review
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. The tragedy of our time is that we have none of those three attributes at large in our society today. Whether under Kamala or Starmer, the Big State threatens to crowd out and squash the genuinely productive private sector.
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 you will 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 international governmental response to the confected Covid, climate change and net zero ‘crises’. We’ve had our 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). The list goes on..
Was this intervention successful ? Will it be ? History, we suggest, will not be kind to the modern neo-Keynesians. Again, 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 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. Governments don’t win wars. People and companies do.
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.
The ‘recovery’ since 2020 has been anything but smooth. The risks to stock markets remain underappreciated. Bear in mind what the billionaire entrepreneur Chamath Palihapitiya said when interviewed by Anthony Pompliano at the height of the ‘pandemic’:
“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..”
We have 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 horribly misguided government policies – against health, energy and our weather.
Politicians clearly have plenty of tough choices ahead of them in a world groaning under the now unpayable burden of sovereign debt. One might also suggest that a comparable burden is the weight of expectations carried by naïve and economically neophyte voters.
Investors also have tough choices. But we think the solutions are clear. Given the extent of the debt load and our views of the likely inflationary outlook, we don’t consider it prudent to support any western state by buying its debt. Avoid overmuch counterparty / inflation / government sequestration risk by keeping cash balances modest. It is still not too late to create what may yet become generational wealth by participating in what still remains a largely ‘stealth’ rally by the monetary metals, gold and silver. As the Irish playwright George Bernard Shaw once remarked,
“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”
Or as the former Conservative MEP Daniel Hannan tweeted more recently,
“[Then Labour Chancellor] Gordon Brown sold half the UK gold reserves for $275 an ounce.
Today, 25 years later, gold has reached $2650 an ounce. What was that about a black hole ?”
………….
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:
Get your Free
financial review
…………
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: info@pricevaluepartners.com.
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.
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