It’s starting to feel a little bit like June 1930. And that’s worrying.

In that month President Herbert Hoover, despite deep misgivings, signed the Tariff Act of 1930, known as the Smoot-Hawley Tariff after its two authors, into law. By raising U.S. tariffs, the act set in motion a competitive trade war that devastated the global economy and helped create the Great Depression.

Watching the unilateral decision by the Japanese to intervene in the currency markets to force down the price of the yen in order to protect Japanese exports, I’ve started to worry about a replay of that history. This time the starring role would go to competitive, beggar-your-neighbor currency interventions and not to any tariff.

But the effect could be the same: Each of the world’s governments acting to protect the interests of its own economy would kill off growth in the global economy.

It’s still just a worry mind you. And we won’t head down this path to lower economic growth unless Japan gives signs that it’s not content with a relatively small drop in the yen and Europe and China star to retaliate to protect their own exports. But the consequences would be so disastrous that I think it’s worth understanding how this yen intervention could trigger Smoot-Hawley II. Read more

We have nothing to fear but a replay of 1937 itself

The specter of 1937 hangs over the economy and the stock market.

That’s the year that over confidence that the Roosevelt administration had whipped the Great Depression and that it was time to balance the federal budget led to another deep recession that wiped out three years of growth and sent the economy reeling back to the Depression depths of 1934.

The Dow Jones Industrial Average, which had climbed 127% from a low of 85.51 on July 26, 1934 to a high of 194 on March 10, 1937,  would fall by 49% from that peak by March 31, 1938. And since it only takes a 50% loss to wipe out a 100% gain, in March 1938 the Dow was at 98.95 just about the 85.51 that it had been in July 1934.

Thanks to another collapse in 1942 stocks wouldn’t match that 1937 peak until 1945.

A few days ago I wrote a post “Most of the time rallies like this have been followed by a gain over the next 12 months”  (http://jubakpicks.com/2009/09/14/most-of-the-time-rallies-like-this-have-been-followed-by-a-gain-over-the-next-12-months/) arguing that the odds were on an investor’s side since a year after almost all big rallies–like the one going on now—the stock market was still higher in a year.

Almost. The one big exception, the one that delivered a loss big enough to wipe out portfolios, came in 1937.

It’s that “almost” that constantly gives me pause as I look, not so much at the stock market, but at the economy and at what passes for our national discussion of economic policy these days.

The comforting thing about looking back at that economic and investment disaster in 1937 is that we did it to ourselves. Bad policy decisions, not accident or fate, led us over the cliff in that year. So all we have to do to avoid a repeat of the results is to avoid the policy mistakes right?

Disturbingly, there are plenty of signs that we might well be prepared to do it to ourselves all over again. Read more