The 20's: Then and Now

We often talk about history not exactly repeating, but rhyming.  It is hard to escape the parallels between the 2020’s and the 1920’s. 

The 1920’s saw a recovery from the 1918 influenza pandemic that left an estimated 20-50 million people dead around the globe. The stock market soared in the 1920’s as many first-time investors were drawn to the markets seemingly inexhaustible upward trend.  The more expensive stocks became the more money was invested and lots of it was borrowed (leverage).  How is this similar to now? 

According to CNBC, investors have poured more money into the stock market over the past five months than the last 12 years combined.  This is a staggering statistic.  With low interest rates and lots of liquidity provided by the federal reserve money is finding its way into the stock market and other investments (like cryptocurrency and non-fungible tokens (NFT)) while newly minted day traders make stocks like GameStop soar and plunge in epic gyrations. Further, as more people are vaccinated, the natural desire to celebrate the end of a tragic period and pent-up demand for consumer spending finds a release, we may see a surging economy over the next two years. That is the assessment from economists at the U.C.L.A. Anderson School of Management who compare the coming recovery to the economic surge that happened 100 years ago, remembered as the Roaring ’20s.

The 1920s saw major changes in technology: the expansion of electricity, cars, telephones, and telegraph service. The 2020s will see information technology continue to change how we conduct business and live our lives. If there is any silver lining to the pandemic, we now know that education and office work can evolve in new and creative ways, generating new opportunities for entrepreneurship and investment.

As we know, the first Roaring ’20s ended with the stock market crash of 1929 and the Great Depression, which lasted until the United States joined World War II in 1941. The crash represented a failure of the Federal Reserve System, which had been created in 1913 and was still a new organization. The Fed failed to intervene in the highly speculative financial markets of the 1920s, and its monetary policies after the crash did little or nothing to spur recovery.

Today we have the recent memory of the global financial crisis of 2008. While the Fed did not stop that economic downturn, the collapse would have been much worse had Bernanke, the chair of the Federal Reserve at the time, not learned from the collapse of 1929 and the Fed’s mistakes in tightening the money supply in the 1930s. Instead, the Fed’s quantitative easing policy helped to rescue the financial system.

The original Roaring ’20s witnessed bubbles in both stock prices and property prices, with overinvestment and speculation. But we now know that inflation in financial and property markets can be as damaging as inflation in consumer goods, and in response to the global financial crisis of 2008, we have seen a massive re-regulation of the banking sector.

How will this end? Are we doomed to repeat the 1930’s? In addition to the already mentioned differences, we also believe the average American has a strong balance sheet as the debt service burden (the percentage of after-tax income needed to pay debt) is at the lowest levels ever recorded (going back to the early 1980’s).  Low interest rates and strong consumers will most likely drive the economy for quite a while (unless interest rates spike up). 

Further, there are many pockets of exuberance and excess, mostly in areas like cryptocurrency and NFTs.  The lure of these types of investments will only get stronger, until reality sets in. 

As William McChesney Martin Jr., head of the Federal Reserve System in the 1950s and 1960s, once said, the task of good policymaking is to take away the punch bowl just as the party is heating up. This may be the challenge for the Biden economic team as we head into another Roaring ’20s: to know when and how to take away the punch bowl—certainly not too soon, but hopefully not too late.

Our goal is to stay balanced and diversified and to avoid speculation as much as we can.  When speculative bubbles pop there is always a lot of pain and our goal is to protect our clients as much as we can.

The Bond&Devick Team

Source: America Magazine. Paul D. McNelis, S.J., professor of finance at the Gabelli School of Business at Fordham University in New York City.