December 15, 2018

The World Turned Upside Down

Our generation’s Great Bull Market began on August 12, 1982 and lasted until January 14, 2000. In eighteen years, the Dow Jones Industrial Average moved from 776.92 to 11,722.98. In this remarkable age, we saw divided government, deregulation, tax cuts and the peace dividend offered by the fall of Communism. As the trading lanes reopened, trillions in capital and millions of workers entered the labor pool, joining the global dynamic. The impediments to growth caused by World War I, the Great Depression, World War II and the Cold War were beginning to fade, ushering in a new age of peace and prosperity. Falling political barriers, increased technology and increased trade intensified resource mobility and decreasing prices; benefiting producers and consumers alike.

The policies of Ronald Reagan and Bill Clinton had a profound economic impact. With some interruptions, the dollar strengthened, imports and exports increased, as did the standard of living. Both Presidents successfully managed to navigate hostile congressional waters, enduring the difficult task governing without control of the house or senate during their full terms of office.

Ronald Reagan boldly cut taxes while lifting Jimmy Carter’s wage and price controls. Reagan reached out to House Leader Tip O’Neill to shore up social security. A decade later, Bill Clinton turned his back on labor unions to pass NAFTA and GATT, with republican support. With the assistance of Bob Dole and Newt Gingrich, the President managed to have a surplus in the budget at the end of his second term. In the summer of 2000, Salomon Smith Barney offered to purchase or exchange $94 billion of U.S. Treasuries. This remains a high point in good stewardship with the nation’s debt. Both parties deserved credit.

In a very short time, there has been a “sea change” in our political landscape. The lessons of cooperation have been lost. There appears to be little sense of community in congress, as many members sleep in their offices and are only in Washington four days per week. If you rarely see your colleagues, there is little chance of understanding them. In this unfortunate backdrop, there is now an overreliance on unenlightened government solutions to solve our problems.

What has also emerged is a reliance on centralized planning as detached bureaucrats, with little private sector experience, “pull the levers” of fiscal and monetary policy, to no avail. The Bush Administration began with a stimulus of $150 billion. The Obama Administration added its $787 billion stimulus. TARP was expanded to include the auto companies and cash for clunkers was added to help lagging domestic sales, but spurred foreign sales as well. Now a jobs program is sold to the public as another magic bullet, after the short term effects of the prior programs have disappeared.

From a monetary standpoint, the Federal Reserve appears content on further weakening the currency. Like Don Quixote, the Fed chases after unemployment windmills, failing to realize that the recovery depends on small business, not the monetizing of the national debt.

Many inflation doves at the Federal Reserve, led by Chicago Fed President Charles Evans, believe that the Central Bank should stoke the fires of inflation to create jobs in the private sector. The argument is based on a theory known as the Phillips Curve. The Phillips Curve purports that there is an inverse relationship between inflation and unemployment; the higher inflation, the lower the unemployment. When taken outside of the classroom, history proves that there is more of a direct relationship. As inflation increases unemployment rises, as business must spend more to borrow capital, resulting in fewer jobs being created. The creation of jobs, at the most basic level, is a result of incentive and innovation derived by the creativity of the human spirit; not by the artificial creation of credit or the physical printing of fiat currency.

If verbiage is not enough, look at data. The S&P 500 closed on October 3, 2008 at 1,099.23. After all of the stimulus programs, cash for clunkers, payroll tax holidays, TARP, QE1, QE2 and Operation Twist, the S&P 500 closed on October 3, 2011 at 1,099.23. A review of history reveals a similar situation. From 1933 to 1938, Roosevelt embarked on an ambitious intervention to end The Great Depression. After increasing the national debt 60%, all of the New Deal programs and tax increases, the S&P 500 dropped 60% from March 6, 1937 to April 29, 1942.

In October 1781, as the British stacked arms at Yorktown, Cornwallis’ musicians played “The World Turned Upside Down.”  That tune adequately describes the current age in which we find ourselves.  As we struggle though this unnecessary and self inflicted economic malaise, our hope is that policy makers will turn to the enlightened ideas the 1980’s and 1990’s to save us from the 1970’s. The promise of a better future lies with the wisdom of the past.

David R. Breuhan is the Vice President of Gregory J. Schwartz & Co. in Bloomfield Hills, Michigan. He is the author of Spread The Wealth: More Haves Fewer Have-Nots, by Hamilton Books.

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Written by
David Breuhan

DAVID BREUHAN is Vice President and Portfolio Manager with Gregory J. Schwartz & Co. in Bloomfield Hills. For greater than two decades, he has managed retirement plans and individual accounts for high net worth clients. David received his Bachelor of Science from the United States Military Academy at West Point and a Master of Science from Walsh College.

Following completion of Airborne and Ranger training, he led soldiers in the United States Army. He served as Cavalry Troop Commander in Operation Desert Storm. David taught graduate school at Walsh College. He has published in Barron’s, The Wall Street Journal, The New York Times and The Detroit News.

David has lectured at West Point, Georgetown University and Hillsdale College. He has appeared on Neil Cavuto, National Public Radio and Bloomberg Radio. His book is entitled, Spread The Wealth: More Haves Fewer Have-Nots.

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Written by David Breuhan