I could be wrong, but let me point out three things that I think about when I hear Great Depression analogies being made to the current crisis.
The first thing I think about is that the financial markets of the 1930’s were prehistoric. Yes, the Federal Reserve was in existence, but it was nowhere near as powerful and it hadn’t had any institutional memory (or history) to draw on. Its basic structure was patterned on the still-nascent central banks of various European countries thanks to the listening tour Senator Nelson Aldrich and others had made across the Continent. Fun fact: the US Senators’ delegation took one of their most critical meetings with German monetary authorities at the Adlon Hotel in Berlin, where Michael Jackson would infamously hang his baby off the balcony for paparazzi almost 100 years later.
Anyway, this time we have an experienced Fed and the Fed knows how powerful it can be. There was a rippling global financial crisis in the midst of the 1990’s bull market and the Fed shut it down in approximately ten seconds. The lessons of Bernanke’s actions during ’07-’09 have taken on a practically Talmudic quality within the institution, from what I’m told. And the Fed has already jumped in with both feet – as Wells Fargo strategist Christopher Harvey put it in Barron’s this weekend, “The Fed took the kitchen sink and threw it at the market. Then it took another kitchen sink and threw it at the market.”
The second thing I would point out is that the cause of the Crash of 1929 is, to this day, still unknown. Yeah, you can chalk it up to valuations and excesses, but that’s a copout. The reality is that there is nothing special that had happened in the days and weeks leading up to the Great Crash, it just sort of got rolling and then kept going – feeding on itself as sentiment turned and the desire to sell infected everyone. But there was no spark. I wrote the opening chapter to my second book on this topic. The closest thing that could be pointed to, years after the fact, was a Roger Babson speech, delivered hundreds of miles away at his New England College, about the speculative nature of the Roaring 20’s. The problem with ascribing the provenance of the market’s crash to this speech is that he had been delivering it, almost word for word, over a period of months. So, all of a sudden people reacted? I don’t think so.
So, in 1929, there was no reason for the onslaught of bearishness. In 2020, there are toddlers in strollers who could tell you why we’re selling off. Everyone knows why we’re down. Everyone knows that it’s temporary.
Okay, the last important difference, and we shall see if it is of any help at all, is the way we buy stocks and support market valuations. In the United States of America of 2020, as opposed to 1929, there are over 100 million participants in 401(k) plans (according the American Benefits Council), and 80 million of them are now actively contributing. That’s $5.7 trillion worth of retirement plan assets held by individuals through 401(k) plans – the majority of whom will not throw in the towel on investing for their future. This leaves out additional investors currently using IRAs, Roth IRAs, SEPs and other tax-advantaged vehicles to make automated contributions. None of this existed in the 1930’s. There were pension funds and rich people speculating in stocks, but nothing even close to the way we’ve oriented our entire economy around the stock market today.
And so while I am aware that one of the principal supports for the market recently has been corporate buybacks, I would be remiss in not mentioning that automated investment contributions have been another. I presented this truth for the first time six years ago in “The Relentless Bid, Explained.” It is true that millions will lose employment during this recession because of social distancing, but it is also true that tens of millions will not. And they will continue to buy stocks every two weeks, which is forced buying at a low boil. In the 30’s, stocks fell 90% from their peak. We have engineered the economy around stocks and stock options and life cycle funds and opt-out corporate retirement plans and such to the degree that a 90% fall would be wholly improbable if not outright impossible.
So, to recap, in 2020 we have three things that they did not have back in the 1930’s: An activist Fed with serious power, a lack of explanation for the stock market plunge and a gigantic contingent of forced buyers via retirement accounts. Will these differences represent enough to forestall further losses in the Dow Jones Industrial Average? Perhaps not. Will they prevent another Great Depression of a comparable scale and scope of eight decades ago? I think the answer is yes, it will.
Most economists credit the onset of WWII as one of the primary drivers of our escape from the Depression of the 1930’s. The bad news is that we are currently at war again today. The good news is that both monetary and fiscal authorities have reacted with wartime levels of stimulus already.
I still believe we need to see the disease show signs of peaking before we can start seriously discussing bottoms or recoveries. We aren’t there yet. But that’s not the same as saying we require a Depression 2.0 to live through on our way to the other side.