Let's get this out of the way right from the start. This is not an article about politics. Nor is it really about policy for that matter. It is instead about the potential for being in the wrong place at the wrong time. And it applies to the upcoming U.S. presidential election in November.
The U.S. economy is an absolute hulking beast, and there is only so much that any president of the United States - Democrat, Republican, Libertarian or Green - can do beyond at the margins to make it better or worse. At the end of the day, the U.S. economy is going to do what it needs to do regardless of what policies are implemented or how much fresh money is printed. As a result, presidents are often the beneficiaries or victims of circumstance due to the time in the secular economic cycle in which they served. And such is the ominous set up for either candidate that prevails in the 2016 election this fall.
So how exactly could Hillary Clinton end up being the next Herbert Hoover? And why isn't Donald Trump (or Gary Johnson or Jill Stein for that matter - hey, it's an unprecedented political year in many respects, so why not?) being singled out in this manner. Don't get me wrong, they could potentially suffer the same unfortunate fate in the end, but similar presidential parallels are lacking.
The following is the set up for the next president as we head into the upcoming election in November.
The U.S. economy has been in recovery from the financial crisis since 2009. Although growth has been sluggish, the economy has been on a fairly sustained growth path. Indeed, we have had some hiccups along the way including periods of weakening in 2011 and 2012, but the path has been steadily higher.
Capital markets, on the other hand, have been an absolute party. A raging boozefest if you will. This includes the U.S. stock market (NYSEARCA:SPY), that has roared back to life with a near tripling from its March 2009 lows more than seven years ago now. This also includes the bond market, where U.S. Treasury yields have fallen from over 4% to below 1.5%. For those less familiar with bonds, prices rise when yields fall, and this is a huge move from a total returns perspective with long-term Treasuries (NYSEARCA:TLT) more than doubling in value since the crisis. Get a lampshade on your head, because investment markets are having a party (except for gold (NYSEARCA:GLD), which strangely did not get the invitation)!
So where have we seen this set up before? It was nearly a century ago back in the 1920s. Back then, we had the end of World War I and the Depression of 1920-21 that was followed by a period of sustained economic expansion. Indeed, the economy was experiencing more robust growth at the time outside of two short recessions in 1923-24 and 1926-27. And the policy backdrop of supply-side economics then was in total contrast to the expanding role of government today. Regardless, the economy was still steadily growing then as it is today.
More significantly, capital markets were absolutely roaring in the 1920s as they are today. Of particular note is the U.S. stock market both then and now. Back then, the stock market got to trading at a "frothy" 15-20 times trailing 12 -month as-reported earnings against Treasury yields at around 3.35% toward its peak. Today, stocks are trading at a lustier 25 times trailing 12-month as-reported earnings against Treasury yields at around 1.50%. In short, these were relentlessly strong times for U.S. stock prices in particular.
So where do we find ourselves today in this parallel world?
Back in the 1920s, it took 97 months from the 1920-21 Depression market bottom in August 1921 until the final peak in September 1929. This, of course, was a mere five months after President Hoover assumed office (Inauguration Day did not move from March to January until 1933 with the passage of the Twentieth Amendment).
Today, we are currently 88 months removed from the 2007-09 financial crisis market bottom in March 2009. Up until just last year, today's market was actually running ahead of the pace of the 1920s market before entering into what the bulls are anticipating is simply an extended period of consolidation before the next move higher.
For after all, what is the final step that would put the cherry on top of this post crisis market rally in rhyming with the history of the 1920s? A euphoric, blow off top. It was around 1927 that the stock market really started getting its giddy up into the bubble that exploded in late 1929. In this regard, today's market appears to be running a bit behind schedule. Maybe it's the fact that the market was running ahead of trend until recently. Maybe it has been the rich valuations. But there's still time for stocks to catch up to the upside, valuation be damned. After all, it's not as though there is a lack of central bank liquidity and excess reserves in the system that couldn't unleash a firestorm of stock price acceleration at any given point in time. For if stocks have defied logic this far, what's a few hundred more S&P points to the upside.
So let's just suppose that today's stock market matched the script at least from a timing perspective first laid out in the 1920s? It would imply the S&P 500 Index peaking nine months from now in May 2017. This, of course, would be just five months after our next president takes office.
So why specifically Hillary Clinton with Herbert Hoover? Back in 1928, Herbert Hoover won the presidency as the third consecutive term of a Republican in office following Warren Harding and Calvin Coolidge before him. And he won the 1928 election decisively as a continuation of the seemingly strong economic policies that had brought us the roaring 1920s.
Turning to today, a victory by Hillary Clinton would also represent the third consecutive term of the same party in the office of the President of the United States, this time being the Democrats. And her election in many ways would represent an endorsement by the American people of a continuation of the economic policies that have brought us to this point during the post-crisis period.
Why not Trump, Johnson or Stein in this same regard? Since the U.S. economy is a beast as stated in the introduction of this article, they would almost certainly suffer the same fate. Because the parallel to Hoover breaks down since Trump would effectively represent a refutation of the status quo while both Johnson and Stein would simply be unprecedented in the U.S. two-party system dating back over the last couple of centuries. Otherwise, the outcome is effectively the same.
This is the one place where I will skim into the politics before returning to the economy and markets. The possible Clinton/Hoover parallel brings an added risk for the Democrats coming out of the 2016 election. For if something even generally similar came to pass under a Clinton administration, it has the potential to be an indictment of 12 years of Democratic economic policy dating back to the start of the Obama administration whether fairly or not. It was this same 12-year indictment that haunted the Republicans in the years that followed Hoover's departure from office and helped resulted in only one Republican president (Eisenhower) during the 36-year period from 1932 to 1968. Couldn't the same fate befall the Republicans if Trump were elected president? Not likely, since Trump has already been branded an outsider by the GOP establishment, thus the blame would likely be heaped on him and him alone whether fairly or not. And the same would hold true of the Libertarians and the Greens if something truly remarkable came to pass (I'm not ruling anything out in 2016 when it comes to politics).
Let's get back to the economy and the markets. Impossible, you might say. The U.S. economy is not going to fall back into a 1930s style Great Depression with the stock market falling by -80% peak to trough. And to this point, I agree, as I do not see this outcome either as a base case or even a remotely high probability outcome for that matter. But even if it is a meaningful economic slowdown with a prolonged bear market that is deep in magnitude and long in duration, it may bring enough pain for the "what have you done for me lately, if not in just the last few hours?" society that we live in today that it could inflict political damage of a comparable scale.
But surely the next president won't be a repeat of the Hoover administration. After all, the next president whether it is Hillary Clinton, Donald Trump, Gary Johnson or Jill Stein will take aggressive fiscal policy action with the support of accommodative central banks to provide the economy much needed relief and offset the pain. This is likely true, but only to an extent.
It should not be expected that policy makers will tighten monetary conditions as they did during the early years of the Great Depression. But then again, what flexibility do they have to loosen policy in a meaningful way going forward, as the U.S. Federal Reserve cupboard is largely bare at this point.
On the fiscal policy side, what is often overlooked about the Hoover administration is that it was engaged in expansionary fiscal policies during the early years of the Great Depression. After all, it's not called the "Roosevelt Dam" but instead the "Hoover Dam". But the magnitude of government spending on fiscal policy was insufficient to fill the hole left behind by collapsing consumer spending, business spending and exports.
Today, while we should reasonably expect a pick-up in fiscal spending in the wake of any meaningful pullback in economic activity in the years ahead, it stands to reason exactly how much we would actually get under any administration. The U.S. national debt is already closing in on $18 trillion, which is already more than 100% of U.S. gross domestic product. Stretching well beyond 100% in this regard will become an increasingly uncomfortable and controversial proposition. Moreover, if U.S. fiscal policy makers have shown reluctance to come together productively and act during the post financial crisis period, it is not necessarily likely that they will join together in unity any time soon to make it happen. It may eventually take place, but it is likely to be late and slow if anything else. And if it is a Republican Congress taking on a Democratic president or vice versa, expect it to be even longer and slower.
Could Hillary Clinton end up as the next Herbert Hoover? Or could Donald Trump, Gary Johnson or Jill Stein suffer the same fate coming out of the next election (I don't know, maybe the next Grover Cleveland (Cleveland #24, not Cleveland #22))? Perhaps. It's certainly not the base case (once again, I will save commenters alarm bells and key strokes in saying I am NOT calling for another Great Depression with this article), but it is a outcome where a meaningful probability could be assigned that at least something of a similar degree could take place given where the economy and markets are today that could upend political fortunes (just ask George H.W. Bush how his "third term" worked out).
As for stocks and bonds, such an outcome would almost certainly be tough on stocks. As for bonds, they would likely benefit despite their already sky-high valuations if history is any guide. Same goes for gold, as long as the government doesn't start dropping the "C" word (no not that one!! The one that starts with "confi" and ends with "scate") in one form or another.
As a result, for those running for the highest office in the land in 2016, they should go into the election with the following though in mind - be careful what you wish for, you may get it.
Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.
Disclosure: I am/we are long TLT, PHYS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.