Back to the Future [Part II]

NOTE TO READER: This is the second part of a series drawing comparisons between the current stock market and markets from years past. The context being used for this narrative is a bit of fantasy – a visit and conversation with Ascall McFiggerty, a fascinating bright-eyed, gregarious older man, with thick, slightly curly gray hair and a well-trimmed, matching beard.  Ascall was named after the final Norse king of Dublin, and he has made himself exceptional by (besides being Irish) perfecting a method of time travel through an international network of Irish pubs.  (See Part I for an introduction to Ascall and his first take on the markets:  Just remember that Ascall’s time travel technology is fantasy, but the history he shares is genuine. I hope it helps enrich your market perspective.

After the market close on Friday, April 5, I headed to Durty Nellie’s Pub (just north of the Chicago Metra Northwest Line station) to enjoy a pint and reflect on a market that saw the S&P 500 Index start at 1559.98, tanked to 1539.50 and recovered by the close to 1553.28 – quite a ride!

Enjoying my brown bread (and honey butter) with my pint, I thought about my conversation at McGonigal’s with Ascall McFiggerty and wondered what his insights might be regarding the morning’s abysmal Nonfarm Payroll Report – showing a net increase of 88,000 workers, instead of the much larger number the market had expected (ranging between 170,000-210,000). Making matters much worse, the total number of adults no longer in the labor force soared by a massive 663,000 (to a new record of 90 million Americans). This was the biggest monthly increase of folks dropping out of the labor force since January 2012, when the BLS did its census recast of U.S. labor numbers. It was a labor report that even the most silver-tongued politician had difficulty spinning into good news.

Suddenly, my attention was drawn over my left shoulder by a sudden, startling sound, but no visible cause was apparent.  As I turned back around, I was quite taken aback to see none other than Ascall McFiggerty, sitting right there across from me.

“Hello, Tom. I just couldn’t resist the chance to come and chew the fat with you again!”

Ascall!! You are looking especially chipper today. I was wondering if you’d drop by. Great to see you!”

“So what’s on your mind, my lad?”

“I wondered how you reacted this morning to the Nonfarm Payroll numbers.”

“Hmmm, I thought you might ask about that, so I came prepared! I’ll bet you noticed that the “total labor force” (to oversimplify, this rate quantifies the percent of adults who are employed, combined with all those still looking for work) tumbled.  It is now at an eye-catching level (63.3%) – bringing the rate down to the lowest level since 1979.  For better or worse, most citizens think of the U.S. employment rate as the “headline” number, now sitting at 7.6%. The fallacy there is that this widely reported number actually hides the hundreds of thousands of unemployed folks who, since 2008, have just given up looking for work.  A much more telling gauge of “real” unemployment would be subtracting the total labor force number from 100% (100-63.3):  36.7%!

Ascall paused to ensure that I was still tracking him, then continued: “That is a number that calls to mind the Great Depression, so I travelled back to 1937 to get a fresh take on politics, economics, and the stock market during those years. Keep in mind that 1937 was the year following a key presidential re-election year – as is this year”

I interrupted Ascall to offer a thought: “I’ve read that it isn’t difficult to find parallels between 1937 and today. If I recall correctly, unemployment had fallen steadily between 1933 and the 1936 election; it settled at 15% after having been as high as 25%.  However, during 1937, that rate reversed its encouraging downward trend and started heading back upward toward 20%.”

The graph to the left shows a reversal during 1937 of a multi-year improvement in employment. Source:

With renewed energy, Ascall replied: “Not only that, Tom, it is vital to know that during 1937, trends in economic production and the price action of the Dow were literally scary.  Industrial production collapsed by 34.5%; and, after trending upward from mid-1932 through the 1936 election, the stock market sharply reversed direction during 1937. It fell 50% within 15 months.  Things fell apart so badly following the 1936 election that 1937 is is often referred to as “a depression within the Depression.”

The sculpture to the left, exhibited at the FDR Museum, depicts the depressing struggles of the countless unemployed, regularly forced to stand in line.                                                     

Needless to say, I was impressed: “Thanks, Ascall, that opens up a whole new perspective on the economy and the market!”

With a glow of excitement, Ascall quickly replied: “Tom, that is just the beginning of the ties between today and 1937.  Do you want to learn more?”

“Absolutely, Ascall!  Tell me more.”

“OK then, here we go! There are at least four broad categories of similarities between these two eras:

I) FEDERAL SPENDING moved to unprecedented levels:

Franklin D. Roosevelt (FDR) was elected President in 1932, with the country mired in the worst economic crisis the nation had ever suffered. If the country needed a fearless leader willing to take it into totally new directions, then FDR was surely the right choice. His determination to shake things up knew no bounds.

“First, FDR opened up the federal checkbook and started driving up spending.

The chart to the left compares the Dow Index trend between 1937 and 1943 with the same Index between 2008 and 2011.  Source:

Ascall paused for a moment and then said: “Tom, it is vital that you know that, until FDR, the federal government never spent more than the aggregate amount of expenditures in all of the nation’s states and cities (except during World War I)!”

“Tell me you are kidding, Ascall! That is amazing!

“Just remember, Tom, that federal income tax did not exist (excluding a short-term tax during the Civil War) until the spring of 1913!

“Man, was that an unlucky year!” I said with a smile.

Ascall continued: “As I said, FDR started ramping up spending – moving it so high that, by 1936, it finally exceeded the aggregate spending by all states and local communities. Not surprisingly, as FDR did this, much of the nation (still treasuring the tradition of strong state and local governments) struggled with FDR’s way of doing things. As a consequence, FDR was the target of much criticism many lampoons, including this depiction of FDR as the Mad Hatter (from Alice in Wonderland), with the Democratic Party Chair (and Postmaster General) as the March Hare, and Congress as the Dormouse (note that the Dormouse was sound asleep).”

“Hmmm,” I said. “Things haven’t change much, eh?”

Ascall went on: “According to the U.S. Office of Management and Budget (OMB), during FDR’s presidency, federal spending averaged 19.35 % of U.S. GDP. More revealing, if one excludes the war years (FDR ramped up spending to 25% of GDP in the year following Pearl Harbor), FDR’s average spending relative to GDP (as calculated by the OMB) was about 9.5% — and never exceeded 12%!”

“In the years following FDR’s presidency, federal spending hovered around 19%.  That ratio became so reliable that economists considered it something of an axiom for decades.

“Moving into our current era, let’s compare spending since 2008 with that of FDR. Within the first full budget year of Barack Obama, during the depths of the recession caused by the mortgage crisis, federal spending exceeded 25% of GDP, setting a new record.  During the following year, spending came in at 24.1% of GDP, and within the 2012 Election Year, spending increased to 24.3% of GDP. So, through those years, the president’s own OMB has estimated that Obama’s spending has averaged 24.13% of GDP, roughly 25% higher than the ratio spent by FDR!

The graph to the left shows the steepening curve of federal spending since 1940. In particular, note the straight upwards trajectory of spending around 2010! Source: St. Louis Federal Reserve Research (FRED).


After showing me his graph of recent federal spending, Ascall seemed anxious to push ahead:

“The second similar trend between 1937 and 2013 is a supposed (but failed) attempt to balance the federal budget.  Following the 1936 election, it sounded as though FDR had somehow “gotten religion” with regard to the need for fiscal discipline. He pushed for some budget-cutting, but became frustrated by a Congress that was obviously not on the same page.  In fact, during 1937 journalist Anne O’Hare McCormick described FDR as resembling ‘the Dutch householder who carefully totes up his accounts every month and who is really annoyed now that he is bent on balancing the budget, that Congress can’t stop spending.’

“In a similar vein, following President Obama’s November 2012 election win, he started speechifying about the priority he was putting on a more balanced budget.  ‘I’m ready and willing to make big commitments to make sure that we’re locking in the kind of deficit reductions that stabilize our deficit, start bringing it down, start bringing down our debt. I’m confident we can do it.’

“As I reviewed speech transcripts from earlier years, I stumbled on this analogous Obama text from February of 2010, spoken as he signed a bill authorizing an additional $1.9 trillion in federal borrowing: ‘After a decade of profligacy, the American people are tired of politicians who talk the talk but don’t walk the walk when it comes to fiscal responsibility. It’s easy to get up in front of the cameras and rant against exploding deficits. What’s hard is actually getting deficits under control. But that’s what we must do. Like families across the country, we have to take responsibility for every dollar we spend.’”

Quite worked up by now, I blurted out: “Wait a minute, Ascall, you must have mixed up your attributions. That sure doesn’t sound like the Obama we are hearing from now. Based on what he has been saying lately, he doesn’t really want to cut spending – just increase taxes.”

“Calm down, Tom. I didn’t mix anything up. You are way too naïve if you expect politicians to be transparent and consistent. They never have been; they never will be.”

After a pause and a deep breath, Ascall asked: “May I move on to my third point now?”

“Sure, sir, I apologize.  I should know better by now. Let’s move ahead… I am all ears.”

“The third trend that links these two eras is dramatic:


FDR was willing and anxious to challenge anyone who stood in his way. An often quoted sentiment expressed by him regarding his own legacy was this one: ‘I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.’

“Few presidents managed to be as outspoken and controversial as FDR, just as you might guess after reading those words of his.”

I jumped in: “You bet’cha, Ascall. My mother was in her teens during the Depression. She always told me that people in those days either absolutely loved FDR, or utterly detested him. There were few folks without a strong opinion. I also remember mom saying that the folks who were wealthy generally resented FDR because they felt he had turned against them in many ways, including dramatically raising their taxes!  And didn’t he rather boldly try to “pack” the Supreme Court with “progressives”, so the Court would no longer get in the way of his transformation of the United States?”

Ascall replied: “You are correct, Tom.  FDR really shook things up, to a degree uncommon among presidents.

“Today it seems to me that President Obama is very much intent upon building on FDR’s legacy of shaking things up, including a particular focus on coaxing as much income tax from the wealthiest citizens as is politically conceivable.  In fact, during his November 14th press conference (following his election win) Obama’s words sounded as though he might have been engaging in some FDR Channeling: ‘What I’m concerned about is not finding ourselves in a situation where the wealthy aren’t paying more, or aren’t paying as much as they should.’”

During Ascall’s pause for a drink, I observed: “No wonder that business leaders and the stock market took a bad turn during 1937.  FDR’s dramatic initiatives and costly government created a lot of uncertainty among those who ran U.S. companies, as well as within the financial markets. In fact, those are the very same sort of concerns that perplexed the markets back in late 2012 – ‘the Fiscal Cliff’, the costs of health care, ‘Sequestration’, etc. It is amazing that this time around (at least so far) the markets have shrugged off those concerns!”

Revealing a Chesire smile, mixed with a twinkling eye, Ascall said:  “Ah, lad… that may be true. But I suggest that you never forget the caveat you added: ‘at least so far’!!”

“So, Ascall, what is the fourth theme linking the present with 1937?,” I asked him.

Ascall took another long sip, then continued: “FDR may have introduced more big, bold, ambitious programs than any other U.S. President, so the fourth trend that unites these eras is this:


During his first term, FDR created the Social Security Program (note that the average life span in the 1930’s was 62.5 years old, which is why 65 was the specified retirement age); the Wagner Act (labor relations reform), and the Banking Act of 1935 (giving the Federal Reserve a new tool – quickly ordering changes within the bank reserve requirements… providing the Fed with much more powerful control over U.S. money supply).

Social Security was created before the election, but the funding of benefits was postponed until after the election.  Therefore, 1937 was the first year for which funds had to be paid by workers and employers through FICA taxes!  Of course, that high additional payroll tax drew a great deal of money out of the economy (sound familiar?). In addition, labor leader John L. Lewis initiated a campaign to ignite labor strikes as a way to force wage increases (thereby putting even more pressure on a fragile economy).  Making matters worse, in an ironic twist of logic, the Fed doubled bank reserve requirements during 1936 and 1937, effectively choking off the availability of cash for the economy. The combined impact of all of these developments was dramatic dramatically negative!

Not being able to hold back, I piped up by saying: “That does sound amazingly similar to the past few years leading up to the present.  Barack Obama never made it a secret that he was utterly determined to literally transform health care, an initiative that became his prime and “signature” government initiative. Despite contentious debates (I kept waiting to watch those public debates on C-SPAN, as promised) the 2,000 page health reform bill was passed in 2010, and in a crafty demonstration of political legerdemain, enforcement of its provisions was postponed until after the 2012 election. As in 1937, a huge, unknown, nationwide benefit plan therefore became a long-term focus of anxiety and uncertainty within business and Wall Street circles – with persistent questions regarding whether a fragile economy can handle (absorb) the unknown changes and huge costs that are coming down the road. I’d say the only thing saving us (thus far) from a market as downward sloping as the Dow was in 1937 is the fact that Ben Bernanke ‘learned’ from the Depression that the last thing the Fed can afford to do during our extended recession is raise bank reserve requirements and ‘choke’ the economy, as occurred in 1937!

While I had been talking, Ascall had been steadily sipping, and finishing, his pint. When he heard me ask my question, he replied by saying: “That is the question, Tom!  That is the question of our day, and it has (in the past) been the question asked by other successful societies facing a period of transition following a crisis.

“This will not definitively answer your question, but it might leave you with something to think about. While I was back in the 1930’s, I visited with the chief economist at Chase National Bank (now J.P. Morgan Chase), Benjamin Anderson. I reviewed what was (then) his latest