Motley Fool Money - Easy Money, Government Stimulus, Speculative Boom: Lessons from The Great Depression

Episode Date: June 14, 2022

Most eyes are on the Federal Reserve in advance of (we assume) another interest rate hike. (0:25) Bill Mann discusses: - What he's watching in the market - Where he's been putting his money to work and which stocks he's been buying - His relative disinterest in IPOs as an event (13:23) Morgan Housel joins Alison Southwick and Robert Brokamp to talk about the speculative boom that caused the Great Depression, and how those lessons apply for investors today. Stocks discussed: BRK.A, BRK.B, MA, GOOG, GOOGL, DPZ Host: Chris Hill Guests: Bill Mann, Alison Southwick, Robert Brokamp, Morgan Housel Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl   Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. Today, we've got Morgan Housel doing what he does best, looking at financial history and drawing lessons for today. Motley Fool Money starts now. I'm Chris Hill, and I'm joined by Motley Fool

Senior Analyst Bill Mann. Thanks for being here. Hey, Chris, how are you? I'd be doing better if the market was going higher, but in that sense, I have a lot of company, don't I? We would all be doing a little bit better if the market was going higher. Yes, exactly. I mean, I guess the good news is that you're not necessarily wondering what you have done wrong. No. No, that is true. So that is some solace. I wanted to get your thoughts on just sort of stepping back.

I mean, sure, we could talk about Oracle's earnings if you really want to, but I'm sort of more interested in Bill Mann's big picture view of where things are right now. Because something Jason and I had talked about yesterday was just the level of pessimism in the market right now. And I don't want to say it's unfounded because when you have smart people like Jamie Diamond coming out and saying, I think there's an economic hurricane coming. And the only question is how bad it's going to be. And by the way, we're going to be doing X, Y, and Z with our balance sheet. We're going to be more conservative. We're going to, like, so it's, if there's a lot of pessimism out there, at least it's grounded

in something. Let's stick with pessimism for just one second. Do you look at the commentary? Do you look at sort of the reaction and some of the comments from maybe not Jamie Diamond, but sort of noted investors? And do you think it's in line with your thinking? Because there are some people out there saying, hey, look. This is bad, and I think it's going to get a lot worse.

It's amazing to me that you bring up Jamie Diamond in his comments right out of the gate because Jamie Diamond joined a CEO roundtable. He's told the story a number of times in the early teens. And one of the first things that he did, you know, the CEO Roundtable, they all get together and they talk about what's this next year going to look like. and Jamie Diamond went through the process, and you would think that CEOs know more than anybody else. He just had some researchers go back and say, okay, they have done this for every single year. Let's go back and see how accurate they were in their prognostications.

And Chris, you would not be surprised to hear that they were not very accurate. They were not very good at prognosticating. The people who you would think, and they're in a semi-private room, right? They're not talking to the public. They're talking to each other. They're not very good about prognosticating. Now, I look at what's happening now. And yes, Jamie Diamond came out and he said, I see a hurricane coming.

He is at a structurally important bank of financial institution. So, yes, he sees the sheet music that's being handed to him. But if we were better at prognosticating, do you think that the S&P 500 would have only been allocated 2% to energy companies in 2021. If we were good at seeing what was coming, we're not. We are not good at seeing what's coming. Are you doing, sorry to get personal, but are you doing anything with your cash right now? Something Jason and I talked about yesterday was putting money to work slowly. I'll just say from in my own financial life earlier this year, when the market drops,

what I thought was a decent amount. I looked at some of the really stable, sustainably profitable businesses that their shares looked like they were on sale to me. And in some cases, they were. Companies like Microsoft and Johnson and Johnson and Apple and that sort of thing. And I thought, okay, I'm going to buy some more shares of those. To a company, they've basically fallen further. So I'm sort of, I don't know, I'm one of the of those people is like, I think I'm holding on to my cash for right now. What are you doing with your money? I actually have been investing. One thing that's really important to recognize is that the price you pay is a form of risk, right? The higher the price of any company,

if you can buy it at $10 a share versus $20 a share, it is essentially the same company. So if you buy something at a higher price, you are essentially, even if it doesn't feel like it at the moment, taking on more risk. So the inverse of that is now. You have companies that are down 60, 70, 80 percent. And some of them are dramatically the same companies. Some of these companies should have never been priced as high as they were and will probably never come back. But what's happening right now, you know, somebody who lives in an emerging market would

be very comfortable with what's happening right now because everything's getting sold. Every asset class, bonds are being sold, sovereigns are being sold, commodities are being sold, stocks are being sold. That is something that people in developing markets are very, they're not happy about, but they're comfortable with. That type of indiscriminate selling suggests to me that we should, in fact, be looking at the other side of the risk equation and buying. And I think it's really easy for people to say, well, this stock's down 90%, so therefore it must be cheap. Some of these companies are never coming back. But I have a hard time believing that, Berkshire Hathaway, which I had bought some a few weeks ago, is really that deeply impacted.

Or MasterCard, or Google, or Domino's Pizza. These are companies that are incredible at making money. And over the cycle and, you know, newsflash, we have not cured the economic cycle. Over the cycle, these companies will continue to make a lot of money. And the last I checked, that's the point of investing. It's Tuesday morning, as you and I are having this conversation, and I think it's reasonable to say that if not all eyes are on the Federal Reserve, most eyes are on the Federal Reserve and the meeting and the likelihood of a rate hike coming later this week.

Are you watching that? And if not, what are you watching to give you a better sense of where the economy is going in the near term? I mean, I think it's interesting what's happening. And what we are going through right now is fairly unprecedented. And in some ways right now goes over the last decade, but also what's happening right now is happening is the last four days or the last six months. Our economy is obviously struggling, but we are also seeing inflation.

So usually when you have an economy that's struggling in the way that ours is now, both the United States and globally, the Federal Reserve or central banks are going to step in and add liquidity. But because we've got an inflationary environment, and it is dangerous, they are having to continue to raise rates, which does not bode well for asset pricing. But asset pricing, ultimately at the end of the day, that is not the horse that leads the economic cart. I mean, it is actually the opposite. So for me, what we're seeing, right now is, you know, is the backside, not just of two years of an incredible amount of liquidity being put into the market, but almost 15 years going back to 2008. I mean, we've

gone through a decade in which sovereign debt around the world, in 2020, $17 trillion of it, traded at a negative rate, which meant that if you held the debt, you paid for the privilege. This is prior to 2015. That was a great. unicorn sighting. So we are coming out of what has been one of the strangest economic periods in world history. Not just our lifetimes. I'm talking a thousand years of actual centralized financial systems. And it just bears remembering that when you come out of something that's weird, that weird things are going to happen on the backside. I've been buying stock. I'm not particularly convicted about it. If you were to tell me that the market was going to go down another 40 percent, I'd say, yeah, I mean, maybe. Maybe we're still, you know, people are out there still spending six figures on a weird picture of a monkey that's got some, you know, that's got some, you know, some code behind it. So who really knows? But I do know right now that the Fed is fighting something that was a natural outcome.

of some real financial stress, and at the end of it, we will hit an equilibrium. Last thing, and then I'll let you go. You would mention that some of these companies are not coming back. You and I have talked before on this show about the SPACs that just littered the market last year and the year before. Certainly now we look at some of them as public companies and think, okay, yeah, you probably shouldn't have. You were a money grab. This was a money grab, and you probably have no business being in the public markets. Do you look at, I forget who said it, but I heard someone say recently that, you know,

asked the question, the rhetorical question, who in God's name would go public in this environment right now? Are IPOs something that you look at as a positive sign, somewhere, whether it's later this year or into 2023, because it really does seem, like, whereas we went through a long stretch of time where we didn't really collectively ask the question about any company going public, why are they going public? We just thought, oh, okay, here's a company going public. It seems like, Bill, we're in an environment right now where if a company were going public, that would be the first thing we would ask.

Like, really? You're going public now in this? The crazy thing is I don't really care that much about IPOs just because I like so much. I think I like so much understanding how a management team is going to interact and behave as a publicly traded entity. And I don't care what people say. It is an entirely different experience to have the public facing you on a quarter by quarter basis from when you were a private company. The thing is, Chris, there are hundreds of SPACs that have been stood up as buckets of money that have a time, they have an egg timer. They have to continue to bring companies public.

You are going to see additional companies come public. I actually think that it is a little bit more of a target-rich environment. Now, you may see companies that are coming public through SPACs because there is sort of a mutually agreed but not expressed desperation between the two. We need the money. You have the money. Let's do a thing and we will, you know, and we'll deal with, you know, the consequences later. So you're going to see more companies come public. I tend to think of times like the, you know, the SPAC bubble, so many companies coming public. You have to remember that they are not, they're not doing that for the benefit of investors. They are doing it at a point in time in which it is good for them. And so the fact that it is a much more difficult time to go public may actually mean that it is a better time to be on our side of the ledger and be buyers of stocks.

I'm sorry, but your SPAC analogy just immediately brought to mind. A bartender says last call and two people just sort of look at each other and thought, all right, why don't we get home together like this? That's right. We haven't been stupid enough yet, but there's just enough time. Bill, man, always great talking to you. Thanks for being here. Thanks, Chris. In the wake of stocks falling this year, we decided to look back at other market crashes from history.

A few years back, Morgan Housel joined Allison Southwick and Robert Brokamp to talk about the speculative boom that caused a great depression and how those lessons apply for investors today. Set the stage for you. It's the roaring 20s. In the wake of World War I, the nation's, wealth more than doubles. This means that a lot of people had enough money to become full-blown consumers. They could buy newfangled things like electric refrigerators and radios, unless we forget the Model T. In this prosperous America, you could have anything, except alcohol, of course. But the party did stop, and suddenly. So today, Morgan joins us for our series this month looking at market crashes in the U.S. And why not start with the big one, the Great Crash, Black

Tuesday? But before we get into the actual crash, what was life for? leading up to the Great Depression. So I think whenever people talk about what caused the Great Depression, what caused the crash of 1929, it's always easy to point to one thing, but then what caused that one thing? You can always keep going back at time and say, what really caused all this to happen? And if you're talking about the Great Depression, I like to start in World War I. Something really important happened in World War I, Frederick Lewis Allen, who is a great historian who wrote a history in the 1920s and 1930s.

He made this point that during World War I, to finance the war, they sold liberty bonds to average everyday Americans, not just wealthy people, but everyday Americans were buying liberty bonds to finance the war. And it was the first time that most Americans had any experience with a stockbroker. Because stockbrokers, up until that point, only dealt with wealthy people and aristocrats. And now it was everyday, you know, train conductors and farmers going in and talking to a stockbroker to buy these liberty bonds, because there's such a push of patriotism to buy these bonds. And because of that, not only did people get their first taste of what it was like

to work with the stockbroker, but stockbrokers had to learn all kinds of new skills to sell to these average everyday people. And high pressure sales tactics had to needle their insecurities and get them to buy something that they really didn't need. But the salesman's job was to force and convince them that you needed this. So it's set up, you know, in the late 19 teens, this early dynamic of Main Street's affiliation with Wall Street that had been, you know, had no relationship before that. So that's kind of where I think the seeds of the Great Depression were ultimately planted, of getting everyday people who didn't have a lot of money, had no sophistication, no training

or education, getting them involved with Wall Street. But then they had no place to get educated either. You're just going to have to trust this stockbroker guy. So that's kind of like the first seeds that were planted. And then after World War I, all the troops came home, devastating period for the war, and the economy instantly falls into a really deep recession, really bad. High deflation, really high unemployment in the early 1920s. And Frederick Lewis Island makes this really interesting point, I think, that between the war and then the recession when people came home,

the people just got tired of being tired. After like seven years of everything going wrong, there's a period kind of in the early and mid-1920s where people just kind of said, I'm ready to have fun again. We've been dealing with like a decade of everything going wrong between war and the recession. I'm ready to let loose and have fun again. And it was almost like the spark that he wrote about that in the early 1920s, people were just ready to have fun and then just kind of let loose. And a few other things happened at the same time that's really important to the lead up of the Great Depression. To continue on with the stories of really awful things happening.

In 1921, there was a really awful famine in Russia. And the United States wanted to do something about it. So, the U.S. government set an artificially high price for the price of wheat and told farmers, as much wheat as you can grow, we will buy it from you at this inflated price. The price of wheat at the time was, I think, 40 cents a bushel. And the government said, we will buy as much as you can grow at a dollar a bushel so that they could send it to Russia to help break the famine. So you had all these farmers that overnight, basically, were minting money and planting as much wheat and corn as they could and making a fortune doing it. it's selling it to the government. And it was so lucrative to be a farmer back then during this time

because of these inflated prices, that they had what were called suitcase farmers, which were people from Chicago and Minneapolis, who were maybe they were lawyers or insurance salesmen that would take the train into Iowa and buy a small farm and grow wheat. They'd come in with their suitcase, and they'd be farmers on the weekend and go home because you can make so much money doing it. And farming was such a big part of the economy back then, that in the early 1920s, when this started, it was just a huge stimulus to the overall economy, this big farming surplus that was going on. At the same time, you had people that were just ready to get back into having fun and helping grow the economy again. And so it was almost overnight in the early

1920s, the U.S. economy just took off like a rocket ship. Part of that was coming out of this recession in the early 1920s, and then you combine that with this big farming stimulus, and it was just boom, off to the races. And because of the psychology at that, time. Frederick Lewis Island writes a lot about this at the time of this. People were so ready to have fun again that you mix that excitement with that much extra money that was flowing around, and it was just a boom time in the 1920s. You mix optimism with a lot of money, and people start making really bad decisions. Well, and then if you also add in debt, because a lot of people didn't have necessarily

all the money to buy these new consumer goods or these investments, but there were people who were willing to lend them money to do that. Back then, the margin requirement to borrow money to buy investments was only 10%. So if you wanted to buy $1,000 worth of stock, you only need to put down $100. All that thing had to do is drop 10%, and then you've lost all the equity in that investment. And also during this period in the 1920s, two of, I think, the most important inventions of the 20th century, the car and the radio, were coming online for average everyday people. much as added to the sense of optimism of what we could do as a country, what our potential

was, completely changed American life in the span of a few years, the car on the radio. Then you add all of that together. You have people who, for the first time ever, have connections to stockbrokers. You have this big economic boom from farming. You have all this optimism coming from the car and the airplane. The 1920s, I think a lot of people know, the booming 20s, the roaring 20s, it was just a great time for a lot of people that just led to a lot of excitement and over-optimism. And so it led to, in the late 1920s, probably the biggest stock bubble that we've ever seen.

And that really took place in just like a year or two. It was really like 1928 and early 1929 that the market just went straight up, just went parabolic. Then day after day after day, stock prices for all companies were just going straight up and increased by several multiples just in the late 1920s. a bubble that it's hard to measure it because earnings and whatnot weren't measured back then, but probably much bigger than the 1999 stock bubble, just completely detached from reality by 1929.

Let's get to the actual bursting of the bubble. What's interesting, too, is that it didn't happen in one day. We talk about the crash of 1929, but it played out over a week. It was basically three days in October of 1929, where the market fell about 12 percent each day consecutively. I think putting that together, rather than all happening at once, having it spread out a little bit, kind of gave investors at the time, I don't think it was as traumatic as we would expect it to be today, because it happened slower than, say, the crash of 1987. It just kind of played out slowly, and people were so accustomed to prosperity and

rising stock prices that the 30% decline that happened in October, was it a big deal, of course. Did stockbrokers jump out the window? Literally, yes, there are accounts of that happening. But I think between people were so shocked, and a 30 percent decline in the grand scheme of things isn't that huge. In three days, it's big, but it's not that big a deal. I mean, stock prices fell 20 percent in the U.S. in 2011. So there was still a pretty big sense of optimism at the time. And Herbert Hoover, who was president and Andrew Mellon, who was Secretary of Treasury at the time, made a big push in the media and newspapers to say, business is sound, the fundamentals

are strong. This is a temporary break, as they called it back then, but we're going to pull through this. Everything is okay. I think people bought it at the time. And so as the month kept playing out into November and December of 1929, things kind of stabilized and recovered a little bit. And the big idea was, that was it. That was tough. But things are going to move on and things are going to keep going. So there was a little bit of a rally after that, but people really had no idea what was still to come. Yeah. So what was still to come? How long are we going to suffer here? So even by mid-1930, it's still, like, most economists thought by looking around what was

happening, that we were in a pretty bad recession, but nothing more than that. A pretty severe recession, but nothing of historic terms. And then it was a summer of 1930, and as we moved into 1931, that the banking system started cracking, which was caused a lot by two things. One, all these investors with margin debt were buying from banks, who were now defaulting on their debt that they were borrowing against. But also, wheat prices and corn prices started plunging. So then farmers, who had been a big driver of the economic boom in the 1920s, and had leveraged

up with all kinds of debt to buy farm equipment and whatnot, were defaulting at record rates too. And back then, the Federal Reserve worked in a different way. They didn't bail out banks like they do today. And more importantly, the big thing was there was no FDIC insurance. So if your local bank was going down, your life savings was going with it. So that began the bank runs of the early 1930s, which is where things really started getting out of hand.

And it kind of peaked in 1932. And there was a starting kind of like a wave of bank failures in 1932. And the big one actually was a bank in Austria called Credit Ansalt in Vienna. That was a huge bank in Austria. And it failed overnight, and no one really saw it coming. And then that, I mean, there have been some economists who've kind of mapped this how it happened. credit, Ansal failed in Vienna, then it spread to Paris, and then spread to London, and then eventually spread to New York. And then it was a bank called the Knickerbocker Trust in the United

States that failed in New York. And after that, the curtain just came down. Nickerbocker. That's like the most perfect name for a failing bank in 1920s, right? Yes. You couldn't write that. And then so after that, after the bank started failing, that's where things started getting really ugly in the United States. So now we're into like 1932. So we're three years after the crash of 1929, which I think, To me, that's probably the biggest misconception of the Great Depression, is that there was a crash in 1929, and then, boom, welcome to the Great Depression. And it wasn't.

It played out, the first couple years played out kind of slowly over a period of many, many years. If you think about the 2008 financial crisis, the worst of that was really contained in literally like a 90-day period. It was late 2008, September, October, November, and then it was pretty much over. The Great Depression played out over three years. And that, I think, did the opposite of what the 1920s did, is that people just got accustomed to pessimism. And their hope vanished.

After you've just been beaten up consistently for three years, people just lose all their optimism and all their faith. And that feeds on itself. Because if businesses and employees and investors don't have any optimism, don't have any confidence, then it's really hard to get the economy going. So the stock market bottomed in mid-1932. unemployment in the economy bottomed in 1933, four years after the crash. So how did we recover? How did we get out of this?

This is where things could get political, and a lot of people still disagree with this 90 years later, but Franklin Roosevelt is elected in 1932, and brings in, you know, starts with the New Deal. So there's that element of it, of economic stimulus from the New Deal, just changing tactics and whatnot. There's also a thing with all recessions that prices get low enough, stock prices, housing prices, labor prices, if things get low enough, then it's attractive to get back in business. And every investment, every business opportunity is attractive at some price. And prices got ridiculously low in the 1930s, everywhere. The price of labor, the price of food. By 1932, stock prices were down 89 percent from their 1929 peak.

So just completely obliterated. But there's still a lot of good companies out there. You talked about the FDIC. Did that come out of this? What other legislation or regulation came out following the Depression to keep this from happening again? Because it's obviously never going to happen again. Knock on one, right? No, it's only going to happen for the next three episodes of this podcast. Not this bad, of course. So the few big ones besides FDIC insurance. One was the SEC. And a lot of the reason that the market grew so high in the 1920s is because fraud and just bad behavior in the stock

market was rampant. One of the big actors during the 1920s who made a fortune, kind of ripping people off in the stock market, was Joseph Kennedy, JFK's father, made a fortune in the 1920s, bringing together groups of investors, and then they would corner a stock and put out false information, and since they had a corner, they could drive up the price, and then once rising prices got other people excited, and then they would dump their shares back on them. There was all this misbehavior in the stock market that was perfectly legal back then, even though they were really taking advantage of vulnerable people. So with that came the SEC, and the punchline of the story is, you know, who the first chairman of the SEC was?

Joseph Kennedy. Same guy. What was FDR's quote about that? I forget. Something along lines, if you want to catch a bank robbery, you got a criminal in charge. Something along those lines. That was the other big thing besides the FDIC was the SEC. So what is your takeaway, as we're winding down here, what is your takeaway for investors?

What's one good lesson from the Great Depression that our listeners should take away? There was a lawyer during the Great Depression in Benjamin Roth, who kept a really incredible diary. He was a lawyer, but he was kind of an amateur investor, too, and kind of an amateur economist. Really smart guy. And his son published the biography, I think five years ago. It's called A Great Depression, The Diary, A Diary. And it's really fascinating just to see a layman's perception of what happened during the Depression. he constantly writes about in 1932, 1933.

He uses the same phrasing over and over again. He says, everyone knows stocks are cheap, but nobody has any cash to buy them. He just talks about it all over the place. He says, not just stocks. He's talking about buildings and real estate in his neighborhood. There's a warehouse down the street. It's selling for nothing, but nobody has any cash to buy it. And he writes about it in the sense of all this opportunity that's lost.

And if anyone had any cash during that period, they could mint a fortune. just opportunity laying right in front of them, but no one had any cash saved up. So to me, I used to write about this quite a bit when I was here at the Molly Fool. People really discount cash as an asset when things are going well. Cash doesn't earn a return. Why would you want to earn cash? Put your money to work. It's not doing anything for you.

The value of cash is what it can do for you when things turn down and things eventually will. That's when you earn your return on cash. And so, I've always held more cash than I think any financial advisor would say is necessary. But that's why I do it. And I think I'm earning a good return on my cash. I'm just not going to realize that return until things get hairy again. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against.

So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.