2016–Parting Thoughts + Trump vs. Coolidge

As we approach the end of 2016, we’ve seen another year of record highs for the market and continued questions on the part of many as to why this is happening. With each passing day there continued to be warnings from the media and pundits that the market was on the verge of a correction or, worse yet, a major bloodletting. Reasons given included the fact that our economic expansion (over six-years-old) is one of the longest in recorded history, valuations (including Shiller’s CAPE PE) are stretched and the animal spirits (speculation) are back up–everyone is buying with abandon. Of course, none of this squares with what we have observe except the age of the economic expansion. Regarding economic expansions they normally do not die of old age.

Another constant is the media’s effort to sell us on the bad news–bad news that they sometimes cook up via obfuscation, conflation and misrepresentation. The glass is never close to half-full. One such attempt came last week in an interview with professor Robert Shiller on the topic of his often cited  (by the bears) cyclically adjusted price earnings ratio (CAPE). Try as they might, CNBC interviewers Carl Quintanilla and Jon Fortt could not get Shiller to really be negative on the market, even though his CAPE ratio was in excess of its red-light level ( a CAPE of 27). You may find a more complete discussion of the value (or lack thereof) of CAPE in “CNBC–“Market indicator hits extreme last seen before plunges in 1929, 2000 and 2008.”

Also in the interview, Shiller said he would not be substantially reducing his equity exposure at this time. That was not mentioned in the story below that summarizes the interview  —  “Trump rally could be like Coolidge’s roaring ’20s before depression, … “  They completely cut out the section of the video interview that talked about the Coolidge administration, the roaring twenties and subsequent Great Depression. Why? Because, it was not that negative. Yes, Shiller compared the incoming Trump administration to the Coolidge years. They are philosophically very attuned. Yes, it did end badly. But he also pointed out we are very early in the game for Mr. Trump. It took eight years for the Coolidge bull market to come to its bad end. There was no warning in this video.

What were the similarities Trump vs. Coolidge?

It was all about policy, not personality. Coolidge was a man on the quiet side who was reputed to have a wry wit.

The Warren Harding (Harding died in 1923)/ Calvin Coolidge ticket in 1920, ran on the slogan:

“Less government in business, more business in government”

As can be seen in the Wikipedia quote below, Harding and Coolidge had a great deal in common with current Republican proposals to “fix” our lethargic economy.

“Harding’s Treasury Secretary, Andrew Mellon, ordered a study which demonstrated historically that, as income tax rates were increased, money was driven underground or abroad. Mellon concluded that lower rates would increase tax revenues.^[147][148] Based on this advice, Harding cut taxes, starting in 1922. The top marginal rate was reduced annually in four stages from 73% in 1921 to 25% in 1925. Taxes were cut for lower incomes starting in 1923. The lower rates substantially increased the money flowing to the treasury. They also pushed massive deregulation and federal spending as a share of GDP fell from 6.5% to 3.5%. By late 1922 the economy began to turn around. Unemployment was pared from its 1921 high of 12% to an average of 3.3% for the remainder of the decade. The misery index which is a combination of unemployment and inflation had its sharpest decline in U.S. history under President Harding. Wages, profits, and productivity all made substantial gains as well real GDP average at over 5% during the 1920s. Libertarian historian Thomas Woods contends that the tax cuts implemented by President Harding ended the Depression of 1920–21 and were responsible for creating a decade-long expansion. Historians Larry Schweikart and Michael Allen argue that, ‘Mellon’s tax policies set the stage for the most amazing growth yet seen in America’s already impressive economy.’^[149]”