Barry Bannister: Government Making Same Policy Mistakes of the 1930's
Barry Bannister, Managing Director of Equity Research at Stifel Nicolaus, joins Financial Sense Newshour to discuss whether to “Sell in May and go away” as well as the stark parallels between now and the 1930's.
Barry is a 5-time winner of WSJ’s All-Star Analyst award, a 7-time winner of Forbes/FT/StarMine top analyst award, the top-10 U.S. Stock Pick analyst for CNBC/Zacks, and a four-time Institutional Investor magazine All-Star Analyst between 2007 and 2010. Here we present a few key excerpts from his interview with Jim Puplava airing Thursday for subscribers.
You think that "Sell in May and go away" may be a mistake this year. Why is that?
"Well, it’s been a mistake so far in May. The sell in May worked for four straight years—’09, ’10, ’11, ’12. If you go back in history you see that no rule of thumb works all the time. I think we’ve checked in the past and it works 6 out of 10 years. So, to play that game four years in a row and assume it has to happen a fifth is ludicrous. If investors could make money off of the calendar, then everyone would be rich and, of course, that’s not possible. We do keep it in mind and I used the calendar, “Sell in May”, quite a bit when I was a cyclicals analyst when you and I first met. Stocks like Deere and Caterpillar were classic in that regards as far as “Sell in May” and come back in October, but not this year for the market as a whole. It is really more fundamentally driven. And, of course, policy driven. You asked me about that earlier. Policy in parallels to the past are just so important right now."
Speaking of these policy driven markets, you have drawn some interesting parallels between 1932 and 1937 with where we’ve been since 2009. Please explain for our listeners how close these two time periods correspond and what that means for the market.
"The parallel is that 2009 to 2014 is very very similar to 1932 to 1937. As I mentioned earlier, we had a complete bank failure from ’07 to ’09; we had one from ’31 to ’32. And what happened at that point is that we got backstopped, we got large deficits, we got accommodative policy, and events unfolded with a massive 5 year bull market in the Dow Jones Industrials; and we’ve had one now. The similarities are stark. For example, from ’32 to ’36, in comparing ’09 to ’13, you had large deficits, low interest rates, talk of socialism under Roosevelt as well as Obama, you had rising confidence in financials post wipeout, you had a halving of BAA rated bond yields then and now, and a 150% earnings growth off the bottom both times. You had a weak dollar—currency war. If you recall, Britain devalued versus gold in ’31 and we followed two years later and then France a few years after that. You also had heavy Wall Street regulation post crash. We’ve had lots of regulation this time and, of course, we had the SEC acts in the early ‘30s. So everything is very similar. The risk is policy. The Fed, ECB, Treasury, Europe—if we make a mistake and the market falls, it’s not going to be fundamental, it’s going to be geopolitical or policy driven."
Chairman Bernanke has made a study of the Great Depression, and especially the mistakes made in 1937 when the Fed reversed policy, and I remember him commenting at Milton Friedman’s 90th birthday where he basically said, “Milt, you know, you were right. We’ll never make that mistake again.” Do you think they are smart enough not to make that mistake?
"Bernanke more than anybody I think was the right man for understanding this at the time because we are in a secondary depression. We had a depression in the 1870s, we had one in the ‘30s, and we have one now. We’re emerging from it and we’re the first to emerge from it. Then, as now, you have all kinds of problems. Japan invaded China in the late ‘30s and they just invaded China again with a devaluation that’s forced the Chinese real currency to 25 year highs. Germany was imposing its business model on the rest of Europe and, then, they were annexing Austria and several other regions. So, history is repeating. The Fed and Treasury acted the same then as now—confident in growth in ’36 and ’37, the Treasury raised taxes. They just did it. They started a new social program—social security in ’37. They just started ACA, which is ObamaCare. They tightened the fiscal deficit quite sharply in ’36 and ’37. Now they’re talking about tightening it again. It maybe a little premature in doing that. (That’s destimulative when you do that.) So, yeah, everything is pretty much a repeat and it’s up to the Fed—I think a Fed exit is difficult. As you commented, then as now, they doubled reserve requirements even as they were buying bonds to suppress rates, which sent a mixed signal. I hope they don’t send mixed signals in the next year. We’ll be watching that closely."
In the rest of this interview Barry also explains why the bull market in commodities has likely peaked along with his target on oil and what needs to happen for the S&P 500 to get to 1700 or higher. If you would like to listen to this full interview airing Thursday or any of our other expert interviews, CLICK HERE to subscribe.
For a list of previous interviews and guests, CLICK HERE to see our archive.
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