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A huge bull market in commodities takes a downturn. Equities are getting clobbered. The nation is groaning under insurmountable debts after the banks throw caution to the wind.
It’s an election year, and some people say the market is over-regulated — others that it’s not regulated enough. All the while, weather is making headlines — in fact, some people believe the weather could herald the beginning of the end.
Does any of this sound familiar? It may sound like the U.S. in the 21st Century, but it’s also an accurate description of our country on the brink of the Great Depression. It’s a story told in the book The Worst Hard Time by Timothy Egan. I highly recommend this National Book Award winner to you, especially because it offers great insights into today’s markets and economic climate.
Until you can get down to the bookstore and pick up a copy, let me give you a brief overview of the story, and tell you three investment lessons that can help all of us today.
Like many bold endeavors, the story starts with immigrants taking …
A Shot at the American Dream
Egan’s story starts in the last free land in America — the Oklahoma panhandle. After the original (native) inhabitants were chased off, settlers could stake out up to 640 acres and take their shot at the American dream.
That part of the country — including surrounding areas of Texas, Colorado and Kansas — was marginally farmable land that marketers palmed off on unsuspecting new arrivals, the kind of folks who believed in tomorrow because it was all they had in the bank. As Egan explains …
“Hope died the first time people laid eyes on Boise City, Oklahoma. It was founded on fraud. Even the name itself was a lie … from the French word le bois — trees. Except there was not a single tree in Boise city. Nor was there a city. On Boise City’s imaginary streets, the buyers found stakes in the ground and flags flapping in the wind. No railroads. No tracks. No plans for railroads. No fine houses. No businesses. Worst of all, the company did not even own the land that it sold.â€
Despite this inauspicious start, people did scratch a living from the land in Boise City and other hamlets. Home was often a hole dug out of the sod, covered with boards and shared with tarantulas, snakes and so many centipedes that they crunched underfoot.
“The flattest, driest, most wind-raked, least arable part of the United States was transformed by government incentive, private showmanship, and human desire from the Great American Desert into Eden with a haircut. Settlement was a dare, on a grand scale, to see if people could defy common sense.â€
But it was a life, and for many, the only home they knew. And for a while it seemed that heaven smiled on this venture — a decade of wet years made farming in the panhandle a breeze.
Farmers Prospered as Wheat Prices Boomed
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| Wheat famers made huge money as grain prices soared! |
New technology reshaped the world of the 1920s — for farmers, the ride of choice was the tractor. In the 1830s, it took 58 hours of work to plant and harvest a single acre. By 1930, it took only three hours for the same job. A tractor did the work of 10 horses and took a lot less maintenance.
In their eagerness to reap as much of a profit as they could, the farmers plowed the tough prairie grass under and planted wheat. With the price of wheat at 80 cents a bushel, they reaped profits.
The problem started in 1915, when, with a war in Europe raging, the government guaranteed the price of wheat at $2 a bushel. The person in charge of this program was named Herbert Hoover. You may have heard of him. Thanks to Hoover’s government largesse, soon every idiot who could scratch a stick in the ground was trying to wrest his fortune from prairie soil.
This was no flash-in-the-pan bubble. It lasted 14 years!
By 1926, the self-described Wheat Queen of Kansas, Ida Watkins, told everyone she made a profit of $75,000 on her two thousand acres — bigger than the salary of any politician, and more money than any star athlete but Babe Ruth himself.
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“Life in America in September 1929 was almost too sweet, too bountiful, too full of riches,†Egan writes.
Before the wheat boom, banks refused to lend to farmers west of the 98th meridian on the grounds that it was “too dry.†Then Congress passed the Federal Farm Loan Act in 1916, and banks offered 40-year loans at 6% interest to any man who had a farm to work.
The farmers turned around and used that money to buy tractors, which in the good times provided more than enough income. And more and more land went under the plow.
But, all good things must end. By 1929, America had a grain surplus. The inevitable happened: Prices crashed while farmers still had loans to pay.
The only way for someone who made $10,000 in 1925 to duplicate his earnings in 1929 was to plant twice the amount. At least, that was the theory. Soon, unsold wheat piled up next to the railroad track. By 1930, land that once brought an income of $4,000 now brought only $400!
This Is a Painful Reminder:
Things Can Always Get Worse …
And things did get worse! The price of wheat actually went to ZERO — that’s what farmers were told they would get if they brought any more of that damned grain near the station.
Since farmers had no income, they couldn’t repay loans. 1930 saw the first widespread bank failures. The town thrifts closed their doors forever, taking what little money farmers had left with them.
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| The Dust Bowl was symbolic of the U.S. economy during the Great Depression. |
And then, that same year, the weather changed. As America tipped into a full-scale drought, the marginally farmable land of the panhandle simply dried up and blew away.
Dust storms raged across the landscape. The clouds of dirt would pile up 10,000 feet high and march across the prairie, looking, as one eyewitness recalled, like a range of mountains on the move.
The storms blew out windows, buried cars and tractors, fried food with static electricity caused by all that dirt rubbing together, suffocated animals where they stood and filled the lungs of every living thing. The storms were killers of animals, men, women and children.
One storm, in 1934, blew up a great rectangle of dust from the Great Plains to the Atlantic, 1,800 miles wide, and laden with 350 million tons of dust — three tons of dust for every American alive at the time.
The worst storm, known as Black Sunday, hit on April 14, 1935, and carried twice as much dirt as was ever dug out of the Panama Canal.
Faced with nature’s furious onslaught, many people ran for their lives. Ten thousand people a month fled the Great Plains, the biggest single exodus in American history. Still, many others stayed … either too stubborn or too poor to move along.
The Dust Bowl was the physical manifestation of the nation’s financial and emotional sickness, problems that turned the election of 1932 into a lightning rod for “change.†The candidates talked about being the real agent of change.
Sound familiar?
Eighty Years Later, We’ve Come Full-Circle:
Three Lessons from the Great Depression
Back then, one of the Democratic candidates was an East-Coast swell named Franklin Delano Roosevelt. FDR’s platform was to give people jobs with a huge public works program to build America’s infrastructure, and he went on to become President.
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| FDR made bold moves that pulled the country out of its slumber. |
FDR is famous for getting America through the Depression. Along with Social Security and other landmark programs, much of his energy was focused on stopping the Dustbowl, which spread like a cancer through America’s heartland.
At its peak, the Dust Bowl covered one hundred million acres. By the end, some scientists estimated that more than 80 million acres in the southern plains were stripped of their topsoil.
But with FDR’s leadership, the problem wasn’t insurmountable:
- Four million acres of abandoned farmland were bought up.
- Young men were paid a dollar a day in the Civilian Conservation Corps to plant trees from the North Dakota border with Canada all the way to Amarillo, Texas.
- A government program taught farmers a new way to till the soil and farmers agreed to abide by strict soil conservation standards.
- New technology allowed those farmers who remained to tap the Ogallala aquifer — a subterranean body of water as large as Lake Superior — in even the driest times.
By these combined efforts, the Dustbowl was tamed. Thanks to these efforts, along with other new programs, the country emerged from its economic slumber. Here’s what I think we can learn from history …
1) Good laws are good for business.
FDR railed against crooked bankers and called for more regulation. His bank holiday and subsequent regulation restored America’s faith in his banks.
Last week, we just saw the government pony up $30 billion of taxpayer dollars to enable one bunch of sharks in pinstripe suits to buy another. Some of the financial instruments that got Bear Stearns in trouble are so complicated that even highly educated analysts can’t understand them, let alone value them. I think it’s time for more regulation, not less.
2) Not all change is good!
Just like back then, all of the current Presidential candidates say they’re agents of real change. But one change that got us in our current financial pickle is letting unregulated institutions — the “shadow banking system†— take over the roles traditionally filled by regulated banks. That’s the kind of change we can do without.
3) Bull markets can end with a bang.
The 1929 bull markets in both grain and equities ended rather suddenly, when everything looked great. This is a reminder to all of us to keep one eye on the exit even in the best markets.
That said, I don’t think we’re anywhere near the end of the current grain bull market. After falling hard and fast last week, grain prices are moving higher again.
Why? This time around, U.S. farmers aren’t just feeding America, they’re feeding the world. And the world has never been hungrier.
World wheat inventories are expected to fall to 110.4 million metric tons in the fiscal year ending May, the lowest since 1978, the U.S. Department of Agriculture said on March 11. The USDA went on to say that U.S. supplies may drop to 6.6 million tons, down 47 percent from a year earlier.
Meanwhile, floods in the nation’s midsection are delaying soybean and corn crops. And out in the old Dustbowl, parts of western Kansas, the Oklahoma Panhandle and West Texas received so little rain in the past month that the winter wheat crop may be hurt.
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It’s not just grains that are looking good, either. Check out this chart of the CCI Index, an equally weighted basket of commodities. It shows the bull market that began in 2001 is still going strong.
So while this bull market will end someday, I think it has a long way to go. Historically, bull markets in commodities last an average of 15 years.
And that makes the pullback we’re seeing now one heck of a buying opportunity.
Yours for trading profits,
Sean
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