HERBERT HOOVER, R.I.P.
by James Dale Davidson
dailyreckoning.com
"History repeats itself, first as a tragedy, next as a
comedy."
- George Santayana
I hope you are at least registering a few chuckles as
George W. Bush does his Herbert Hoover imitation. Each
time that Bush has followed in Hoover's footsteps and
tried to assure investors that shares were a bargain
because the economy is "fundamentally sound," the market
has sold off. The sell-off when he held forth on
valuation issues on July 22nd was particularly emphatic,
with the Dow plunging 234.68 points, the S&P 500 falling
27.90 and the NASDAQ giving up 36.50.
As I have hinted on previous occasions, I wish that Bush
would repair his focus, not because I wish him ill, but
because I wish the market well. It won't be good for
President Bush's reputation when the straggling remnant
of the once large legion of day traders conclude that
every ostensibly encouraging statement Bush makes is an
infallible sell signal.
And it won't be good for America or the world if the
enemies of markets gain greater political ascendancy in
the United States. In other words, it would be a
disaster if Bush were to stumble along any further in
Herbert Hoover's footsteps.
To see how dire a disaster could be lying in store, you
need only glance at Argentina, a once rich and promising
country that has been destroyed in the past year.
Indeed, per capita income among Argentines has plunged
by more than 70% since January of this year, a
breathtaking decline. Most of the blame goes to
Argentine politicians, but Bush and his ham-handed
Treasury Secretary, Paul O'Neill, also deserve mention
as ghostwriters of the catastrophe.
The U.S. Treasury idiotically advised Argentina to
abandon its currency board system, which automatically
made the Argentine peso worth a dollar. This was like
advising someone swaying at the top of an abyss to take
the plunge. Even worse, the Bush administration didn't
just dish out the wrong advice, they gave an ally a
shove over the edge into destitution.
Of course, Argentina has not featured prominently in the
US headlines. While we lost Argentina, Brazil, Uruguay
and probably much of the rest of South America, we did
have success in the God-forsaken reaches of Afghanistan.
I applaud that success of Bush policy, but as investors,
you and I should both temper our applause. A drawback of
the Afghan success and the whole "War on Terrorism" is
that it has helped play to and reinforce the sense of
fear that has gripped the American psyche.
Fear has its consequences. You can't keep Americans
constantly agitated about terrorism and have no follow-
up consequences. The Bush administration has foolishly
put fear on steroids. The effect has magnified far
beyond the War on Terrorism. Fear is contagious. It
smells. Animals will eat your lunch if they smell your
fear. Fear has economic and political consequences. Fear
is the emotion that sits on the teeter-totter with
greed. The balance between the two of them governs
investment markets. Fear has lately gotten fat on the
steady diet of worry over terrorism. This has tipped
over the scales and helped reduce stock valuations to
bear market depths.
I suspect that Bush and his advisers believe that trying
to keep public attention focused on the "War on
Terrorism" helps underscore popular support for Bush,
which soared with his handling of the attack on
Afghanistan. But I fear that they have made a grave
mistake. I suspect that the cause and effect are more
complicated, and possibly counter-productive for the
Republicans.
Why?
Because people in a fearful frame of mind become
negative on their own prospects, and begin to behave and
think like losers. The administration needs to
understand, as Franklin Roosevelt shrewdly did, that
"fear" is to be feared, not cultivated. When people are
in a fearful mood, they behave fearfully. They are
sellers. Sellers of stock. And, indeed, they tend to
sell themselves short, demanding succor and support from
government, a game at which the Democrats have better
credentials than Republicans.
This is why I say that Bush is stumbling along in
Herbert Hoover's footsteps. By that, I mean no
disrespect to George W. Bush, who is ill-advised and so
preoccupied with trying to unravel Osama bin Laden's
turban that he has no time to think about the important
issues facing the economy.
Nor do I intend any disrespect to the memory of Herbert
Hoover, who was an intelligent and decent man who had
the misfortune to be standing at the band stand the last
time the music stopped. Hoover did, in fact, play a part
in prolonging and deepening the Depression. But his
sins, like those Bush seems to be indulging now, were of
a different character than political enemies of either
man would willingly admit.
Bush, like Hoover, is stumbling into disaster, not
because he is an advocate of laissez faire, but because
he is implicated in closing markets, intensifying
regulation and increasing the scope of government - all
mistakes that are being repeated to much applause in
today's headlines.
After 1929, the Hoover policy of protectionism and
regulation resulted in a protracted bear market, which
took a quarter of a century to recover to 1929 levels. I
am convinced that part of the reason the economy and the
engines of innovation sputtered so badly after 1929 was
the fact that leaders compounded rather than
counteracted a general failure of nerve. With fear the
predominant emotion, everyone suddenly felt smaller,
less competent, less responsible and incapable of self-
reliance.
The demand for protection and coddling took precedence
over the celebration of opportunity and enterprise in
the hearts of men. Herbert Hoover, a reputed superman,
who faced the oncoming Depression with a far more
enlarged reputation than George W. Bush, intervened
vigorously in the free market. He attempted to regulate
prices and wages higher, through protectionism,
government price-fixing and a massive government
stimulus program, including exaggerated efforts to
stabilize the "family farm." They didn't work.
It is little remembered that Hoover vigorously expanded
government during his term beginning in 1929. In fact,
Hoover was so conspicuously a big spender that Franklin
Roosevelt gained much political currency during the 1932
elections by proposing to trim Hoover's bloated
government spending by 25% and balance the budget.
Roosevelt denounced Hoover for "the greatest spending
administration in peace times in all our history."
Roosevelt would soon outdo Hoover as an architect of
spending, but that doesn't change the fact that Hoover
pioneered the "government stimulus" approach to reviving
the economy. George W. Bush, too, has proven to be a big
spender.
The Republicans seem intent on rediscovering their
legacy as the "party of Hoover." The perceived problem
with accountancy and executives hogging the returns from
shareholders presented an opening, a missed opportunity,
to address the underlying difficulties. Namely, the
complexity and incomprehensibility of the U.S. tax laws,
and their consequences in turning stock investment from
a yield play into solely a capital gains exercise for
most investors.
But President Bush and his supporters in Congress
lavished their attentions elsewhere. They utterly failed
to grasp the issue or to inform public perceptions as to
the causes of the mismatch between the reality of
corporate finances and their representation in
accounting entries.
In fact, the whole sorry episode of earnings
misstatements represents Exhibit Number One in evidence
of the ill-effects of the monstrous U.S. Tax code,
compounded by ill-conceived securities regulations. The
double-taxation of dividends is directly implicated in
such nonsense as the Enron compensation committee voting
to dispense 75% of the company's annual profit as
bonuses for top executives.
If the shareholders had been looking for the dividends,
as well as capital gains, this would never have been
allowed to happen. But nobody on the Enron board had to
care about retaining cash to pay dividends. Equally, if
corporate accounting is screwed up, it is largely
because the tax laws are unknowable and securities
regulation is ill-conceived.
Regards,
James Davidson
for The Daily Reckoning
Editor's Note: James Davidson has enjoyed great success
founding new companies in a variety of industries. He's
a graduate of Oxford University, and a renowned author
and venture capitalist whose articles have appeared in
publications from The Wall Street Journal to USA Today.
He currently sits on the boards of over 20 thriving,
technology-driven companies. Davidson's latest research
and investment picks can be found in:
Vantage Point Investment Advisory
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