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Perspectives on economics and finances with GFD

Benjamin Harrison and the Terrible Tariff

Donald Trump was elected president promising to use protectionist measures, if necessary, to bring jobs back to America. Economists warn that raising tariffs reduces trade and hurts the economy. The Smoot-Hawley Act of 1930 is blamed for intensifying the Great Depression, and the lesser-known McKinley Tariff of 1890 provides an instructive lesson on how protectionist policies can impact the stock market and politics. In 1888, the protectionist Republican Benjamin Harrison defeated the pro-trade Democrat Grover Cleveland. Cleveland won the popular vote, but Harrison won the electoral college. Harrison increased government spending past the billion-dollar mark for the first time in history, and helped to pass the McKinley Tariff of 1890, which raised tariffs around 50%.

What was the effect of the tariff on the stock market? Between 1888 when Harrison was elected and 1890 when the McKinley Tariff was passed, the Dow Jones Average was in a bull market. In fact, the pattern of the DJA in 1889 looks similar to the pattern the stock market followed in 2016. Once it was evident that the Tariff Act of 1890 would pass and was loaded down with 450 amendments, the stock market began to tank, falling from its peak of 99.14 on May 17, 1890 to a low of 76.77 on December 8, 1890.  
 

   
The tariff was not popular, in part because it led to higher prices for many consumer goods. The Republicans lost control of Congress in 1890 and Grover Cleveland defeated Benjamin Harrison in 1892. Cleveland reversed Harrison’s policies. In 1894, the Wilson-Gorman Tariff Act was passed, which lowered tariffs in the United States, undoing the McKinley Tariff of 1890. Donald Trump should learn the lessons of history and avoid the temptation to raise tariffs as President Harrison did. Otherwise, we all will pay the price.

Trump’s Tariffs: Smoot–Hawley Tariff Version 2.0?

Donald Trump’s inauguration speech vowed to return protectionism in an effort to not only bolster employment, but to recapture positions that have migrated overseas. His initial defense against the outflow of American jobs to foreign countries is to raise border taxes on foreign goods imported into the US by renegotiating the NAFTA Agreement. Spearheading this charge is a specific tariff, and perhaps one might say, penalty, on Mexico, by levying a 20% fee on goods produced by Mexico. Rather than singling out a specific country, Trump should study the effects of the Tariff Act of 1930, otherwise known as the Smoot–Hawley Tariff, to see how this worked out for the economy in the past.
Signed into law on June 17, 1930, the Smoot–Hawley Tariff was sponsored by Senator Reed Smoot and Representative Willis C. Hawley and effectively raised tariffs on over 20,000 imported goods. The goal was to reverse early stages of the global economic contraction that started at the end of 1929. Congress sought to protect American workers, and particularly farmers, from foreign competition as a result of the rapid expansion of technology infiltrating the workforce. Cars, trucks, and tractors replaced horses and mules, and farmers saw a major decrease in the demand of their agricultural products, contributing to a surplus in farm produce. While demand fell, and supply increased, combined with foreign farmers saturating the US market, America suffered a period of over-production mixed with under consumption, culminating in a massive trade deficit. The snowball effect of the Smoot–Hawley Tariff was felt globally. US imports decreased by 66% from $4.4 billion (1929) to $1.5 billion (1933). Because foreign countries weren’t selling many products to the US, they responded by importing less from the US. Subsequently, American exports decreased 61% from $5.4 billion to $2.1 billion. Overall, world trade decreased by over 60% between 1929 and 1934. The graph below shows the decrease in US Nominal GDP from 1929 to 1934.
Unemployment was already high at 8% in 1930 when the Smoot-Hawley Tariff Act was passed as a result of the agricultural industries. But the law failed to tackle the true issues quick enough, and employment rates jumped to 16% in 1931, and 25% in 1932–33. The graph below shows the increase in number of people unemployed in the US from 1930 to 1933.

The Great Depression, which started in the US, cast a long shadow and its impact was felt by major trading partners across the ocean. The 1930s were plagued with stock market crashes, high unemployment, bank failures, poverty, and bankruptcy. Economists blame the protectionist ideology for many of the issues during this decade. After World War II, nations agreed to promote more free trade and stimulate global growth so as to avoid a second depression. If we can learn from this example, I would hate to see history repeat itself. Many global economies are still fragile from the financial crisis of 2008. Is Trump ready to put us in another one?

The Future of Energy Prices: Lessons from 750 Years of History

Today, the future of energy prices is as uncertain as ever. Whereas in the 1970s, there was a fear that the supply of oil could decline dramatically, causing future oil prices to rise, fracking and other technological innovations have increased oil reserves to levels never before seen in history. At the same time, natural gas is becoming a clean substitute for petroleum, and because of concerns over global warming, solar power and battery technology are improving dramatically as attempts to end the economy’s dependence on carbon-based energy increase. Although coal is one of the dirtiest of energy resources, it remains an important source of power for electricity plants, especially since many countries want to eliminate any reliance on nuclear power.

Global Financial Data has recently introduced commodity indices that provide data on over 1000 years of commodity prices. It is only as a result of these indices that we can see the anomalous behavior of energy prices over the past forty years and wonder how long or whether this trend will continue.  

Energy Resources During the Past 750 Years

From the 1200s to the 1800s, the economy’s primary energy resource was firewood, with coal and lamp oil acting as secondary resources. Each, in its own way, provided different types of energy for cooking, heating and power. GFD’s data on firewood prices begins in 1252, coal prices begin in 1447, and lamp oil price data begins in 1272. Although firewood was the primary source for energy from the 1200s to the 1800s, it was gradually replaced by electricity and gas in the 1800s as energy was brought directly into the home. As the graph below shows, although there were periods when the price of firewood rose dramatically, the price of firewood also stayed the same for centuries.

 
As the use of firewood declined in the 1800s, in part because the forests of Europe and America were exhausted, coal become more prominent and by the 1900s, petroleum replaced coal as the primary source of energy. In the 1700s, whale oil replaced lamp oil as whalers from New Bedford and other parts of New England searched global oceans for whales to kill and convert their blubber into oil. Whaling became the principal industry of New England making the area rich. Had the world remained dependent on whale oil, whales would have become extinct long ago.
As the graph of whale oil prices below shows, the impact of war on energy prices is nothing new. The primary spikes in whale oil prices in the 1800s occurred during the War of 1812 and the Civil War.  

 
In the 1860s, petroleum oil was discovered in Pennsylvania and quickly replaced whale oil as a source of energy. When oil was first produced in Pennsylvania in 1859, a barrel of oil sold for $20, but because of oversupply, the price quickly fell to 10 cents by the end of 1861, making it a cheap substitute for whale oil. Overnight the whaling business went into steady decline, with production falling by 70% between 1854 and 1865, leaving us Moby Dick, and saving whales from extinction. By combining historical data for coal, coal gas, firewood, lamp oil, whale oil, petroleum oil and natural gas, GFD has created a commodity index of energy prices that covers the past 750 years.  

Long-term Trends in Commodity Prices

The logarithmic chart below compares the behavior of energy prices to agricultural and industrial commodity prices over the past 750 years. Between the three, energy prices have increased the most, rising over 500-fold in the past 750 years, while industrial commodities have increased in price the least. A quick study of the chart shows that there were long periods of hundreds of years when the price of energy hardly changed, in particular, between 1350 and 1550 and again between 1700 and 1900. However, the 1900s and the 2000s have proven to be a period of wild, but generally rising changes in the price of energy and other commodities.
Several interesting facts emerge from a long-term analysis of commodity prices. Industrial commodities, basically metals and non-food agriculturals, have consistently risen in price less than other commodities. In fact, the dip in industrial commodity prices in the 1930s returned the index to where it had been in 1550! Since then, industrial commodity prices have increased faster than agriculturals, but still not as fast as energy prices. Of the three major commodity indices that GFD calculates for energy, agriculturals and industrials, the energy index has increased the most over the past 750 years. Between 1252 and 1970, both energy and agricultural prices increased by a factor of 60 while industrial commodity prices increased by only a factor of six. During those 700 years, agricultural and energy prices increased in line with one another with few dramatic swings in relative prices.  

 
The price of energy really began to diverge from agricultural prices around 1860 when petroleum oil was discovered in Pennsylvania. Energy prices have leapt ahead of agricultural prices during the past 50 years, especially as a result of large price increases in the 1970s and 2000s. Since 1970, commodity prices have followed dramatically different paths. Between 1970 and 2016, the agricultural index increased almost four-fold, the industrial index ten-fold and the energy index thirty-fold! It is only with this chart that we realize the anomalous behavior in commodity prices that has occurred over the past 40 years and broke a 700-year trend of fairly equal increases in energy and agricultural commodity prices. Another interesting revelation of the chart is the periodic spikes in commodity prices that occur. Such spikes were rare before the industrial revolution, but now seem to come with some degree of regularity. The first three spikes occurred during wars, in the 1810s during the Napoleonic Wars and War of 1812, in the 1860s during the American Civil War, and in the 1910s during World War I. The first two spikes were followed by forty-year price decreases as a reversion to the mean in prices during times of peace. The price increase during World War I saw a similar decline in prices follow in the 1920s and 1930s in agricultural and industrial commodities, but not in energy prices. On the other hand, while agricultural and industrial commodity prices showed sharp increases during World War II, no similar increase in energy prices occurred during the war. The two most recent spikes in energy prices in the 1970s and in the 2000s have yet to be followed by reversions to the mean. While supply factors, primarily scarcity, drove the spike in energy prices in the 1970s, higher demand from China and other countries drove the spike in prices during the 2000s. Since the 1970s, both energy and industrial commodities have followed similar price patterns while agricultural price increases have been more steady.  

The Surprising Interplay Between Coal and Oil Prices

The chart below provides a comparison of the behavior of two of the underlying components of the energy price index, oil, represented by the lower price line since 1800 and coal, which has shown a steady uptrend over the past few centuries.
Few people would have guessed that over the long term, coal has shown such a consistent increase in its price, following a 500-year trendline that started in the early 1500s. Even more surprising is the fact that oil prices, as represented by lamp oil, whale oil and petroleum, showed no tendency to increase from the late 1500s to the 1930s. When petroleum oil was first produced in Pennsylvania, the price of oil went through a series of wild swings, starting at $20 in 1859, collapsing down to 10 cents in 1861, then rising back to $11 in 1864, and gradually declining in price until the end of the 1800s. During the 1900s, both oil and coal prices increased steadily, but oil prices have increased five times as fast as coal prices over the past 100 years because of increased demand for oil relative to coal.  

The Future of Commodity Prices

 
Were one to simply rely upon the persistence of current trends into the future, there would be two logical conclusions. First, energy and industrial commodity prices will continue to increase at a faster rate than agricultural prices. Second, oil prices will continue to rise at a faster rate than coal prices. The reality of supply and demand appear to reinforce these trends. Declining population combined with improving technology means that food is unlikely to become scarce causing large price increases. As people become richer, they switch from low-resource grains to high-resource livestock, but there is little reason to believe that this change in the composition of food consumption will cause dramatic overall increases in agricultural prices. With respect to energy, future changes in demand will be driven more by economic growth than by population increases. In developed countries, energy input per unit of production is declining and to some degree, this offsets the increased demand for energy in emerging markets. Countries like China, which rely heavily on oil imports, are reducing their energy dependence through the development of solar power and improved storage for batteries. Services play an increasing role in both developed and emerging markets, and as services increase their share of GDP, the relative dependence of the economy on petroleum and coal will decline. Future supply and demand for energy depend upon technology and how quickly solar and battery technology are able to improve, as well as how much fracking and related technologies are able to increase the amount of oil that can be retrieved from the ground. Because of the impact of carbon-based energy on global warming, the world is attempting to reduce its reliance on coal and oil. Long-term global trends in population, the composition of the work force, technology, the impact of carbon-based resources on the environment, slower overall economic growth and other factors favor reduced reliance on commodities in the future. Since the economy has passed through its most recent 30-year spike in commodity prices in the 2000s (previous spikes were in the 1910s, 1940s and 1970s), commodity prices are likely to decline at least until the 2020s. Whether commodity prices spike again in the 2030s will depend upon global economic conditions twenty years in the future. The analysis of long-term trends in commodity prices is enlightening. The fears of the 1970s that the world would soon be facing a resource-scarce planet which was running short of energy, food and other commodities never occurred. If anything, the expectation should be for increased supplies of resources and declining commodity prices for the next twenty years. Higher demand for commodities will depend primarily upon how quickly emerging markets increase their GDP while technological improvements both increase the supply of energy and provide substitutes through solar power, material composites and other technological improvements. A review of the 750-year chart of commodity prices shows that for most of history, commodity prices stayed the same for periods of several centuries. It was mainly in the 1500s and the 1900s that the world experienced irreversible increases in commodity prices. Could this pattern repeat itself in the twenty-first century? Right now, this seems unlikely. The pattern over the past 100 years has shown no sign of reversing itself. For now, the safest bet is for rising commodity prices, and especially for rising energy prices. But then, safe bets are not always safe.

2017: Let the Bull Markets Continue

  In our annual review of global stock markets, we noticed that a relatively large number of countries put in what could be a bear market bottom in 2016. If this is true, investors should expect that global markets will continue a bull market run in 2017 rather than forming a top that leads to a bear market. Global Financial Data has data on bull and bear markets on 100 countries beginning in 1693. With this data, we have been able to track bull and bear markets during the past three centuries. We define a bear market as a decline of 20% or more in a country’s primary stock market average and a bull market as an increase in the market of 50% or more. Although a 20% decline is a commonly accepted decline to indicate a bear market, there are no clear rules on what constitutes a bull market. The reason we settled on a 50% increase is that if a market declines by 20% (from 1000 to 800), it would have to increase by at least 50% (from 800 to 1200) to rise 20% above the previous market top. Any changes of a smaller magnitude are treated as either a bear market rally or a bull market contraction.

By our count, 37 countries hit what could be bear market bottoms in 2016. We excluded eight countries (Ghana, Cyprus, Kenya, Malawi, Portugal, Tanzania, Uganda and Zambia) because these countries failed to rally at least 10% from their market bottom, and so, their bear market could continue into 2017. The Cyprus stock market, for example, has declined 99.45% from its all-time high in November 1999. If you had put a $1000 in the Cyprus stock market in 1999, now you would barely have enough left for a cup of coffee at Starbucks. We also excluded Canada from this list. Even though Canada ended a 24.36% bear market in January and has rallied 29% since then, the Canadian market had only risen 40% from its previous bear market bottom in October 2011. We calculated both the percentage increase in the previous bull market and the decrease in the bear market that ended in 2016. For the 37 countries in our list, the previous bull market had risen by 141% with Mongolia ending the strongest bull run with a 626% increase. The bear markets that ended in 2016 had an average decline of 41%, but since then, most of the markets have shown significant recoveries. By the end of 2016, the average stock market in our list had risen by 31% from its market bottom. Several countries ended bear markets that had lasted over five years (Brazil, Colombia, the Czech Republic, Kuwait, Mongolia, and Oman).  

Have Emerging Markets Ended a Four-year Bear Market?

One country actually suffered two bear markets in 2016, Venezuela, which ended a 30% bear market in July, rallied 228% into December, then suffered a 26% decline over a period of three weeks. These fluctuations occurred in the country with the highest inflation in the world, and adjusting for inflation, the results were quite different. During 2016, the Venezuela Bolivar Fuerte (sic) fell against the US Dollar by about 75%. Measured in US Dollars, the Caracas Stock Exchange Index declined by 73% between June 2015 and December 2016. The highest denomination banknote in Venezuela, the 100 Bolivar, is worth about three cents. I think I can safely say that Venezuela has not hit a bottom yet.

Of the 37 countries that probably hit a bear market bottom in 2016, one-third of them were in Europe. Interestingly, even though most European countries hit their market bottoms in January or February, the MSCI Europe Index hit its bottom on June 27, 2016 after the United Kingdom voted in favor of Brexit. Two other international indices hit bottoms in 2016. The MSCI EAFE Index declined by 25% between July 2014 and February 2016 while the MSCI Emerging Market Index declined by 43% between May 2011 and January 2016. Both of them now appear to have hit a bottom and are moving up again. The MSCI World Index did not suffer a 20% bear market decline primarily because of the strength of the United States stock market. Although a bear would argue that there is no reason why the bear markets these countries endured could not continue and each market hit a lower low in 2017, given the fact that on average the markets have bounced off their bear market bottom by 30%, it seems unlikely that they are all headed for lower lows in 2017. Although some bears may argue that a country like the United States has been in a bull market for almost eight years, which is longer than the historical average, there is no reason why the bull market in the United States cannot continue. The fact that numerous countries hit market bottoms in 2016 at least provides support for a continuance of the current bull market into 2017 and reduces the likelihood that markets are headed for a major top in 2017. The table below provides information on the 37 countries and three international indices that hit bear market bottoms in 2016. The table provides information on the previous market top, when it ended and the size of that bull market; when the bear market decline ended and the amount of the decline; and how much the market has recovered since then. Individual stock markets are measured in local currency while international indices and Venezuela are measured in US Dollars.  
Country Bull Top Change Bear Bottom Change 2016 Recovery
Abu Dhabi 9/18/2014 144.93 1/21/2016 -28.59 21.66
Belgium 4/13/2015 104.31 2/11/2016 -21.25 16.30
Brazil 11/4/2010 133.58 1/20/2016 -48.43 59.99
China 6/12/2015 165.15 2/29/2016 -48.02 15.53
Colombia 11/5/2010 151.96 1/18/2016 -51.78 28.75
Croatia 2/11/2011 84.84 1/18/2016 -32.55 26.54
Czech Republic 4/15/2010 107.51 6/27/2016 -39.42 16.65
Egypt 9/7/2014 147.67 1/21/2016 -48.26 147.74
France 4/27/2015 92.87 2/11/2016 -25.28 24.47
Germany 4/10/2015 120.19 2/11/2016 -29.00 26.40
Greece 3/1/2014 187.51 2/11/2016 -67.81 45.99
Hong Kong 4/28/2015 75.03 2/12/2016 -35.59 20.09
India 1/29/2015 95.60 2/11/2016 -22.67 16.01
Iraq 10/4/2011 63.50 6/16/2016 -73.18 28.75
Italy 4/15/2015 91.29 6/27/2016 -30.74 22.61
Japan 8/10/2015 143.17 2/12/2016 -29.27 26.91
Kazakhstan 9/3/2014 55.26 1/21/2016 -39.12 69.89
Kuwait 6/24/2008 70.82 1/26/2016 -68.47 16.46
Luxembourg 4/14/2015 73.02 2/11/2016 -34.48 41.39
Mongolia 2/25/2011 626.20 5/5/2016 -68.18 17.09
Namibia 5/5/2015 199.62 1/20/2016 -36.31 38.52
Netherlands 4/13/2015 85.92 2/11/2016 -24.28 24.42
Nigeria 7/9/2014 118.19 1/19/2016 -47.82 19.68
Norway 4/15/2015 72.83 1/20/2016 -26.35 29.50
Oman 1/16/2011 66.38 1/21/2016 -30.74 18.81
Peru 4/2/2012 298.29 1/20/2016 -63.09 75.34
Philippines 4/10/2015 376.85 1/21/2016 -25.14 12.43
Poland 4/28/2011 120.89 1/20/2016 -42.90 16.32
Qatar 9/18/2014 239.24 1/18/2016 -40.65 22.54
Romania 8/10/2015 83.09 1/18/2016 -21.21 17.71
Saudi Arabia 9/9/2014 169.96 10/3/2016 -51.42 33.12
Singapore 5/22/2013 143.72 1/21/2016 -26.50 12.75
Spain 4/13/2015 99.78 2/11/2016 -34.95 20.49
Sweden 4/27/2015 109.56 2/11/2016 -22.84 22.79
Ukraine 8/1/2014 65.89 5/24/2016 -54.63 23.17
Venezuela 6/13/2015 100.40 12/10/2016 -73.34 14.07
Zimbabwe 8/1/2013 133.18 6/17/2016 -59.95 54.76
MSCI EAFE 7/3/2014 52.30 2/12/2016 -25.21 12.84
MSCI Emerging 5/2/2011 153.96 1/21/2016 -42.93 5.24
MSCI Europe 5/21/2015 53.45 6/27/2016 -25.53 12.89

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Our comprehensive financial databases span global markets offering data never compiled into an electronic format. We create and generate our own proprietary data series while we continue to investigate new sources and extend existing series whenever possible. GFD supports full data transparency to enable our users to verify financial data points, tracing them back to the original source documents. GFD is the original supplier of complete historical data.

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