Trump, Hoover, and the Roaring ‘20s Deja vu

Everyone remembers the crypto bull market during Trump’s first presidency. Bitcoin shot up from under $1000 to a peak of $20k. Ethereum and ERC-20 tokens did even better, delivering 100-baggers to early investors.

A project named EOS managed to raise $4.4 billion in Ethereum, equivalent to last year’s hottest IPO – Lineage.

VC money was free flowing, so much so that Dash coin started chartering private planes to fly their marketing teams “the DASH force” around. A project named Air Ethereum was pitching the idea of timeshares on private planes.

Crypto was supposed to solve all the world’s problems. No pitch was ridiculous. All you needed was a smart contract and investors would chuck a few thousand Ethereum your way – just in case it catches on.

This exuberance mirrored an earlier period in American history—the Roaring 1920s.

F. Scott Fitzgerald’s novel, The Great Gatsby, captures the zeitgeist of that decade. The Roaring 20s, as they are now called, was a great decade for Americans. New technologies – automobile, radio, electricity, aviation – changed everyone’s lives for the better.

European gold flooded New York, fueling a boom in financial assets. The capitalists threw increasingly lavish parties, and the who’s who attended the equivalent of a Met gala every week. The popular press praised these parties, since it meant more employment for seamstresses, haberdashers, tradesmen and workers.

It was America’s first experience of the wonder drug – loose monetary policy.

The US was technically on the gold standard, which restricted the Fed’s ability to run the printing press. However, the inflow of European gold meant they could issue more dollars backed by that gold. This created a boom in America. The performance of the stock market, and the genuine technological innovations which created economic profits, served as a virtuous feedback loop that attracted more gold to US shores.

On the flip side, the United Kingdom, then the world’s dominant Empire, was bleeding gold to the United States. The British Empire was already reeling from the debts of World War I and the colonies were getting more expensive to run.

The Bank of England had two options – raise interest rates to retain capital at home, or accept deflation, bankruptcies, and economic misery.

They turned to a third option – ask the United States to come to their aid. The BoE called up the Fed, explained their problem, and asked nicely if the Fed would print dollars out of thin air. Monetary policy is relative. If you can’t raise rates, get the other guy to lower them so capital flows shift.

The Fed obliged and started printing money. The Great Gatsby was published in 1925. The next four years were even more opulent. The stock market screamed higher. Margin debt exploded. Irving Fisher, the Paul Krugman of that era, declared on October 15, 1929, that stocks have reached “what looks like a permanently high plateau".

Two weeks later, America entered The Great Depression.

The Great Depression wasn’t just a stock market crash. Investors had experienced stock market crashes before, most recently in the Panic of 1907 when the Knickerbocker Trust failed. Besides, there were no Bogleheads back then. No cult of equities.

“Gentlemen prefer bonds” was a popular saying. The catchphrase was a play on the novel Gentlemen Prefer Blonds (1925).

The stock market crash didn’t hurt as much as what followed. The end of lavish parties meant tradesmen, seamstresses, and the whole cottage industry that had sprung up around that era’s opulence just vanished.

Margin debt – buying stocks on leverage – caused financial contagion. Nobody knew who was financially solvent, so money and credit dried up. The titans of industry made a big show of ‘insider purchases’, but nobody believed them.

Bank runs became common as people clamored to get their gold back. Capital inflows turned into capital outflows.

Herbert Hoover, a wealthy mining investor and quintessential outsider, had become president just as the bubble was about to burst. He had run on an anti-Wall Street platform and was alarmed by the rise of margin debt. Reducing leverage was one of his top priorities.

Instead of doing nothing and letting the bust play out, as his predecessor Woodrow Wilson had done during the 1920-21 depression, Hoover succumbed to Wall Street interests. His political power was fading. The popular press dubbed shanty towns ‘Hoovervilles’ and by not ‘doing something’ he was playing into the hands of his political enemies.

Less than 9 months into The Great Depression, he signed the Smoot-Hawley Tariff Act.

Written by two Republican congressmen, the act raised US tariffs on 20,000 imported goods. The world retaliated, reducing trade with the US and imposing their own tariffs, further isolating the American economy. The result? A deepening depression, with unemployment soaring and capital fleeing the country.

The economists, including Irving Fisher of the “permanently high plateau” fame, told Hoover that the tariffs were a terrible idea. But all appeals to reason fell on Hoover’s deaf ears. Tariffs were the hill he would die on. After all, workers didn’t have jobs, so if you made it expensive to import, someone would have to pay these workers to make the same thing in America.

Tariffs hurt only the furriners, not the Americans.

Hoover also became heavily interventionist. He bullied factory owners to employ more workers at their plants – or else. The US was a laissez-faire economy, so this came as a shock. Behind closed doors, the capitalists referred to his threats as the “iron fist in a velvet glove”. This was before The Godfather – the phrase “an offer he can’t refuse” hadn’t been invented yet.

And if the workers still couldn’t get jobs, they could be engaged in “public works” projects. Like building a wall across the entire Southern border (oops, wrong President!). Like completing the Hoover dam, building roads, highways and federal buildings.

Hoover didn’t have the power of money printer go brrr, otherwise he could have just sent stimmy checks to the unemployed and told them to stay at home.

History often rhymes.

In many ways, Trump’s “America First” slogan echoes Hoover’s protectionist stance, but with far-reaching global consequences.

Hoover took office in March 1929, 8 years into the Roaring ‘20s bull market.

At the start of the Trump Presidency, the stock market looks eerily similar.

Rather than wait for a market crash and foreign capital exodus to begin, Trump wants to impose tariffs right away.

Instead of roads and buildings, he wants to build a 500-mile wall.

I expect a lot of good to come out of the Trump Presidency, but I can’t help but wonder – has he deliberately been set up to fail spectacularly?

On Inauguration Day, the 47th President of the United States is most associated with a memecoin. The First Lady of the United States is also associated with a memecoin.

Is American Exceptionalism real, or is it a meme?

A few minutes into his speech, Trump declares War on Panama, a long-time US ally.

"The dollar is our currency, but your problem" – Treasury Secretary John Connally, 1971

“America First” – Donald Trump

“Every man for himself” – sailors abandoning a sinking ship

An Empire needs allies. Having allies means sacrificing self-interest for the common good. The fastest way to lose allies – short of carpet bombing them like they did in Kosovo  – is by putting America first.

By declaring America First, Trump is signaling that he is putting an end to the American Empire.

Welcome to the multi-polar world

People in positions of power at nation-states and central banks don’t care that Trump made a few billion dollars off memecoins. They care about policy shifts.

Trump has signaled to his Western allies that it is now every man for himself. You can bet everyone from Bernd Lucke at the AfD and Geert Wilders at PVV, to the Brussels bureaucrats and Davos man, are paying attention. The significance of this shift will be felt at every supra-national organization.

Investment implication #1: goodbye, dollar

The big dollar bear market in the 2000s was driven by two factors: China joining the WTO and Europe organizing as a single economic bloc with a common currency.

We’re about to see America First being echoed by other countries. The German elections next month could get the ball rolling. Canadian elections are next. Germany has had enough of being steamrolled by the EU and Davos man. Canadians are sick of Trudeau’s spinelessness and Trump’s threats.

It takes a long time to establish peace and global free trade. It takes very little to destroy it.

While it may seem like changes to the status quo are in a far-off future, they are very real and there isn’t all that much time to prepare.

“There are decades where nothing happens; and there are weeks where decades happen.” – Vladimir Lenin

I favor owning the Swiss Franc and gold primarily, plus a mix of Canadian dollar, kiwi, Brazilian real, and Singapore dollars.

Investment implication #2: follow the tariffs

25% tariff on Canadian lumber? Buy lumber futures or US forestry REITs.

25% tariff on Canadian heavy oil? Buy gasoline, diesel, etc.

This is the first order trade. The second order trade – be cautious in buying homebuilder stocks or US refinery stocks – depends on the actual laws passed.

Investment implication #3: war and sanctions

Declaring war on Panama and attempting to re-take the Panama Canal is going to lead to higher freight costs. Combine that with sweeping sanctions on ships transporting Russian oil, the Houthi attacks on Red Sea transits (temporarily paused), and the ageing of the world’s shipping fleet, and everything is in place for a bull market in shipping stocks. Shipping hasn’t had a long-term bull market since the GFC; it is long overdue.

Sanctions also lower demand for the dollar since sanctioned entities will be forced to use alternate currencies for trade settlement.

Investment implication #4: crypto and memecoins

Fill in the blank: FTX is to the Democrats as ________ is to the Republicans.

The Trump memecoin either signals a long-term top for crypto or marks the beginning of the American crypto renaissance. The crypto industry has been forced offshore because the SEC has always been hostile to it. With Gary Gensler gone and Trump signaling he is pro-crypto, this is about to change.

The Biden administration shut down Silvergate bank and Signature bank for being crypto-friendly. Coinbase and crypto entrepreneurs got de-banked, a situation that has been brought to light by famous VCs (google Operation Chokepoint 2.0).

Crypto-friendly policies may lead to more overall capital flows into crypto, boosting prices of Bitcoin, Ethereum and Solana. It may also cause more speculative capital inflows, boosting the prices of memecoins, NFTs, etc.

If it makes you uncomfortable to risk hard-earned wealth on memecoins and tokens with no intrinsic value, there’s another way to play it – buy the TradFi businesses supporting the crypto ecosystem.

This means buying shares in the issuers of stablecoins, crypto-friendly banks, custodians, liquidity providers, etc. Those IPOs are coming once the SEC puts out clear rules to regulate crypto.

Investment implication #5: energy

Trump has lifted the Biden admin ban on new LNG export permits. “Drill baby drill” was part of his Inauguration speech. He is serious about promoting the domestic oil industry and exporting LNG to Europe.

In his first term, the Trump admin advocated for a Strategic Uranium Reserve to boost the US uranium mining industry. With a trade war looming, this is going to become a bigger priority.

My Outlook

Geopolitical risk, trade wars, economic policy shifts. Things are moving so fast, having the right macro framework has never been more important.

I wrote Preparing for a Minsky Moment on December 16. My outlook hasn’t changed – first deflation, then stagflation.

I want to avoid speculative tech and crypto investments until the Fed starts printing again. There will be better entry points in the near future.

I am biased towards owning gold, gold miners, copper miners, energy stocks, shipping stocks and select early-stage resource stocks.

If I must own tech, I favor Chinese tech over US tech. If I must own crypto, I prefer Solana over Ethereum.

Picking high quality trends – and buying cheap – makes it easier to hold on through the scary moments.

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Good Trading!

Kashyap

hello@kashyapsriram.com