Some guidance from 1933-37

"Here we find another example of what would today be unthinkable... If you sell [someone Pounds (£) for January delivery] you could find yourself with no means to legally buy back your position. So strange as it might sound, they drove speculators out of the short positions. Government just didn’t want any short bets against them in any market. They sought to have their cake along with a full belly and free rent all at the same time. If it couldn’t be achieved by a free market system, then they would make up their own rules and limit the freedoms of the market to their liking.

"The last four months of 1933 were marked by numerous shocking issues. Many of the steps taken to force the markets to yield to the will of government are steps which will one day soon be reimplemented. Today we are all aware of the G-5 group of central banks and the political consensus around the world that promotes the manipulation of foreign exchange to achieve economic stability. The methods of the present are no different from those attempted by the central banks first in 1925, again in 1927 and finally by Roosevelt in 1933. In the September 25, 1933 edition of Time magazine, we find an interesting comment as to how the stock market was viewed to be a hedge against the currency inflation policies of Roosevelt. This is very important because I seriously doubt that anyone would view the stock market today as a hedge against inflation. Nevertheless, this issue was the primary factor which led the stock market into its rally which eventually peaked during 1937. Time magazine reported upon this aspect as follows:

"'Methods of hedging against inflation within U.S. frontiers have become a favorite coffee-&-cognac topic. Purchase of industrial stocks is, of course, the most popular hedge, but commodities and land have been creeping up fast since the NRA threatened profits with higher labor costs. Some shrewd businessmen with little capital at stake argue that the best thing is to go as deep into debt as the banks (or friends) will allow; eventually they will pay off with cheaper dollars. Carl Snyder, economist for the Federal Reserve Board, was asked lately by a wealthy friend how he could hedge against all possible contingencies including deflation or stabilization so that he would die as rich as he was at that moment. ‘One way,’ snapped Economist Snyder, ‘is to shoot yourself.’"

"The comment of economist Snyder in a very realistic sense was quite true. The only guarantee that one would die with essentially his current assets in this situation was to commit suicide for you never know what tomorrow would bring.

"There is no doubt that during the year 1933, the stock market gained significantly on the prohibition issue which anticipated that the country would turn "wet" as of January 1, 1934. But the entire issue of Roosevelt’s currency inflation had a large impact upon the performance of the market as well.

"The market began to rally finally from the summer of 1933 lows on the perception of a hedge against inflation. After a rally into January 1934, the market fell back and consolidated into a July low during 1934 once again. From there, commodity prices began to rally after the convertibility of gold for U.S. citizens had been officially abandoned in January 1934 and the effects of inflation began to spread throughout the world. Eventually, the inflation scenario continued to drive the markets higher into 1937.

"From March 1933 into 1937, stocks rose largely upon the belief that inflation would raise the price levels of commodities and therefore earnings would rise as well. Stocks were also viewed as a hedge against inflation as we read in the September 25, 1933 edition of Time magazine. Therefore, we find some continuity in the analysis which took the position that stocks would rise in the shadow of commodities. This was largely created by the fact that much of the economy was heavily commodity oriented.
High techs were not exactly the rage of the times. Keep in mind that the automobile was viewed to be a large consumer of commodities. So we do find that there is some logic to the commodity relationship prior to World War II. But as the economy developed over the next several decades, the U.S. industrials and service oriented business sectors began to play a much more dominant role in the GNP of the United States. Thus, the concept of commodity relationships with the stock market has been divided and almost forgotten for the broad market as a whole.

"After inflation spending continued yet commodities and stocks declined from the 1937 high, that scenario of currency inflation disappeared and Roosevelt’s theories appeared to be a total failure."

-- 1933, from "The Greatest Bull Market In History", Martin Armstrong