Money and Markets: Investing Insights

What could be worse than the Great Depression?

Martin D. Weiss, Ph.D. | Monday, March 28, 2016 at 7:30 am

No one can deny that the Great Depression was a bad thing.
But in some ways, the kind of economy and society that our government has helped create — in order to avoid a depression — could actually be worse.
As I’ll prove to you in just a moment, we now have …

• The biggest concentration of wealth in 100 years; and at the same time …
• The worst political division and dysfunction since the Civil War.
• Plus, some of the most worrisome risks for investors in history.

The last time we saw a similar convergence of these extremes was in 1929.
And the only way that the nation’s balance was ultimately restored was with the Great Depression.
But is today’s situation really as extreme as it was in 1929? Are we truly destined to repeat the consequences? If so, how can investors prepare?
First, the proof …

Concentration of Wealth

The richest one-thousandth (0.1%) of America’s households owned …

• 7.1% of the nation’s wealth in 1978
• 22% of the wealth in 2012, and
• An estimated 24% of the wealth in 2015.

That means they’ve more than tripled their share of the nation’s assets.
But it goes beyond that. Zero in on the richest one-ten-thousandth (0.01%) of America’s families, and the changes are even more dramatic. This topmost tier controlled …

• 2.2% of the wealth in 1978
• 12% in 2012, and
• An estimated 14% in 2015 …

This means their piece of the asset pie is now more than six times larger.And it means these super-rich families control 1,400 times more than the average wealth-per-capita in the U.S.
Everyone else has much, much less.
But this is not just a problem for the poor. Nor is it an issue limited to the nation’s middle class. It also may be hindering hundreds of thousands of higher-net-worth investors from growing their portfolios.
With their controlling interests of the nation’s big corporations, with the companies’ massive stock buybacks that crowd out dividends …
The super-rich are now squeezing the rich!
All this data comes from an exhaustive study recently published by the National Bureau of Economic Research (NBER), capsulated in the black bars of the chart below.

Black bars: Wealth share of richest 0.01% of America’s households. Data: Emmanuel Saez and Gabriel Zucman. Red line: Distance between Republicans and Democrats in House of Representatives. (Data: McCarty, Poole and Rosenthal.

Look how the concentration of wealth reached a 100-year low in 1978 … and how it has grown virtually nonstop since then!
Plus, if you follow the chart through time, you’ll see four other, even more revealing, realities:
First, the last time wealth concentration was so extreme was back in 1929, just prior to the stock market crash.
Second, except for a brief interlude during World War I, there has been only one event in modern history that caused the super-rich to relinquish their stranglehold on the nation’s assets: The Great Depression of the 1930s.
The suffering of that period cannot be discounted. But that’s also when the groundwork was laid for millions of average investors to build substantial wealth after World War II.
Third, unlike the Great Depression, the Great Recession of 2008-2010 did nothing to stop the ascent of the super-rich.
Quite to the contrary, since 2008, the wealth-concentration trend has continued unabated.
Why didn’t the Great Recession stop the near-vertical rise of the nation’s billionaires?
One factor was TARP, the U.S. Treasury’s bank bailouts in the wake of the 2008 debt crisis, helping to perpetuate a quasi-monopoly among the nation’s top five megabanks — JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, and Wells Fargo.
Indeed, according to the latest data provided by the Office of the Comptroller of the Currency (OCC), these five banks represent less than one-thousandth (0.1%) of all the commercial banks in the United States. But they control 46% of all bank assets and 94% of all bank-owned derivatives, or 940-times the average per-bank holdings.

New law cracks down on right to use cash The U.S. government is trying to restrict your access to cash. But not for the reason you think … According to leaked evidence it’s much, much worse.

External Sponsorship

This has helped boost still further the fortunes of their CEOs, their largest shareholders, their highly bonused traders, plus those of their closest corporate clients.
Another factor is the Fed’s relentless, nonstop push for near-zero interest rates for seven long years, smashing income opportunities for average investors and retirees … facilitating high-profit gambits for those who could best afford the risk … and driving even more wealth share into the hands of the super-rich.
Fourth, the most shocking revelation of all: About five years ago, the wealth share controlled by the richest one-ten-thousandth (0.01%) in America matched that of 1929 almost to a tee. But with the bank bailouts and near-zero interest rates, it has now become even more extreme today than in that memorable year of the great stock market crash.

Political Division and Dysfunction

Most economists would argue that, in a capitalist society, some concentration of wealth is necessary, even desirable.
The question is: How much is too much?
I know. You’re probably thinking this second topic is strictly for cocktail-hour chit-chat. Or maybe you’re wondering how I’m going to take this conversation beyond the typical tussles between Sanders and Trump supporters?
Read on and I’ll show you how.
First, as you’ve probably noticed by now, the same chart I just showed you also has a red line that measures political division and dysfunction in America …

• When the red line is lower, it means that Republicans and Democrats vote more by the issues: They cross party lines and draft legislation together.
• When the red line is higher, it means they more often disregard the substance of the issues: They vote strictly along party lines, get nothing done, and throw bricks at each other.

(The chart is based on an exhaustive study of voting patterns in the U.S. House of Representatives, courtesy of political scientists McCarty, Poole and Rosenthal. Similar data for the Senate shows essentially the same pattern.)
Second, what we’re witnessing now is even worse than Washington gridlock — that was just the passive-aggressive phase of America’s power struggles.
What we’re seeing is the beginning of outright political warfare that splinters the two major parties … tears apart the fabric of society … and may threaten future chaos in financial markets.
According to the Pew Research Center, in the last 20 years …

• The share of Americans expressing consistently conservative or consistently liberal opinions has doubled.
• Partisan antipathy and venom have soared. The proportion of Republicans with negative opinions of Democrats has jumped from 17% to 43%. And among Democrats with comparable anti-Republican sentiment, it has more than doubled from 16% to 38%.
• Worse, the vast majority on each side now views the opposing party as a threat to the nation’s well-being, almost like enemies of the state.
• Liberals and conservatives are even seeking to live in different communities: Liberals are far more likely to say they want racial and ethnic diversity in their area. Conservatives are far more likely to say they want to be with others that share their religious faith.
• The extreme believers on both sides are drowning out the moderates, participating far more actively in every stage of the political process. They speak louder, organize more, vote more often, and donate about double the money of the average American … and they do all of this far more today than in the past.

Has this ever happened before? Yes.
It was right after the American Civil War. And based on the measure I just showed you (of political division and dysfunction), it’s now even worse:

• Back in 1879, shortly after the post-Civil War Reconstruction years, the distance between the parties in the House of Representatives was a very high 0.79 (on a scale of zero to 1). That was bad.
• In 2010, it was 0.97. That was worse. And now, it’s probably even more extreme.

That doesn’t exactly give us much hope for resolving the nation’s massive deficits in the federal budget, Social Security, Medicare, or veterans’ benefits.
Nor is it going to facilitate much of the “change” that candidates for president are promising in their 2016 campaigns.
Quite to the contrary, it sets the country up for the kind of involuntary, market-driven realignment of wealth and power that struck in the 1930s.
You see, throughout history, economic wealth and political power have forever been intertwined.
And today, they connect in the realms of political donations and Washington lobbying … tax loopholes and tax policy … offshore investing and foreign policy. But those are just the visible, supposedly “legal” connections.
So when the bubble of economic power bursts, expect a similar outcome for the bubble of political dysfunction.
How can investors prepare for these kinds of frightening economic and political reversals?
Do you sell all your assets and put everything in cash that yields next to nothing? Or do you embark on a quest for profit and yield regardless of risk?
Do you hunker down in your home and withdraw from politics-gone-mad? Or do you jump in with both feet to help tip the scale?
I don’t give political advice. But for your investments, I have just two pivotal words: Caution and moderation.
Too vague? Then let me tell you exactly what I’m doing with my own money …

• I’m not selling everything, but I am accumulating an oversized pile of cash.
• I’m not reaching for impossible profits, but I do seek out the highest possible quality of investments cash can buy, waiting for sharp price declines to pick up big bargains.
• I’m not running in panic from the dangers, but I keep them firmly on my radar screen — not only dangers in the U.S. but also those in countries like China. (See The biggest Global Risk Right Now and The China Fallacy.
• I’m definitely not counting on the Fed to rescue my investments. The Fed has dug itself (and the economy) into an Eight Trillion-Dollar Trap.
• Instead, I’m building a protective wall of hedges around my portfolio, as I explain in My 7-Step Portfolio Protection Strategy and 5 ETFs for Protection in Another 2008.

No one can predict the future with certainty, and that’s especially true in this turbulent election year.
All the more reason for you to avoid risk and seek safety, financially and personally.
Good luck and God bless!
Martin
Important note from Larry Edelson: We are on the cusp of the most profitable bull market of our lifetime. Stocks will be driven higher by powerful global undercurrents that Wall Street will either ignore or fail to understand. As the Dow doubles, some stocks will see explosive gains of 300%, 400%, 500% and more. Savvy investors who make the right moves will become very rich! Click here for my free report to find out how it could make you rich beyond your dreams.

Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40 years to helping millions of average investors find truly safe havens and investments. He is president of Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. And he is the chairman of the Sound Dollar Committee, originally founded by his father in 1959 to help President Dwight D. Eisenhower balance the federal budget. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recesssion and Depression.

The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.