This morning, my co-worker Sam Clement and I recorded the upcoming ‘Trading Perspectives’ podcast which will drop on Monday afternoon. We discussed the recent market volatility and the potential reasons for it. By this point, you have probably heard a lot of the same old excuses from any number of different outlets no fewer than umpteen times. Am I right?
However, for all the bricks in the proverbial wall of worry; for all the loose lips of politicians and Fed officials which sink ships (or something along those lines); for all the talk about trade wars, immigrant caravans, Brexit, belligerent Russians, and a whole host of other worries, you know, it has been a very long time since the US had anything approaching a normal monetary policy.
Could that a bigger issue than we might currently believe? That it has been so long since we haven’t had our foot on the gas we don’t know how to respond when we don’t? Even if things aren’t all that bad, and the world isn’t going to stop revolving? Hmm.
I came to this conclusion as it was coming out of my mouth during our recording session. You see, Sam graduated from Auburn University back in May. Obviously, 2008 was 10 years ago. As such, he was just finishing the fall semester of 7th grade back then. Basically, he was just out of elementary school. I don’t mind telling you, brother, that made me feel really old.
What about all those 20-somethings which work in various capacities at the money center banks and wire houses? The were in high school or middle school. The early 30s young Turks? They were still on college campuses, and probably going to a keg party or three (maybe not everyone). Those folks in their mid-late 30s, who are calling a lot of the day to day shots at mutual funds and investment houses across the country? They were just starting their careers, still getting coffees, back when the US last had a relatively normal monetary policy. All those folks who have been dumping money in their 401(k) accounts, setting it for the last decade, and forgetting it because stocks go up after all?
You see, a decade is a blink of an eye for mankind, but a huge chunk of one’s career and investing life. Seriously. ‘We’ haven’t talked about a lot of this material, like inverted yield curves, non-free trade, and the like, for so long, very few even remember such things. Folks outside the investment industry? Fuhgeddaboudit.
So, when the headlines are chock full of this arcane stuff, and it is arcane, how does the average person process it? Particularly when the media outlets seemingly want to take everything to the worst-case scenario? Apparently, not very well, and I understand why.
For the last decade, or most of it at least, the monetary authorities have done just about everything in their power to keep the economic fires burning, if you will. They stopped just short of calling the Bureau of Engraving & Printing and ordering massive amounts of brand new $100 bills, and I mean printing wads of cash like the Venezuelans or Zimbabweans. Heck, even ordering a new denomination like a $500 or $1,000 bill. Again, seriously.
Let me give you this one: ten years ago, the world’s economy was akin to a 90-lb. weakling. So, the world’s various central banks swooped in and started feeding it, and I mean stuffing it with all kinds of tasty morsels. Obviously, the economy put on some weight, and now might need to shed a few pounds. If not that, it certainly needs to quit gorging itself the way it has been. In other words, it is time for a diet of sorts, and who likes diets?
Now, if you have ever had to shed a few pounds, you know there are any number of ways of doing it, and none of them as fun as eating a steak, drinking a milkshake, or sitting down with a tub of buttery popcorn. Am I right? In fact, who has ever been happy when their ‘loose’ clothes get tight? When the doctor tells you to lose a few, although they are probably a little more diplomatic than that? When friends laughingly say you look more “prosperous”? When you know it all to be true? When you have never had to worry about your weight in the past?
No one. However, most people know fad or crash diets don’t work long-term, and the best way to stay healthy is to eat modest amounts of nutritious food and get plenty of exercise. It doesn’t have to be skullduggery. Clearly, I am at risk of being incredibly cavalier about a very complicated situation, involving literally trillions of dollars and other currency units. However, I like the analogy, and think it puts things in context.
So, if you will indulge me, let me start closing the loop: after years of a sumptuous feast, the Federal Reserve has been slowly removing items off the table. At first, we didn’t notice, at all, because the buffet was still groaning with food. However, we have recently come to realize it, even though there is still plenty, a gracious plenty, left to eat…even if it is mostly the healthier stuff.
While no one is terribly pleased, those of us who have been around a while remember times when there wasn’t enough, let alone enough of the stuff we really wanted (in terms of monetary policy). However, there are a lot of folks who don’t remember such times. All they remember, or care to remember, is the powers that be encouraging them to be ‘fat & happy.’ To them, the reduction of items in the smorgasbord is a real problem. Fair enough.
How else to explain the extreme reactions we have had in the markets over the last 6-8 weeks? The economic data has been and continues to be pretty decent, good even. To be sure, the money supply is growing at a decreasing rate and the yield curve has flattened, but to such an extent as to warrant shedding billions upon billions of stock market capitalization?
I would argue not, even if I CAN understand why investor psyche has recently changed…it has been a long time since we have been here. So long in fact, a lot of us, in the country and in the industry, don’t really remember last when. I guess you can say you can forgive the markets for being a little skittish, as all of this seems sort of like unchartered territory even if it isn’t.
With this so glaringly apparent, our leaders in both government and the Federal Reserve need to do a much better job in allaying understandable fears. I have been doing this a long time, and can’t remember when the powers that be have been as ‘tone deaf’ as they seem to be now, and as content as they seem to be in building our proverbial wall of worry as opposed to tearing it down. I have three words for these people: Get it done. Whew.
Economically? Things just aren’t as bad, nor do they prove to be as bad, as the recent volatility would have you believe. Period.
Have a great weekend.
John Norris