June 29, 2016

Teasing Us All

A line in the 1973 song Lord Mr. Ford goes, “All the cars placed end to end would reach to the moon and back again, and there’d probably be some fool pull out to pass.”

Such is the delicate balance of global finance and economics that if somebody wheels out of line like the UK did from the European Union last week, a pileup ensues.

We should wonder why the heck everything is so fragile, especially stocks. Humans were engaged in commerce long before bureaucratic bodies decreed a need for pacts and zones. The USA was trading globally back when everyone funded government with the very tariffs now vilified. We did better then, the May trade deficit of $60 billion says.

To contend that global trade will suffer setbacks if the UK leaves the EU is like saying every pro athlete must have the same agent. There must be something else here.  Sherlock Holmes, that fictional feature of Scotsman Arthur Conan Doyle’s imagination, said that after eliminating the impossible, what remains, no matter how implausible, is the answer.

For instance, when you eliminate the impossible about the stock market, the implausible remaining fact is that it’s mostly priced by arbitragers. That was the case Monday in the data, where the Dow Jones Industrials shed 260 points on arbitrage (last Friday though, macro money via indexes and ETFs panicked at the disco). Naturally arbitragers reversed course yesterday. If traders drive the market down and nobody sells, they conclude money is hoping for a bounce – so they offer one.

The market has devolved into a series of reactions to expectations versus outcomes. No wonder.  So have political and monetary policies. As the Brexit recedes and something else arises (perhaps a reactionary Japanese currency-devaluation rattling US stocks again) we’ll continue to bounce from rail to rail down the road, occasionally keeping it between the lines, because policy-makers are managing to minutia.

Ever got a credit card with a teaser rate?  The low promotional cost is intended to prompt a reaction from you.  The card company wants consumption to follow.  Who benefits? You could say, “I got some stuff I wouldn’t otherwise be able to afford.”

True enough. But should you buy things on credit you can’t afford, and if you do, would you expect to be more prosperous as a result or less so?  We’ll come to it in a moment.

The beneficiary is the credit-card company, which hopes to drive revenue in the present through transactions, and revenue in the future if or when the interest-rate normalizes.

Central banks since 2009 have been engaged in a grand teaser-rate experiment. In effect the Fed and others offered the planet a low introductory rate. Who benefits?  We humans got stuff we couldn’t otherwise afford such as mortgages (bought by the Fed to boot), new cars and refrigerators. But does spending borrowed money lead to future prosperity?

If you’ve ever had a financial planner or a grandparent, you know that the secret to future prosperity is the exact opposite – saving money now instead of spending it.

What I would like to know, Janet Yellen, Larry Summers, Austan Goolsbee, Greg Ip, Steve Liesman, Jon Hilsenrath and the rest of you super-smart economists is if we know that saving today is the key to future prosperity, why are you supporting monetary policy that encourages spending now for future prosperity?  Both things can’t be true.

Think about the Federal Reserve and interest rates. We’re all waiting for the impossible.  If we’ve had a low introductory rate for seven years prompting everyone from companies to consumers to spend and borrow today, how in the world could it be true that normalizing rates would promote economic growth?

The problem, however, isn’t normal rates but the original policy of a years-long teaser rate getting people to spend. It’s why everything is so fragile. Markets and economies are perched on a temporary condition: An introductory rate.

Who in our analogy is the credit-card company benefiting from our spending? Governments.  They measure consumption – spending – as economic growth.  If there is economic growth, governments can claim to have solved problems and then can continue to promise citizens more stuff in the future, which will require yet more economic growth to fund it. This way they stay in charge and get everybody doing the same things.

The Brexit is a crack in the grand teaser-rate plan. That’s why it’s rattling markets. Teaser rates that promote spending do not create actual growth and will not produce prosperity. Yet the savings and thrift that do are not only discouraged but inhibited.

If we’ve all figured that out, expect a rough time in coming months for stocks because the truth at first hurts. If we haven’t, then the implausible will continue until it becomes impossible. Or somebody else wheels out of line.

Share this article:
Facebook
Twitter
LinkedIn

More posts

dreamstime m 99921172
April 10, 2024

You wonder what’s going to happen next. I mean, look around.  The South Carolina women ran ruthlessly through everyone, capping a 38-0 season with the...

dreamstime l 27136185
April 3, 2024

Is impending volatility predictable?  Sherlock Holmes would not tell Watson it’s elementary, that’s for sure.  But there is a tale behind the tape. Permit me...

dreamstime m 105967603
March 27, 2024

Vanguard founder Jack Bogle said to own the averages. Index funds.  That seed germinated into a tree that filled the investment world. Look at Blackrock....

dreamstime m 6563143
March 20, 2024

I was walking up Steamboat Springs’s Emerald Mountain with my friend Charlie last week and he said, “Trading volatility is like trading air.”  Charlie was...

dreamstime m 5149030
March 13, 2024

My wife Karen is reading Peter Attia’s book, Outlive, which is like reading it myself. I get the benefit of Karen as filter for tidbits...

dreamstime m 66699772
March 6, 2024

What the…? Everything was awesome. Monday. Then yesterday, stocks toppled like a thawed corpse in Nederland (inside joke, there). No obvious reason. Some said it was...