The13th Beer
Posted on Saturday, September 10th, 2016
Welcome back! So completes THE most boring summer in investing history. Well maybe not quite but pretty damn close. It is astounding that markets have been so complacent in front of the fall investing season with a litany of worries globally including our own US Presidential election less than 90 days away. I myself am much less anxious about that result since I swore off watching the nightly news shows. I highly recommend it. What was once entertaining turned dark and depressing very quickly. All of my friends that I have un-followed for posting political fodder I apologize. I will be back after the election when things return to normal.
Speaking of returning to normal, the Federal Reserve is contemplating a rate rise at their September meeting. It seems that Fed officials may be worrying about the negative consequences of 0% interest rates. Why is this important? Savers have been punished for far too long. Pension funds and insurance companies are the biggest savers in the world and have a very important role in planning for our later years. They have been paralyzed by the 0% and negative interest rate game. The unintended consequences of the zero bound are mounting. Zombie companies stumble in the dark here in the US as they are able to float debt in the current 0% interest rate environment. Much as we criticized Japan for harboring zombies companies in the 1990’s we continue to harbor them as well.
One wonders how long they can continue to distort policy and have the system survive. The Federal Reserve continues to give the patient more monetary heroin in the thought that it will make the patient better. One of my favorite professors in college was a gentleman from the London School of Economics. He taught us the Law of Diminishing Returns. Not much economic theory works in the real world, but this law is absolute. In short, if I have one beer on a hot summer day it tastes great. The second tastes pretty good as well. The thirteenth? Not so much. Global central bankers are ordering their 13th beer.
The problem is that you cannot get away from this crisis without feeling the pain of lower asset prices. The Piper must be paid. The Federal Reserve stepped in front of this crisis and has been left there alone by our fiscal policy friends in Congress. Politicians worldwide have left central banks to do the heavy lifting. Here is the problem. Monetary policy alone was never expected to rescue and stimulate the system. It was just to buy politicians time to deregulate, simplify tax codes and stimulate the economy fiscally. With no help coming from the fiscal side central banks around the world kept supplying more monetary support to the patient. The Federal Reserve wishes to get the patient off of monetary policy support. Here is the problem. The patient is not ready to stand on their own and Congress does not wish to step in and help care (fiscally) for the patient. Complicating matters is that if the patient falters Congress will blame the Federal Reserve. Don’t forget that Congress is the Federal Reserve’s boss. Since the crisis began we have all known that eventually monetary support would have to be withdrawn. Problem is, now everyone is afraid to do it. The negative unintended consequences rage on. Central banks at some point will have to withdraw support and financial markets will shudder, shake and cry out for more medicine. Eventually they will be fine. It is time to bring the patient around. Problem is – they won’t. The Federal Reserve has too much to lose as Congress will blame them.
Until you have fiscal responsibility you are not going to have effective monetary policy.
It (current fiscal policy) drives monetary policy to be increasingly irresponsible. – Richard Fisher former Dallas Federal Reserve President CNBC 9/8/016
This Friday, markets shuddered as they contemplated a rate hike in September. The data doesn’t currently support a rate hike. Could the Federal Reserve be putting subtle pressure on Congress for their support? It may not last long. If markets stumble we would expect the Fed to announce that the market has reacted so negatively that they must continue policy as is. Around and around we go.
We are a bit unnerved as the market seems to be experiencing a seemingly irrational exuberance when it comes to valuations especially when it comes to dividend paying stocks. As long as central banks continue to expand liquidity and investors keep the faith asset prices will head higher.
Precious metals are insurance against investors losing their faith in central banks. While investors have been pulling money from the market two buyers have been out there keeping the home fires burning. Two buyers who are not price sensitive. Corporations in the form of buybacks and central bankers. Markets could roar higher as professionals are underinvested and markets could sink lower due to a change in central bank policy. Either way, after such a quiet summer, markets are ready to move. Be prepared for anything. Welcome back.