|The Markets Have Proven To Be Both fickle And Baffling|
Indeed the markets have proven to be both fickle and baffling making at times extraordinary price moves that can only be explained in hindsight by the influence of a combination of outside forces such as cross border money flows, the carry trade, computer trading, and much more. True value and price discover is absent when factors like a short squeeze or manipulation corrupts a market. Market pricing does not always derive a fair price and the distortions can last for long periods, this means a market can remain irrational far longer than we think. Recent wild fluctuations in the markets based solely on the idea the Fed was ready to raise or delay raising interest rates has been way overdone because anyone in their right mind knows unless inflation soars any increase will be very minor. Until the Fed is actually forced to raise interest rates by some unforeseen event or a great jump in demand that spurs economic growth it is difficult to envision rates returning to what most people would consider normal by historic standards.
With so much of Americans wealth held hostage by market forces, market direction is an important issue. Like many economy watchers and investors I'm forced to ask, when will all the nonsense end? When will bad news again cause Markets to fall? As of late a barrage of bad news has flowed out of all sectors of the global economy. Volley after volley has bombarded the markets only to reinforce fears of going from zero interest rates to negative rates. This has caused even more people to think that "we are saved" because interest rates can not soon be raised or as many claim, never be raised. One place we get general agreement is that the financial area of the economy and stock markets have fared better than the economy as a whole since 2008 based on a large increase in the monetary base. This coupled with artificially low interest rates causing investors to take on more risk in order to get some kind of return on their money has fueled high equity prices.
Ben Bernanke in a recent interview where the former Fed Chairman was busy pumping sales of his new book conceded, that Fed policy has not cured all our problems concerning issues such as the too big to fail when he said, "I wouldn’t say the problem is solved, by any means, but it’s being paid attention to and progress is being made there." He also conceded the middle class has gone nowhere when he said, "obviously, a lot of the benefit of the growth and recovery has gone to the more upper-income class." As expected Bernanke's new book, “The Courage to Act: A Memoir of a Crisis and Its Aftermath.” a title he claims refers to policy-makers around the world is an effort to take credit for the best, distance himself from the worse. Bernanke uses the worn defense that consequences would have been far more dire if he had not acted, he paints a rather positive picture of himself while casting the blame for our woes onto others.
In all honesty the average consumer will see little effect from an interest rate increase of a quarter or a half percent. Today even in a zero interest rate environment it is not uncommon to find many Americans with poor credit paying interest rates in the teens or in the area of twenty percent. These consumers will likely see no real difference in their rates and savers will continue to pay a high price for these policies. This does not mean all is well, many of us see major difficulties ahead for the economy and contend any claim of a recovery is built on a very weak foundation. It does however raise the question as to whether markets should be overly concerned as to when rates are adjusted upward in the most minor way. The crux of our economic problems are far larger and the system far more fragile and open to contagion based on leverage and promises that cannot be kept than most people care to admit.
Several well respected investors like Pimco’s Bill Gross agree with Jeremy Grantham’s long-term prediction that bond investors should be expecting 2% to 3% returns over the future years, this is lower than many expect based on slow growth. Grantham warns: “GDP growth for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.” If fellas like Gross and Grantham are correct it will be tough sledding ahead. Looking ahead at long-term macro-trends: “The U.S. GDP growth rate that we have become accustomed to for over a hundred years” is “not going back to the glory days of the U.S. GDP growth,” no matter how much wishful thinking the media quotes from many economists and Wall Street banks. If it is true we are in denial about the amount of future growth we can expect the stock market is involved in a bout of “irrational enthusiasm” that will not end well.
Most business people, bank economists, and the Fed assume that economic growth will recover to its old rates, but demographics would indicate otherwise. A big spike in interest rates wouldn’t be friendly for stocks, this means we are in a bit of a trap. The American dollar is the worlds reserve currency. Changes in the value of the dollar are thus magnified in importance and do not just effect America but the whole world. All the people and countries that hold dollars can at anytime greatly effect our ability to do business as usual. The central reason the dollar remains strong is that the economies of the other three major currencies are in worse shape than ours and have also pursued QE policies. Bernanke set the bailout and money printing machines on high and flooding America and the world with QE, and by selling other central bankers on this solution he has taken the lead in an experiment that is losing traction.
Japan remains the poster child and living proof that low interest rates do not guarantee economic growth and prosperity. As we measure the results of the Bernanke policy it seems they may not be much different from those achieved by Japan over the last few decades. The Fed has placed us on a path that avoids real reform bailing out the very people that caused many of our problems, and lurking in the shadows is the possibility of an economic meltdown of our faith-based system. Real economic momentum seems to ebb shortly after each new wave of stimulus and another fix seems to be constantly needed, it is becoming harder to ignore that each fix adds to the distortions that already exist. This is akin to a doctor telling a patient to double or triple his dosage when the medicine does not work. We have stepped onto a very slippery slope filled with danger.