Very low interest rates make people crazy.
It is dangerous to participate in an economy where people are doing crazy things.
It is even more dangerous when the crazy period ends. Interest rates are going up.
People say I am a "doom scroller." This blog sends up warnings, most often to Democrats, who I worry are doing self-destructive things, by accident and foolishness. Democrats mostly live in urban, multicultural enclaves of educated people and they are certain they are morally and practically correct. I am part of that cohort but think I recognize better than my friends that much of what we think and favor is politically unpopular, and we aren't making it popular. The voters are warning us, if we will listen. How else could someone so flagrantly unfit and dangerous as Trump get the support of about half of America?
I feel like a killjoy. I sometimes feel like an unpopular designated driver--only I am sitting in the passenger seat. Politics is crazy, and so is the economy. So I am doing more doom scrolling today.
The Federal Reserve has made extraordinarily low interest rates a matter of policy for over a decade. They created the crazy. Since the GOP largely blocked infrastructure fiscal stimulus to get us out of the Great Financial Crisis of 2008-2009 the Fed compensated with huge monetary stimulus. They recapitalized banks and other businesses that acted like banks (AIG, General Electric, brokerages), they bought distressed mortgage and corporate bonds, and they made interest rates near zero. It gave investors the confidence that when problems happened, the Fed safety-net would protect them.
It also meant borrowing was very inexpensive. For over a decade the return on bank deposits held by savers are less than zero. Inflation was low--about 2%--so people lost money by holding cash. Currently, inflation worldwide is about 8%--and returns on safe, liquid savings are still about zero. The Fed, at long last, is responding by raising borrowing rates, but even now with "sky high" mortgage rates at 6%--up from 3% a year ago, with inflation at 8%-- a borrower is paid to borrow money.
That has the same effect on the economy as dividing by zero has on a math problem. It makes a crazy result. Investors range between restless and crazy if they see themselves doomed to lose money doing something "safe and prudent." A great many people need "safe and prudent" investments. It isn't available, so they seek yield where they can get it, in risky investments. Stock prices reflect that desperation. The financial world did what it does. It creates products to feed investor appetites. Remember leveraged buy-outs and junk bonds in the 1980s? Remember internet IPOs? Remember "derivatives"? Remember collateralized mortgage bonds?
Investors are acting crazy because the free borrowed money is crazy. I have seen these things unwind, past and again now. Market prices for stocks--especially technology stocks, are down sharply this year, as are NFTs and cryptocurrencies. Remember what happened to internet stocks in 2002. Even the lucky companies that survived did so after shedding 90% of their price. This may not be the bottom.
Maybe we could have a huge bear market without a recession and high unemployment. Boomers are retiring. Help-wanted signs are everywhere. The Fed raising the price of borrowing theoretically could reduce foolish speculation without crashing the economy and employment. The economy might cool off by making the rich less rich, not by taking jobs from the poor to make them even more poor. But that is not how it worked out in the past. Crashes end up hurting everyone.
My readers skew older and prosperous. So I send up a warning. People who look at their investment accounts and assume it represents real, solid, reliable value, may be caught up in the crazy, even if they don't want to be and even if they don't own NFTs and cryptocurrencies. Those account numbers may only represent current price, and a false one at that.
Be careful. We are in transition.
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8 comments:
No matter how far back you go it's safe to say we are always in transition.
That aside, until the politics of wealth inequality are addressed we will continue the boom/bust cycles. The Fed could have started raising rates in 2015 when the recovery was underway and also note that the stock market reacted to Trump's election with a historic speculative mania.
What goes up, must come down.
Buying NFTs with cryptocurrency reminds me of playing Monopoly, except you have to buy THE play money.
There are many Democrats with only a high school diploma or GED. There also are Democrats living in suburbs. In some states, such as Massachusetts, most of the state is Democratic, although they will elect moderate Republicans, especially if the Democratic nominee has issues.
Maybe you can define "educated." Cities are very diverse and the levels of education among Democrats vary from very little education to highly educated.
I predict we will end up with much more regulation of these speculative investments, once it’s too late.
Peter: you state that crashes hurt everyone. I disagree. If the market tanks 50%, the 70 year old retiree with $500,000 invested in equities is screwed. He can no longer pull out $50k per year to supplement his social security and expect to be financially secure into his late 80’s.
On the other hand, the 70 year old retiree with $20MLN will be just fine, in fact, he may be able to take advantage of the bear market and buy up more stock at lower prices. Or buy up the foreclosed real estate of those without the means to get through the crash.
Markets go up and go down, but those who are wealthy (and prudent) do well regardless.
Dear Anonymous,
People who read this blog--even people with less than $20 million dollars--have money in cash and are ready to take advantage of a bear market. I don't presume to give financial advice to people whose situation I don't understand, but I consider this blog post to be a heads up and warning. Consider one's risk tolerance. Consider one's cash flow needs. A person with enough money to outlast a long bear market is probably ok. A 60-30-10 portfolio did well enough over the past ten years and such a portfolio had money available in March of 2020 and has it available right now.
Some people want go-go performance. They live and die by the sword. People in the accumulation phase of their lives should welcome a bad market IF they can keep their jobs and income and keep accumulating.
Peter Sage
Retired Financial Advisor
Peter Sage
Peter, my investment counselor (now counselors) were instructed to nvest my money in safe, clean stocks. I didn’t want to grow my portfolio, and told them “just earn me enough to protect me against inflation. They accidentally (thanks to a bull market) expanded my holdings rather phenomenally.
Now my holdings (still waiting for my quarterly report) remain far above what they’ve been worth over the last 20-30 or more years.
Maybe the market will fall even more, like enough to shrink my holdings to a 20-30 year ago level.
Regardless, I expect to follow their advice: don’t start selling stuff when prices fall. When you do that, you’re taking a loss. If you just “Hang in there”, everything will (as it always has in the past) recover to pre crash levels, sooner or later.
Obviously my counselors have no crystal ball, but I’ve done extremely well just leaving my money in their hands.
I’m curious, Peter, and I’m not asking in a critical way. If one takes his money out of the stock market, where should he put it? (I do have a small number of rental houses, which -thanks to me doing about 98% of the construction myself-continue to pay well, even though I refuse to raise rents, just because I can get away with it.
But to transfer money from the stock market to the housing industry? For me, not a chance. Have you seen the cost of houses lately? And I’m too damned old to build any more houses. The work is just too physical.
I know you won’t make investment recommendations, but serously, where can someone move their stock market wealth to that's better than the stock market? Gold? Blackjack? Betting on your favorite race horses? Slot machines?
Malcolm, email me directly Peter.w.sage@gmail.com
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