October has arrived and the darker spirits of the market have emerged beginning with an immediate October sell-off of equities. Boo! It is the Season of the Witch, and equities are being spooked. The first three days of the quarter eliminated the third quarter’s gains as an increasing flow of struggling economic indicators has appeared.
Stocks have lately been trading like the rock of Sisyphus from Greek mythology. Just as they approach new highs, they inevitably reverse course. Sisyphus received his comeuppance when dealt the eternal punishment of forever rolling a boulder up a hill in the depths of Hades, only to have it roll back down. A trickster at heart, Sisyphus represents the folly of those who seek to trifle with the natural order of things.
Looks like a modern central banker!
In the world of markets, central bankers are sometimes presumed to possess supernatural powers to manage the timing of events or even the broader economy. The Sisyphean dilemma proposes a task which can never be completed.
Markets have appeared trapped in this Sisyphean sine wave for eighteen months with small net gains thanks to dividends and interest. Every rally corrects itself seeming to be a portent of imminent recession. Chicken Little, if he had grown to become an Ivy League economist, might say, “The treasury yield curve is inverted, and the economy is falling.” And politics, well let’s not even go there for fear of melting down the Twitterverse. You might think the sky is falling.
Turmoil in the affairs of humanity (and markets) is the natural order of things. We simply have a 24/7 news cycle constantly pounding our collective psyche with negative vibes. It makes me think fondly of the past when cars didn’t have a phone, and you had to talk to your date.
The good news is the world, by most measures, is a better place than it has ever been. The US unemployment rate just hit a 50-year low, and incomes are in an uptrend. Markets never go up in a straight line, though they tend to be positive over the long term, and the dividends and interest get paid.
WHY ARE MARKETS GLOOMY?
There now exist $17 Trillion (that’s with a Big T) in global bonds trading with a negative interest rate. The third largest bank in Denmark is offering 10-year mortgages with a –0.5% interest rate. I wish I could get some of that action. They pay you to borrow the money to buy your house. It is an absolutely befuddling state of financial affairs that this can actually exist.
I have been asked on several occasions to explain this strange magic. It doesn’t fit the script of the traditional schools of economic thought which say that while negative interest rates may be hypothetically possible in a mathematical model, it is highly unlikely anyone would ever choose to pay someone else to use their own money. That would be like paying interest to the bank on your deposits.
In Europe and Japan economic growth is so anemic, there exists little demand by private interests for capital in the form of loans. The governments run intractable deficits, while aging (and shrinking) populations consume resources more than generate them. There is no demand for capital to stimulate demand, or absorb the capital raised by bond issuance. So the capital builds up, with nowhere to go except banks. Pension and insurance companies are forced to acquire the debt, no matter what the cost, hence a negative rate.
In the realm of the world’s central bankers, it is Keynesian economic theory which guides their presumed wisdom. The central bankers twist the twin control knobs of 1) lower interest rates (Fed Funds, LIBOR), and 2) buying bonds (aka quantitative easing) to inject money into the economy, thereby stimulating growth. Let’s not kid ourselves, this is money printing, and the magic hasn’t been working very well for the past decade. They can’t even get a good monetary inflation to start.
The global economy is slowing into recession despite the Herculean, or more appropriately Sisyphean, wizardry of bankers in grey suits. Much of the stimulus has instead migrated to safe haven US financial markets. US Bonds yields have dropped like a rock as bond prices are bid up.
The gloom comes from a general unease by the powers that be that they no longer have the power, and it is Adam Smith’s “animal spirits” that are ruling matters economic. This would be the billions of daily decisions of individuals, which truly drive the macro world from a micro base. GDP starts from the ground up.
The US is doing fine, even as the economy slows. Even if we do have a recession, it is a necessary process as resources are allocated to their best, most profitable use. We expect a longer, slower economic expansion, so try not to listen too closely to the doomsayers.
The confusion of the economic mandarins is not necessarily a bad thing. One shouldn’t let their frustration drive disciplined, long-term planning and investment strategy. After all, GDP starts in your house!
Like Halloween, markets have their tricks and treats. We work for more of the latter, and less of the former.