The View from Right Field

The Stock Market: Real or Addicted? – A Follow Up

This is a follow up on last Friday’s post, “Is the Stock Market for Real or Just Addicted to Low Interest Rates and Easy Money?”  In writing it, I realized I have been saying the same thing for years.  In looking back at my past posts on the economy, I found I even used the “Christiane F.” analogy, about the problems the stock market would have trying to kick its addiction to low interest rates, before. 

Which gets to the first point of this post: Maybe I’m wrong about the economy.  Maybe things have changed.  Maybe low interest rates are appropriate, and maybe the stock market is for real.  You would have lost a lot of money betting against the stock market over the last ten years.

Is the Stock Market for Real or Just Addicted to Low Interest Rates and Easy Money?

Federal Reserve chairman Jerome Powell indicated in Congressional hearings on Wednesday that the Fed could be cutting its benchmark interest rate later this month – and the stock market promptly went up.  So, a “Powell Put”?  (See here.) 

In addition to a possible U.S. rate cut, interest rates in Europe remains at historic lows.  The European Central Bank’s rate for overnight deposits by banks is -0.4% (where it has been for over three years), which means you would get back less than you put in.  In June, five-year bonds issued by mortgage banks in Germany were priced at -0.2%, which means you would have to pay the bank in order to lend them money.¹  And in Denmark some banks are even offering mortgages at negative rates,¹ which means … well, you get the idea.

Making Inequality Worse By Lowering Interest Rates?

While the Federal Reserve did not lower interest rates on Wednesday, they did indicate they might do so later this year.  Which caused interest rates on bonds to go down, and stock prices to go up.  Once again, making those who are already well off (and have money in the stock market) better off.  And perhaps making inequality an even bigger problem?

Is “Tariff Man” Messing Up the Economy?

At one point in his dealings with China (which continue), President Trump called himself “Tariff Man” – apparently because he likes tariffs and thinks they are good things to impose and/or to threaten other countries with.  Which brings me to the tariffs that President Trump threatened to impose on Mexican imports into the United States if Mexico didn’t do more to stop people from entering the U. S. illegally. 

I have commented previously on President Trump’s arguably rogue or unilateralist approach to foreign policy.  I am not a fan of it.¹  I don’t think it’s good in the long run – or the short run – but I also don’t think it does any good for me to complain about it again and again.  And it gets tiring.  Therefore, this post.

But I think President Trump’s threat to impose tariffs on imports from Mexico in this case causes a different kind of problem that I haven’t commented on before, at least with respect to President Trump, so I wanted to do so. 

Fine-Tuning Probably Works Better on Pianos Than the Economy

The Federal Reserve has shifted course recently.  Previously, it indicated that interest rates would stay the same for a while (which was itself a change from indications last year that rates would going up this year).  Now, however, the Fed is signaling that, if the economy weakens because of “trade wars,” it might cut interest rates.

Some are calling this shift the “Powell put,” in memory of the “Greenspan put” in the 1990s/early 2000s, when then-Federal Reserve chairman Alan Greenspan cut interest rates, and kept them low, to try to keep the economy growing.  While Alan Greenspan’s low rates may have worked in the short run, some see those low rates as one of the factors causing the 2008 financial crisis.

Is MMT the Answer to Our Problems?

The new big thing, well, one of the new big things, in the intersection of politics and economics is something called Modern Monetary Theory or MMT.  One of the big proponents of MMT is Stephanie Kelton, an economics professor at Stony Brook University.  This excerpt from Monday’s Wall Street Journal explains the idea:

“Ms. Kelton argues the government doesn’t need to worry so much about how much it borrows to pay for spending programs.  Unlike a household or business, it can never run out of money.  The government can always print money to pay for debts.  The constraint, according to MMT, isn’t the deficit, but whether the borrowing and spending spurs inflation and disrupts economic activity.

With inflation and interest rates now very low, the government has plenty of room to borrow and spend more, MMT advocates say.  The notion has gained traction among Democratic presidential hopefuls, helping to fuel ambitious policy proposals.

The Problem with Models

In her Notebook column in Saturday’s Financial Times,¹ Gillian Tett notes that auto loans, including “subprime” auto loans, have risen sharply over the past year.  In addition, the number of delinquent car loans, especially in the subprime category, are rising, too.  In fact, a million more Americans are delinquent on their car loans now than in 2010.

In trying to come up with a reason for the increase, which has apparently left some observers baffled, Ms. Tett says:

“But there is yet another possible explanation: consumer behavior might be shifting and, in the process, upending economists’ projections about default, as subprime mortgages did a decade ago.”

Ms. Tett notes that economists missed the subprime mortgage collapse because, inter alia, their models assumed consumers would default on the loans in a particular way: first, credit cards; second, auto loans; and last, mortgages.  But that wasn’t what happened.  People defaulted on the mortgages first.  Ms. Tett suggests this was because it was more acceptable to default on a mortgage but people needed their credit cards to live.  I would say it slightly differently: People started defaulting on their mortgages first because they realized that, in many states, it took a long time for people to get evicted from their house, while the effects of defaulting on their credit card or auto loan were more immediate.

Will Trump Reach a Real Agreement With China? More Importantly, Can Pandas Fly?

Donald Trump has delayed the March 1 deadline for increasing tariffs on Chinese imports, saying that he expects the details of a final deal between the U.S. and China will be worked out at a summit meeting with Chinese President Xi Jinping, to be held at President Trump’s Mar-a-Lago estate in Florida.  One question, of course, is what any such agreement would provide.  Would it just cover China agreeing to buy more stuff from the United States or would it really change the way the Chinese economy works?

The Economist, in a leader in its current issue (“Can pandas fly?”¹), encourages President Xi to, inter alia, limit the state’s role in allocating capital and temper China’s industrial policy.  The Economist says that “[a] more economically liberal China would end up richer and make fewer enemies.” 

But this misunderstands President Xi’s priorities – and the priorities of his predecessors.  Thirty years ago, Deng Xiaoping crushed the protesters in Tiananmen Square because maintaining control was worth putting his economic reforms on hold for a time.  It is the same with President Xi.  Growth is nice, but political control is more important.
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¹ “Can pandas fly?” was the title of the leader in the print edition of The Economist.

John C. Bogle, RIP

John Bogle, the man who essentially invented the idea of index fund investing for individual investors, passed away yesterday at the age of 89.¹

In 1976, the Vanguard Group, the company which was formed by Mr. Bogle in 1974, established First Index Investment Trust, the first index mutual fund for individual investors.  The fund only collected $11 million during its initial underwriting, but today, the fund, now known as Vanguard 500 Index Fund, has more than $400 billion in assets. 

Unlearning the Lessons of the Financial Crisis – One at a Time

In an interview with FT Weekend,¹ former Federal Reserve chairman Janet Yellen said that, even though work on the post-financial crisis regulatory framework is yet to be finished, Washington is already moving to ease “burdens” on financial firms.  Among the key concerns for Ms. Yellen is lending to indebted, less-creditworthy corporate borrowers, which she sees as a potential source of systemic risk.

In light of her comments, one wonders what she thinks of an article in The Wall Street Journal last week indicating that Fair Isaac Corp., the company that created the FICO credit rating score, is planning on revising the way the score is calculated.  In addition to measuring how people manage their credit, which is what they do now, Fair Isaac will look at how people manage their cash.  The idea, according to the article, is “to boost the number of approvals for credit cards, personal loans and other debt”.