Incredibly low interest rates are telling us a story that few seem able to decipher. For well over a year, interest rates on cash deposits have been near zero, while the “reward” for being a long-term Treasury investor has hovered below 3 percent. The last time rates coalesced around 2 percent was more than a generation ago.
Concurrently, the economy has
lost buying power, jobs, and valuation. As every global bourse in my universe
struggles to gain upside traction, a worldwide decline in sentiment, earnings
acceleration, and pricing power has diminished the foundation of free-exchange
and capital markets. The erosion of market fundamentals and
fairness has been the single greatest consequence of disinflation and low
interest rates in this decade.
The negative real rate of
return on cash is a continuing indication that the economy is moving down, not
up. As investors seek yield in gold,
distressed bonds and hybrid ETF’s, they drain money away from equity speculation and money market reserves, making it
more difficult for a market, or economic, upside trend to materialize.
Two sides, same story.
Global stagnation and
disinflation are the opposite progenitors of what we need for expansion, and
lurk as the iceberg in the water that might sink economic renaissance.
If one considers the enormous
effort put in by Federal Reserve monetary policy and state austerity measures
to keep the cost of money low, one might easily understand how those policies
overextended and why there is a gap in savings rates between the wealthy and
the not-so-wealthy, as well as the older generation versus the younger. We have spent so much time, and money, chasing
real estate, gold, stocks, artwork, leverage, and greed during the past twenty
years that we forgot the proverbial “rainy day,” not to mention the well-being
of our neighbors and friends. That rainy
day is here, in spades.
The key to ameliorating our
“cashless recovery” is to allow rates to follow market forces upwards
consistent with an historical ebb and flow over generations. This could create a cycle of savings, higher
return on time deposits, modest expansionary inflation, and jobs creation, as
opposed to our current state of low rates, high speculation, loss of value in
asset classes, and psychological despair.
Nature versus nurture.
Markets are obviously complex.
But they play to a natural cycle, a
progression that evolves over time from high growth to low growth, inflation to
deflation. Any artificial manipulation of those cycles interferes with the nature
of things, the laws of supply and demand. Build up too much cash and you create demand
for something that might not ordinarily exist as we did with real estate
(homes) and gold. Our most recent run-up
in equity prices and tangible assets was the direct result of policies and
objectives which magnified boom times, high enthusiasm, and, unfortunately,
artificial market forces created by a desire not to have the bull market end. Trying to avoid what is historically
preordained by history, physics, and science is a dangerous game. The synthesis of new banking and brokerage
products in order to maintain profit margins is an alchemy that we can ill
afford, and a game with which the public has already grown tired and
suspicious.
In the end, both bond
investors and stock investors are suffering. Today, we no longer have a definitional
“alternative investment scenario” in which bonds offer the safe-haven from
equity volatility and risk that they might otherwise. Instead, we are governed not by science,
statistics, and methodology, but by synthesized monetary policy that has backed
itself into an untenable corner.
Strangely, it might be a
victory if the markets simply were to “break even” in the end and recalibrate a
new equilibrium.
(Note: the next market weekly will be published on
Tuesday, November 29th. In
the meantime, Happy Thanksgiving to all my valued readers!!)
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