What
now?
In
an acknowledgement to worries about the vibrancy of the global economy and its
reverberating effects upon the US, the Federal Reserve Board's most anticipated
announcement about interest rates last Thursday did little to quell market
concerns.
Their
statement maintained a "bias" towards a rate hike sometime in the
near future, but left interest rates unchanged for the present.
The
reasoning behind this decision pertained mostly to developments abroad, most
notably in China, which are putting downwards pressure on inflation and
capacity elsewhere, despite solid evidence that the global recovery is taking
root.
This
temporary retreat puts us squarely in the same situation as we were before, one
in which micro-predictions and market volatility take precedence over macro
planning, true investing, and asset
allocation modeling.
So
now that the announcement has been made, I think we should look back at the
lethal volatility and panic which punctuated the run-up to Thursday.
We
know that this has been a terrible quarter for market performance, but the inordinate
jockeying for position and speculation that characterized the past few months
was excessive and unwarranted. Secular
patterns in interest rates already tell us what we know: interest will rise, must rise, no
matter what the Fed would have said or will say in the future.
Market
forces by themselves are much stronger than man-made manipulation. Inflation is a by-product of economic
growth. Our nascent economic turnaround
will spur profit growth, price pressure, and, indeed, higher costs of borrowing. Why, then, all the turmoil and manipulation
in the stock market?
Up
is down
Mostly
because the US and global bourses became the sole beneficiary of monetary
intervention. Some would argue that
supporting the stock market was actually the mandate of Fed policy. At a time when they left little margin for
error, the Fed governors must surely have realized that not only are monetary
factors in play when announcing their policy statements, but so too are the
fiscal and psychological effects of those decisions.
Unfortunately,
we have been relying upon "easy money" and a lack of alternative
investments for too long for there not to be a tremendous reshuffling of the
deck prior to these announcements. The central deception in all market
performance during the past year and a half is that stocks were acting on their
own.....as if no other factors except for consumer demand and corporate
governance played a role. In fact,
no single factor except for the cost of
money influenced market performance
more than any other!!
So,
are the financial markets better off as a result of Thursday's decision? Not really.
By dint of their actions, the Fed board will set in motion yet another "mechanical"
reflex, a reaction solely to their moves, not the "invisible hand" or
secular forces which traditionally govern the convention of economics. We will be dealing with this discomfort and
volatility for several months hence, until the next Board meeting.....the
"next most important" monetary inflection point.
There
seems to be an environment in which pecuniary boards across the globe impose a
kind-of short term norm upon the financial markets as opposed to offering
clarity about long-term financial, and thus psychological, direction. As a result, the timeline becomes compressed
and market-makers act accordingly. If
the monetary policy makers can't be clear about the macro data, how are
investors supposed to deal with that same data?
I
become concerned because markets seem to represent this dichotomy between short
term signals and secular definitions, a distinction that stymies the
expectations for those who have real money at risk. In a practical world, one needs to be able to
plan for, and quantify, the potential obstacles, as well as laying out a reasonable
destination and expected level of risk.
Without splitting hairs, I think the Fed showed a lack of courage and
foresight just as we got within striking distance of the finish line.
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