Cut
the noise....not interest rates
With the stock market
seemingly floundering "at the top" investors have turned their focus
to another easy target, the US Federal Reserve.
The Fed has been on a two year quixotic journey first of raising
interest rates at the tail end of the economic recovery to address concerns
that the decade-old surge had been igniting inflation, overspending, and
borrowing; then lowering interest rates in response even when political (and
economic) pressures imposed a "nope,
that's not what 's really going on" reality upon them.
So, just as with the
volatility we have seen in equities, the bond market began a schizophrenic ping -pong match with itself over which data
and opinions were real (or sell-able to the public) and which were not.
But, curiously, the
indecisiveness has actually fed into its own narrative and created a real
problem for financial markets overall.
There actually isn't the type of liquidity (money) to go around that
many experts think, nor is there an appetite right now to be a heavy borrower
no matter how attractive rates might be.
Just recently the Fed again "cut" interest rates (the rate at
which banks borrow from each other over the short term).
But does that rate cut
really affect the lending experience or possibilities for the average investor?
The answer depends
largely upon other things well outside the span of Chairman Powell's
jurisdiction.
Your
wealth, not theirs
For one, the real
economic output of the global economy isn't as strong as the experts would have
you believe. For example, nearly 2
percent GDP in the US is not catastrophic, but it pales in comparison to
earlier economic predictions or where the economy should be in an environment
of low interest rates, full employment, and a record-setting stock market.
Many, including me,
expect the data to continue to improve.
But the exogenous political pressures to manufacture low interest rates
and expansive borrowing is an exercise in pointlessness. Are politicians and monetarists pounding the
table for what they see, or what they hope
to see?
At a time when interest
rates are historically low, the real rate
of return on fixed income assets is
precarious. The 30 year US Government
bond rate has been rising for more than two years. So as the integer value of rates is going
higher the valuation of fixed income securities is falling. The bond market is going through a
mini-crisis. The Fed's influence is not
enough to quell market forces that are worried about bubbles, growth, and a
dearth of borrowing.
In fact, the short term
activities of the Fed did produce a yield curve "inversion" late this
past summer....that is when short term rates exceed the rate on longer term
bonds. But that inversion quickly
self-corrected back to historically syncopated levels we see now.
With all the political
influences upon global central banks it is difficult to manufacture a cohesive
strategy which encompasses economics, geopolitics, financial markets and
consumer sentiment, thus putting more strain upon the activities of government
and business, not to mention Wall Street's speculators and longer term
investors.
If the messengers could
just quiet the hyperbolic rhetoric for a while, the dust would settle nicely in
our favor.
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