Back in Ireland for a few days, we take up an agreeable routine. We read and write in the morning. In the afternoon, we lay stone, closing the open gable ends of our old barn.
We’ve done stone masonry in France, Argentina, and now here. (There are no stones in the Maryland tidewater.) This is the best.
The stones here are more rectangular and easier to split. The only problem is that we’re working high up on a scaffold. And while the stones are easy to lay, it’s hard to get them up to where we’re working…
When the sun sets, we are worn out…and eager to return to our laptop.
So let’s look at yesterday’s trading…
The stock market began the day with a positive outlook. When we looked early in the morning, we saw green. But by noon, the Dow began selling off. It fell more than 400 points at one point.
Then, late in the day, investors found their inner dogs, cats, and other animal spirits, and barked up prices a bit. But the Dow still ended the day down 245 points.
That was bad news for the old-timers. It left the index below the technical levels — such as the 200-day moving average — causing them to sweat. This morning, stocks opened up…But the day ain’t over ’til it’s over.
What’s going on? Why so much volatility? What next?
People need an explanation. The media’s job is to give it to them — the simpler, the better.
So newscasters looked around for a cause. More trade barriers, said one. Violence in America, said another. Trump, said an analyst. The Fed, countered an economist.
None of these explanations are very challenging. In fact, all allow viewers to blame someone other than themselves, which is the goal of all modern media and political discussion.
The commentators might just as well have offered this explanation:
‘Because you’ve been damned fools…spending too much…borrowing too much…and believing this preposterous claptrap we’ve been giving you for the last 30 years.’
Our job here at the Diary is not to blame anyone, but simply to try to understand what’s going on. Day after day, the media brings us more claptrap. We can hardly keep up!
But let us soldier on…
Among the most gaudy of the propositions put to us over the last 30 (or more) years is the idea that the motley collection of PhDs, bankers, and political hacks who make up the Federal Open Market Committee (FOMC) can do a better job of selecting an appropriate short-term interest rate than buyers and sellers of credit can do on their own.
As far as we know, the FOMC members do not walk on water. And none has ever performed a miracle.
And yet, they are believed to be able to divine the exact interest rate — to two decimal places — needed by the biggest economy in the world.
As a theoretical matter, nobody in his right mind would believe it. And every experiment in price-fixing (rather than letting prices be discovered in an open market) has ended in failure.
But that doesn’t seem to prevent anyone — including the president of the United States of America — from having an opinion and advising the Fed to ‘tighten up’ or ‘loosen up,’ depending on the circumstances.
Nobody objects to EZ money, so the Fed generally loosened up — allowing rates to stay too low for too long — (Mistake #1) over the last three decades.
Then, fearing that things were getting out of control, it tightened up — raising rates — (Mistake #2) to try to get back to normal.
That produced an inevitable sell-off in the stock market and a recession — just like in 1990, 2001, and 2007 — which led to a panic (Mistake #3) in which rates were cut back again, which inevitably eased into Mistake #1…then Mistake #2…and so on…
To bring you up to date, the Fed is now making Mistake #2…but so timidly, you’d hardly notice.
Still, as rates rise, little by little, we can see the stock market preparing to break down…the economy rolling over…and the Fed governors looking through their files for notes on how to make Mistake #3 again.
Deficits run wild
Little-noticed yesterday was a report from the US Treasury admitting that budget deficits are running wild. The feds are now borrowing at a rate of $1.6 trillion a year and forecasting a deficit of $1.3 trillion next year — about twice the deficit the Trump team inherited from the previous administration.
And here, you can connect the dots yourself. The deficit is going to get bigger, not smaller.
First, people are getting older…Budgets for Medicare, Medicaid, Social Security, and other ‘non-discretionary’ items are rising. This spending is baked in the cake, so to speak. It is the result of open-ended entitlements granted by the feds.
Defence spending, too, is increasing. This is discretionary, but effectively out of congressional control, since the military/security/surveillance wing of the Deep State calls the shots.
Defending the nation could be very cheap, since we have no capable or motivated enemies; it could be done for, say, a quarter of the present $700 billion budget.
Archenemy Russia spends only $60 billion per year on defence, for example. Apparently, that’s enough to keep the Chinese or the Poles from invading.
But while national defence is cheap, an empire is expensive — about $1 trillion a year, all in.
What do we get for that money? Well, if any sparrow falls anywhere in the known universe, it will be our warriors who pushed it!
Extraordinary monetary policy
After nearly 10 years of extraordinary monetary policy — and 36 years of falling interest rates — the credit cycle seemed to turn in July 2016.
Since then, yields have been rising. The Fed is no longer buying up debt; it is selling. Interest rates have risen since July 2016, with mortgage rates now over 5%, and they’re likely to continue rising.
This rise in interest rates comes at a very inconvenient time — just as borrowing needs are exploding.
Mr Trump’s tax cut did not perform as advertised…or at least, not yet. Instead of ‘paying for itself,’ the nation’s finances are deteriorating…with soaring deficits.
Ultimately, the private sector has to pay for all government spending, including deficits. But the real current output of the private sector — taking out inventories and one-time trade effects — is actually going down.
And the bull market in stocks and the expansion in the economy are both in record territory.
Markets and economies move in cycles — up, then down. Even if conditions were otherwise perfect, we would still expect a downcycle.
Those are the dots we’re looking at. What do we make of them? Do you see what we see?
Tune in tomorrow…