The Story that Bewitched Us All and Turned Wall Street into a Managed Market

Apr 112013
 

Perhaps one of the most interesting observations history will make in regard to the present is just how much it’s governed by language and not numbers. While this may have always been true to some extent, there are few times in the history of the American stock market when this fact, by itself, so obviously outweighs fundamental and technical considerations.

So clear and present is the power that language, backstopped by no more than mere words, wields over today’s market that I’d even go so far as to describe the situation as a .

You’ve heard of managed economies, of course. Well, let me introduce you to the idea of a managed stock market, a bright red cape waving at the charging bull, luring him on.

As the market indices approach and break all-time highs, the story that bears the most responsibility for these amazing feats is not so much the one that has to do with underlying economic strength. Or future productivity gains. Nor is it one driven by the prospect of magnificent technological breakthroughs to come.

It’s merely the one that has to do with the , like Mr. Draghi’s sister institution in Europe, promising to do “whatever it takes” to ensure financial stability through unbelievably experimental monetary policy. In short, a seemingly resolute commitment to hold down until the unemployment rate comes down and the economy goes up. Come hell or high water.

But hell and high water comes in many forms. Inflation being one of them. The question that begs for admittance to the bullfight is the one about an economy that really does pick up steam. Enough say, to spur out-of-control inflation. What will Mr. Bernanke do then?

Absurdity notwithstanding, it’s perceived weakness in the economy that is underwriting the current market euphoria. Whether you’re a dove or hawk, I think we can all agree that this is the condition that really provides our over-zealous monetary policy with all the rope. But let’s put that on hold for the moment. For now, suffice it to say, we believe we have the luxury of balancing on the razor’s edge of low inflation over a vast roiling ocean of money supply.

As a market observer, I find it fascinating how the low interest rate promise pops up whenever the bull seems about to take a breather. Moreover, how effective it is. Yesterday, on April 10th, for example, as the S&P 500 snorted past all previous milestones, it was the collective belief that the Fed, despite their indications to the contrary a mere couple of weeks ago, will stick to it’s easy money mantra through the end of the year that almost single-handedly drove the market higher. The reason? Highly disappointing employment numbers last Friday. Traders and talking heads reason that since the employment reading came out after last week’s Fed meeting any talk of higher rates will be silenced–at least for now.

This means we’re in a very curious predicament: in spite of economic negativity, the surging stock market has come to rely on persistently low interest rates coming to the rescue. The idea that a story like this will trump economic signals and move the market higher is by definition perverse. In this upside-down financial reality, bad economic news turns out to be good for investing. Even more amazingly, there have been many instances over the past year or so when the market actually declined just because investors believed that higher rates might soon be riding in on the back of a strengthening economy.

It’s therefore interesting to ask what happens once the collective forces of really start to believe that our economy is getting better. That is, when everyone believes that low interest will have to be banished. For how can a situation that’s become so dependent on low rates survive when conditions change?

The frightening answer is that it won’t. Many people will lose a lot of money. In a market of buyers and sellers (i.e., winners and losers), one side must always pay.

But there are already losers. Right now, extreme low interest rates are being purchased out of the accounts of retirees. Thanks to Mr. Bernanke and the Federal Reserve Board, it’s grandma and grandpa who are recapitalizing Wall Street. It’s also our pension funds. And everyone who pays insurance premiums. Or purchases gas or any other petro-chemical or commodity product denominated in weak dollars. Or signs a contract on a house the value of which has been summoned higher by the genie of low mortgage rates. Nowadays money may be produced by phantom printing presses, but we’re all paying whether we like it or not. Incredibly, virtually no public debate about all this has taken place in our ostensible democracy save for what may or may not occur behind the Kafka-like closed doors of the Fed. Unfortunately, none of this institution’s sages are elected.

It’s hardly necessary to state that low inflation expectations enable the band to play on. And how convenient it is for the Federal Reserve to discount certain types of inflation over others! After taking stock of all the exclusions they apply to the inflation numbers used to justify low rates, one begins to wonder how abstract and arcane the exclusion criteria must be to actually include something. But surely these are things that only a Harvard economist comprehends. The rest of us must accept it on faith that this rarefied view of reality is beneficial.

More frightening yet is that, when interest rates finally increase, our massively indebted government will need prodigious inflation in order to offset the effects that a higher debt service will entail.

More frightening still is the the question that if huge economic forces are prospering in today’s low interest rate environment, how will they react to a serious threat of significantly higher rates? The answer, I think, is that they will do everything in their power to ensure very modest and gradual changes. That doesn’t mean they’ll succeed, but it does point to the types of policies the mainstream power base will trumpet.

This is the other side of the low interest rate promise: if and when the economy improves enough to warrant weaning off of low rates, the Fed will be in a position to ensure that rates increase in a way that assures financial stability. But will they actually possess this power? Or will the power that they think they wield today vanish tomorrow?

The most frightening thing of all is that, while it’s easy to make grand promises, there’s no one on earth who can predict the kind of variables the global economy will face a year or two down the road when the necessity of finally raising rates may rear its monstrous head. How will react to ’s own radical attempts to debase its currency (both countries, by the way, hold enormous quantities of U.S. government debt)? Combined with the looming specter of a weak dollar and a weakening euro, this may pressure the to do things it might not otherwise have done. Already, intelligent prognosticators might wonder whether may be using the crazies in as a proxy to intimidate the region and further assert itself. In other words, cast as ’s very own mad dog of the . Do we think that we’re the only ones capable of using proxies? Or that the can only be made in America?

More to the point, how do rising tensions among the great and growing powers of the East factor into our faith in our ability to manage low interest rates and the stock market? How much can we rely on economists to predict political outcomes?

When the world’s largest central banks collude in managing global financial markets through monetary experimentation, the magnitude of which the world has never witnessed, how can we possibly put any real faith into the kinds of promises that are currently being made? Let alone our future financial  security? Yet that is just what these bastions of finance would have us do. You would think they’d at least have the decency to tell us that it’s precisely our future financial security that may be the price exacted for such a fanatical faith.

If something’s too good to be true, my grandma used to say, then it’s probably just a pile of bullshit.

Tags: , , , , , , , , , , , , , , , , , ,

A Modest Solution to Finally Resolve the Problem of Poor People

Apr 122012
 

* Prefatory Note: For those who’re somewhat reading challenged, this post is intended to be satirical. *

As an American citizen who loves his country and is concerned about its future, I’m proud to admit that I also love money. So much so that I spend hours a day pouring over financial news and sage commentary from our nation’s army of astute economists. Through my constant attention to this barrage of knowledge and, if I may say so myself, my own rather sagacious wealth management, I’ve come to see myself as somewhat of a financial guru. Not formally or professionally, of course, but what I’d humbly refer to as the armchair variety.

Acting in this capacity and spurred on by my love of country (as well as money), I’ve formulated–or, shall we say, distilled–from the global conversation about how to deal with our present economic woes a solution to the problem of poverty. My plan calls for cutting taxes, lowering wages, and slashing government spending.

The first thing to realize is that our real problems are structural in nature. In this regard, we in the developed world must learn from our prosperous friends in . Even the communists have come to understand that you must pay your workers less than your competitors if you want to be competitive. What could be more fundamental to a healthy capitalist system than that?

This is why the advice from institutions like the U.S. Congress, the World Bank,  and my good friends at PIMCO (rhetorically speaking, of course) are exactly right when they recommend that prosperity challenged regions in the developed world should cut their labor costs. If, to return to health and wealth, our citizens must tighten their belts and go to Walmart a little more often, then good medicine.

But I’ve taken the prescription even further. You see, in our post-modern era where we’re up against the likes of Brazil, Russia, India, and China, the developed world has got to understand that poverty is a resource and not a detriment. Poverty isn’t something to be overcome or eliminated but rather used and embraced. What is the miracle of China if not wealth created out of poverty? Gold from lead as it were?

For Europe and America to return to competitiveness, they must, as our experts constantly recommend, find ways to cut labor costs and curtail government spending. The trick, of course, is to do it in a way that doesn’t derail the economy and reduce business’ profitability. Like the Chinese, we need access to a large pool of impoverished people who, despite this fact, can still pull their weight and support the economy.

We also need to drastically reduce government spending. The biggest areas, as we all know, are defense, Social Security, and health care. Yet defense must remain sacrosanct. Today more than ever, we still need protection, as we always have, from the hordes of people beyond our borders who hate and envy us. Who want to destroy our way of life. We must protect our people from those people. Our people must be able to work for the lowest possible pay in conditions of maximum safety.

It’s therefore logical to slash Social Security spending and government financed health care costs, like Medicaid and Medicare. So, in addition to cutting wages to the bone, I’d like to introduce you to my secret weapon in the war for prosperity: the cigarette. Yes, that’s right, the cigarette.

Cigarette smoking is a time-honored tradition rooted in our American heritage and handed down by our forebears. The way it was lambasted by liberals, like the Clintons, in the 1990′s was extremely unfortunate. The way it’s being taxed by our spendthrift government is downright un-American. I submit to you here and now that cigarettes are as American as guns and apple pie. They’re also, as I stated above, the solution to our economic problems.

We all know how much poor people love to smoke. For many, it’s a brief escape from the monotony of their jobs. A way to deal with stress and fatigue. You can probably even recall scenes of them clustered in groups during break times. Think how much better it was for everyone when poor people could smoke without being bothered with high taxes. Without being told it’s bad for their health.

Why not bring back the good old days? I say let the poor man spoke as much as he likes. Instead of taxing him to death, we could put a lot of extra money back in his pocket by eliminating cigarette taxes. President Obama’s so pleased about his payroll tax deduction, which only offers a measly grand or so. Think how much a three pack a day smoker would save if we cut cigarette taxes by 90%? Instead of paying $20 per day, he might only pay $3! That adds up to savings of $17 per day 365 days per year. Over $6,200 per year!

Now that’s what I call a stimulus plan. But wouldn’t higher cancer rates increase health care spending? Not necessarily. My plan would require that Medicare and/or Medicaid list smoking as a pre-existing condition for cancer. Let them smoke as much as they want. In the unfortunate event cancer develops, then no coverage. It’s as simple as that.

I can hear the bleeding hearts already complaining that it would be inhumane to let them die of cancer without treatment. Well, who said anything about no treatment? The pre-existing clause would allow those who fall under it to be treated with the latest in-home hospice care. That way, the dying would be able to spend their last days in the comfort of their own homes, blissfully sedated, and in the company of their loved ones.

Another brilliant feature of the plan involves the fact that many smokers will die prematurely. But just wait until you hear this. I think you’ll agree that this is efficient market-minded thinking at its best. If we increase the retirement age from 65 to 67 or even 70, statistics indicate that most smokers will hardly even need to receive Social Security payments. The benefits are obvious: more money going into Social Security and less going out. The same is true for Medicare and Medicaid. Thus, not only do we cut government spending, but we shore up  America’s sinking entitlement programs for years to come.

Looking at my plan objectively, anyone but a fool or a liberal, can easily see how much sense it makes. In fact, I would even go so far to say that it’s an actuary’s wet dream. Cigarettes, a product so necessary to the lives of poor people, ensures that they work, reproduce, and terminate in ways that fully support prosperity. Now we can predict with greater certainty how much and for how long an entire population of people will tax government benefits. That is, how much they’ll draw from Social Security and Medicare over their lives.

Who would ever have thought that the solution to poverty and government spending could be so cleanly and efficiently solved? Through the salvation of cigarettes, the poor man can once again stand proud in the knowledge that he’s no longer a burden to his country but a contributor. A veritable resource if ever there was one.

There is just one final point I’d like to make. Call it the icing on the cake. In return for their patriotic contribution, I think it’s only fitting that we show our gratitude to poor people by rewarding them in some way. As long as an individual agrees to purchase an  affordable life insurance policy that requires a minimum daily smoking regimen, then his estate would receive a portion of the amount spent on cigarettes over his life plus the prevailing rate of interest during the contract period. This represents the raw beauty and power of a truly market-based approach to solving society’s most pressing problems. Under my plan, everyone, even the poor man, benefits.

Tags: , , , , , , , ,