Sunday, March 23, 2014

Not all smoke and mirrors...

If you're in the camp of the Peter Schiffs and David Stockmans of the world (each was at the top of his game on "Fed Day" last week), you believe the economic growth (as tepid as it's been), as well as the rise in stock prices, occurring since the bottom of the Great Recession is nothing more than an illusion conjured up by the members of the Federal Open Market Committee with strategically-positioned mirrors, veiled by the smoke emanating from their many commentaries.

While I am sympathetic to the ideology I think these gentlemen subscribe to, I can't quite join the party when it comes to how we've arrived at this juncture. With regard to Schiff (who I'm more familiar with) in particular: he's been throwing himself out there with predictions of a market collapse, all the way back to when the market was done collapsing in the spring of '09. Watch an interview with him and you'll witness a man with great conviction, and little tolerance for anyone with a competing theory. Whenever I watch Mr. Schiff, I think man, this guy's bright, and he may ultimately be right, but my goodness he could use a little humility. I mean, he hasn't been the best market forecaster for quite some time now. 

To believe that the stock market reaching all time highs is entirely the result of the Fed pumping money into bank excess reserve accounts is to give zero credit to the folks who manage the companies that comprise the major market averages. And I'm not in that camp: To some degree, private sector enterprises have enacted the kinds of policies Schiff, Stockman and yours truly say need to be adopted by the public sector. The closing of unprofitable facilities and subsidiaries, and the laying off of unproductive personnel, for example. Essentially doing what needed to be done to become/remain profitable in what remains a very uncertain environment. Today's S&P 500 company sits atop a huge pile of cash that, if deployed (to things other than stock-price-supporting share buybacks), could be an economic game changer going forward. Oh, and yes (nodding to Schiff), they have of course refinanced their debt, and some (in many instances to fund buy backs), at Fed-suppressed interest rates.

As I've stressedad nauseam, here from day one, I am to no small degree concerned with the potential fallout resulting from the unavoidable misallocation of resources that occurs when government attempts to direct the allocation of resources (Schiff has legitimate grounds for his concerns). And I have little doubt that the market will bring deliverance to Schiff's waning rep as a forecaster. But that, the next recession/bear market, would be inevitable, with or without a penny's worth of accommodation from the Fed.

You see, the economy is cyclical: recessions serve to purge expansion-born excesses. And, yes, I agree, government has, once again, gotten in the way of the process: Poorly run companies and executive name badges remain today only by the grace of their cronies in Washington. And---as a result of all the Fed's QE---trillions of dollars rest in bank excess reserves that, if it were to begin pouring into the economy, could take up all that inflation-suppressing slack in a hurry and send the Fed's heads spinning. To ward off (or, perhaps more likely, to attempt to contain) inflation, the Fed would have to sell its bonds back to a market that, I suspect, would require yields substantially higher than their coupon rates (the rates at which the bonds were issued).

All this circumventing of economic nature, as you can see, is potentially very hazardous in the long-run. It's akin to cordoning off miles of underbrush from a forest fire---leaving it to grow, unabated, and choke any new growth---and leaving nature to ultimately conjure up the kind of flames that an army of firefighters won't be able to subdue. That, a policy-induced depression, is what the Schiffs and the Stockmans of the world are betting their reputations on---and they could very well be right. But, then again, some black swan (unforeseeable development) could prove them wrong. Some new technology, wireless electricity (HT Darren Thomas) perhaps, or allowing the world's greatest producer of energy (us) unfettered access to the global market, or something---or combination of things---else, might tilt the economy in a way that could indeed circumvent the extreme pain these soothsayers see coming. The Internet surely did real damage to the reputations of some latter 20th Century fortune tellers.

So then, as much as I subscribe to the notion that government intervention into the economy can't help but create dangerous distortions, in the long run---inevitable recessions (great and small) notwithstanding---I remain optimistic. I believe Adam Smith, way back in the 18th Century, had it right:
The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.

Stop right now and look around you---what you see is not all smoke and mirrors. What you see is the proof that Smith knew what he was talking about.

And of course there's always this from F. A. Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

And to demonstrate to the Schiffs and Stockmans how little they really know about what they imagine they can predict.

No comments:

Post a Comment