Friday, September 19, 2014

You'll not find "confident entrepreneurship" among the omniscient observers...

What a week this has been! The FOMC meeting, the Scottish independence vote and the biggest IPO ever.

Breaking it down:

The Fed left interest rates alone and left the word "considerable"---describing the time period between now and the first rate hike---in the post-meeting announcement...

The Scots, in a 55/45 vote, decided not to end their 307-year marriage to the UK...

China's baby, a very big baby, chose a bunch of Yankees to take it public. Those of you who succumb to the popular fantasy that China would aim to do Americans harm are, well.... I'll leave it with fantasy...

For today, we'll focus on the Fed:

While listening to Janet Yellen's post-FOMC meeting press conference something occurred to me: As I observed the movements in the prices of various countries' stocks and currencies, commodities, and government bonds (the four monitors that occupy one of my screens), I thought to myself, traders are moving these prices minute by minute second by second as they gauge the impact on overall sentiment of the comments of the U.S. Federal Open Market Committee.  Whether a Fed move, or statement, today will impact the economy this year, next, or ever is not something they're the least bit concerned with. They need to make a directional bet for today, that's about it...

And, you know, traders---these days---own the Fed. That is, the Fed is clearly concerned with the potential near-term market reaction to their every utterance. 

Our clients hear from me constantly that a 10+% drop in stock prices (a "correction") would be a most healthy occurrence right about now. And while they typically nod their heads in agreement, I know that when that correction finally arrives, palpitations will do away with those affirmations. I suppose, thus, that the Fed frets a lot about a plunge in consumption that might occur amid plunging asset prices (i.e., palpitating hearts make for white-knuckled consumers) . After all, the real estate/credit bubble bursting spawned the "greatest recession since the Great Depression".

So let's look at that desperate aversion to asset deflation: What happens when, say, the stock market or the real estate market takes a hit? Of course owners aren't happy. But on balance is it truly such an awful thing? I guess that depends on whether you're an owner or a prospective owner. And whether you're thinking short-term or long-term. With respect to stocks, if you're an owner and you're hoping the market will continue higher for as long as you remain an owner, you're, frankly, deluded. And if you're emotional well-being is dependent upon your portfolio rising year in and year out, I strongly recommend you get out---and right now. Not that I think the next great bear market lurks around the next corner (I'm agnostic, actually), it's that corrections and bear markets are unavoidable, essential even, stock market phenomena.

If  you're a prospective owner, well... I guess a plunge in prices would be a very nice thing for you. You'd be buying cheaper. But apparently you're not the party the Fed concerns itself with. Nope, the Fed is hell-bent on pulling every conceivable string to avert the next great, or modest even, opportunity for buyers to pick up long-term assets on the cheap. And in its efforts, it inspires speculators to invest in assets and derivatives that they believe will respond most aggressively to its machinations---as opposed to the things that might prove most productive in the long-run. And that---the piling into certain things (treasury bonds, mortgage backed securities, real estate, emerging market currencies, for example) is where bubbles come from. Better to leave asset prices to the market.

Not that the market is by any means perfect, but---left to its own devices---it does perfectly respond to the consequences of imperfect business decisions. It takes care of mistakes by re-pricing them. And in that process, the seeds of future success are planted.

The powers that be---Fed governors in my example---either lack faith in the market, or are ultimately concerned with reputational risk should they allow it to re-price things accordingly.  

Here's Israel Kirzner in his 1966 classic, , with an example of how the market turns error into opportunity:
It should be noticed, however, that disappointingly low prices for tangible things, do not necessarily mean that these things will be put to uses for which they were not originally planned. It is still entirely possible that the ovens may yet be sold to bakers. The low oven prices may indeed spell severe losses for the oven manufacturer. But these low prices may make it just worthwhile for the baker to continue baking bread. What has happened in this case is that the entrepreneurial error on the part of the oven-manufacturer has channeled resources into a branch of production (bread baking), where these resources "ought not" to be employed, as judged from the view point of an omniscient observer. In other words, perfect foreknowledge of market conditions on the part of all entrepreneurs would have inspired multi-period plans in which bread baking would now be a smaller industry than is now in fact the case. But, the error on the part of the oven-manufacturer once having been made, competent entrepreneurship has been able to make the best of a bad situation. The ovens have been put to work, bread baking has been permitted to exploit the ready-to-hand ovens (even though these ovens would not, on better judgment, have been produced in the first place).

I assure you---any fine intentions notwithstanding---"competent entrepreneurship" is not be found on the board of the FOMC...

No comments:

Post a Comment