LOW INTEREST RATE POLICIES: WHAT’S BAD FOR CHINA IS BAD FOR AMERICA

8/5/13

This morning’s (i.e., Monday, 8/5/13, page A2) Wall Street Journal features an article by Tom Orlik, “Murky Data Complicate China’s Policy Choices” that addresses the possible undercounting of Chinese consumption in calculating that nation’s GDP.

While Mr. Orlik’s main argument was, as usual, insightful bordering on intriguing, yours truly was especially struck by an observation made late in the article, to wit…

“Critics say low interest rates have crimped income for households by reducing returns on savings, denting consumption growth.  The International Monetary Fund estimates that low interest rates transfer about 4% of GDP a year out of the pockets of household savers and into the coffers of state-owned firms that borrow at preferential rates.”

I have been arguing for years that what I call “Ben Bernanke’s War on the Elderly,” or the continuing low interest rate policy that is by no means uniquely American, is in effect a huge tax on those with the prudence to save imposed in order to reward those who spend.   But never have I seen it put so succinctly, outside my blogs, as Mr. Orlik puts it in this morning’s WSJ article.   Unfortunately, Mr. Orlik is writing about China, so the comparison to the United States might escape some readers.  Further, the comparison is not as perfect as one would want; for example, in this country, the low interest rates transfer money out of the pockets of savers to the government and other prodigious spenders rather than to state owned enterprises, as in China. 

Still, the point is the same; low interest rates are having an insidious effect on our economy.   The immediate effects are to deter consumption and to make the lives of those who depend on their savings more difficult.  The effects will only intensify over the years as savers are pillaged in order to reward spenders with the predictable effect on our already miniscule savings rate.   One hopes that more people would make this point about the United States.

SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?

4/15/13

As I have said on numerous occasions in the past, trying to discern why the stock market has done what it has done is nearly as perilous as trying to figure out where the stock market is going in anything but the long term, in which the answer to the latter is “up.”  But people make fabulous livings pretending to know why the stock market is doing what it is doing and where the stock market is going and enlightening the gullible with their “wisdom.”   Further, it’s not pointless to try to determine what the market is doing; we can often learn something in such a pursuit, even when, as in many of life’s endeavors, what we achieve is not likely to be what we initially sought to achieve.

So why has the stock market done so well of late?   (The market is having a horrible day today; as I write this, the S&P and the Dow are down a percent, plus or minus a few basis points and the NASDAQ is down around a percent and a half.  Stocks didn’t do much of anything Friday, but the trend of late has been up, with the Dow and the S&P reaching all time highs, and the NASDAQ reaching a multi-year high, last Thursday.   And who knows?   Today’s action may prove to be an ephemeral blip; notice how nicely the markets recovered Friday.)   The two most prominent explanations are

1. The economy is improving at a steady, if slow, pace and the stock market reflects that as more investors, both professional and individual, buy into the recovering economy story.
2. Due to what I have referred to as Ben Bernanke’s war on the elderly, people have nowhere else to go with their money and thus are moving, albeit in most cases reluctantly, toward taking more risk in the form of dividend paying stocks.

Both explanations are plausible.    The second has more appeal to yours truly, but, as anyone who has read me for more than a few weeks knows, I am something of a permabear.  But I digress.

The real explanation for the stock markets’ exuberance, rational or irrational, may be simpler than even the above two.   As the market has approached and transcended all time highs, people may have become convinced that what their financial advisors, be they genuine investment professionals or mere poseurs, have been telling them is correct:   the stock market always comes back and that, as far as the market is concerned, what goes down must come back up.  

The average person might be saying to himself or herself something like “Well, we’re close to, or at, all time highs EVEN AFTER THE DEBACLE OF A FEW YEARS AGO.  And that fiasco was about as bad as anything we’re likely to see in my lifetime.   If the market can recover from that disaster, it can recover from anything, so maybe the stock market is the place to be, just like my advisor has always been telling me.”

If our theoretical investor looks at the ten year return of the Dow, the S&P, and the NASDAQ, s/he would see that those indicators have returned, annually and respectively, 5.8%, 5.8%, and 8.9% plus the dividend.  And, again, this despite that 10 year period's including the 2008/2009 drubbing.

I don’t pretend to know that this simple, but maybe not all that simplistic, line of reasoning is useful as an investment strategy, but it does seem to explain a lot of investor behavior of late.  And, I have to admit, it is making this seeming permabear consider increasing his long term exposure to stocks…but, as in all things investment wise, gradually.