Catch-22 has a brilliant hook, but I think Joseph Heller is criminally overrated. My overarching response to his Something Happened was that…well…pretty much nothing happened. That may have been the point, but if so, it shouldn’t have been buried in 600-odd pages of bleak. All of which is prefatory to saying that I hadn’t intended to write about the markets in this edition of The Better Letter, but a bunch of important somethings happened in the markets last week, so I start there before moving on to some fun stuff and then to cancel culture.
Where’s the Fire?
“The fundamentals of the U.S. economy remain strong.”
That was the unfortunate opening line, provided by the Trump team, of the statement by Federal Reserve Chairman Jerome Powell announcing the Fed’s between-meeting, “emergency” half-point rate cut Tuesday on account of the global spread of the coronavirus and the anticipated economic consequences therefrom. However, as the economist John Kenneth Galbraith reminded in his Introduction to The Great Crash, 1929:
“Always when markets are in trouble, the phrases are the same. ‘The economic situation is fundamentally sound’ or simply ‘The economic situation is fundamentally sound’ or simply ‘The fundamentals are good.’ All who hear these words should know that something is wrong.”
The administration would have been well-served to have been more well-read (the general public too: on Tuesday, with 15 primary elections, crazy markets, an emergency Fed rate cut, and the growing worldwide coronavirus outbreak, the top story on Facebook was about Hillary Clinton’s emails).
Something indeed is wrong. The Fed is doing what it can, but its tools are limited: “a rate cut will not reduce the rate of infection — it won’t fix a broken supply chain,” Powell warned. Moreover, the Fed can’t “print a vaccine,” it can’t “help companies deal with delayed orders or an infected work force,” and it can’t “get people to go out.”
We need what Powell called a “multifaceted” response – first and foremost a competent and effective health policy (which there are very good reasons to doubt*) and, secondarily, a carefully enacted fiscal policy, neither of which are in the Fed’s toolbox (although the president signed an $8 billion coronavirus funding bill last week). Still, the projected economic problems seem largely temporary, empty airliners and hotel rooms notwithstanding.
More problematic, at least for the markets, is that the Fed pulled the fire alarm without pointing out the fire.
It’s clear that problems – potentially big problems – are looming, but they don’t appear to be here yet. The Fed’s precipitous action came despite still generally strong economic data. A between-meeting “emergency” rate cut suggests that another is likely at the next regular meeting…in just a week-and-a-half.
What does the Fed know (or fear) that the market doesn’t?
Bond markets were on fire in a flight-to-safety trade last week, and that mostly happens when some other big thing is on fire (but not in a good way). After falling sharply the previous week, the yield on the benchmark 10-year U.S. Treasury note tumbled further following the Fed’s rate cut, moving below 1 percent for the first time in history on Tuesday and reaching a new record low of 0.657 percent on Friday before rising a bit into the close. Despite violent price action in stocks both up and down since the rate cut, bond markets just keep pushing yields lower – into historic territory such that real yields are less than zero up and down the yield curve.
That’s never happened before. On a risk adjusted basis, the long-bond has outperformed every S&P 500 stock since its most recent peak yield (3.4647%) in November 2018. President Trump wants more. He wants negative interest rates. Already in record territory, there’s no way to know if rates will continue to go down or by how much.
What does the bond market know that we don’t?
Nearly 100 years ago, Frank Knight made his famous distinction between risk and uncertainty. In neither instance do we know for sure what will happen. However, when we know the potential outcomes in advance, and perhaps the probabilities thereof, we’re talking about risk. Think dice or poker.
On the other hand, when we don’t know the possible outcomes in advance, and thus their relative probabilities, we’re talking about uncertainty. Think complex systems like economies or the global spread of a dangerous virus.
When markets are volatile, you can count on the financial media to point to uncertainty as a cause. However, we all face uncertainty all day, every day. The uncertainty trope takes center stage when we recognize how uncertain life is – how little we know – as with the breadth, scope, and impact of a global pandemic. We don’t deal with uncertainty very well, especially at the extremes. That’s why we routinely overpay for insurance policies and lottery tickets.
Even when we know (or at least someone knows) about a specific fire, real or metaphorical, there will always be many, many more fires and potential fires “out there.” When we think uncertainty is somehow limited or contained, we delude ourselves.
Something is always on fire, somewhere, with potentially major consequences. But we’re not usually as aware of it as we are right now.
If you hadn’t been paying attention last week, you might have thought the market had a no big deal week…mostly up a little. If you were paying attention, you had quite the ride.
Stocks seem more skittish than fragile, but that may be a distinction without a difference. When the market jumps, in either direction, lots of people are jumpy, too. Accordingly, the markets rode a rollercoaster last week, coming full circle to nowhere.
It is possible, perhaps likely, that in a few weeks or months COVID-19 will have been contained, with limited economic damage. However, to this point, that is far from certain. We don’t know where the fire’s going to be or how bad it’s going to get, but there’s plenty of smoke already. And so long as uncertainty is so obvious, stocks are likely to be volatile.
* From a political standpoint, what we need to combat COVID-19 is transparency, good management, data, and science. To this point, none of these characteristics have been in President Trump’s wheelhouse.
Totally Worth It
Here are some recent stories I found interesting, noteworthy, important, fun, or just plain weird.
Love this. Off-duty Nashville officers save couple trapped in tornado rubble. The “Monday Effect” is real. RIP, Freeman Dyson. RIP, Jack Welch. The future of hoops. Yikes. Archery dodgeball. A bad night can happen to anybody. Google parent Alphabet invents fish recognition system. The deepest river in the world. Don’t try to pet a moose (duh). Prepping for disaster. Creative thief. Can you really hire a hit man on the dark web? Not the Lent I would have expected: A beer-only diet.
Mixed Media: The best thing I read this week (pictures). Twitter does something good. I’m all-in for Snacks (video). A fantastic Senior Night (video). Mike Trout hits rockets, and not just in baseball (video). The Houston Astros are having a difficult spring (video; video). Kentucky fan sinks half-court shot, wins $10k and celebrates spectacularly (video). Explanation for Tom Steyer’s lack of electoral traction (video). Wait for it (video). Pet snake swallows an entire beach towel (icky video). Good news from Alex Trebek of Jeopardy! (video). For decades, cartographers have been hiding covert illustrations within Switzerland’s official maps. Artist makes travel posters for National Parks based on their worst one-star reviews.
“Blackbird” – Thunderstorm Artis
Isn’t it terrific when an unknown artist with magical talent gets an opportunity and nails it?
My question for any President of the United States:
Thomas, why did you want slaves?
I was a proud Grandbob when I saw this, written by one of my grandsons last week. It shows a moral awareness instilled by his parents and, I hope, a willingness to speak truth to power, especially for a kindergartner.
There’s a danger in it, too, as today’s “cancel culture” demonstrates. Barack Obama gets it.
That statement drew widespread condemnation. “I gasped at what I heard,” Ernest Owens wrote in The New York Times, and called the former President “regressive.”
I think he’s prophetic.
My darling bride teaches fifth grade. She opens each school year with Wonder, R.J. Palacio’s rare gem of a novel (and more recently a major motion picture). It’s populated by characters who linger in your memory and heart. It features August Pullman, a 10-year-old boy who likes Star Wars and Xbox, ordinary except for his jarring facial anomalies. Homeschooled all his life, Auggie heads to public school for fifth grade and he is not the only one changed by the experience. At his new school, Principal Dyer teaches an important lesson, emphasized by Mr. Browne to his students on the first day of school: “When given the choice between being right or being kind, choose kind.”
Current culture, and especially digital culture, takes the opposite approach. It is utterly polarized and ultimately (morally) invested in its own side’s rightness. It’s “us versus them,” kindness be damned.
“America rules! Our Beatles are way better than your precious Rolling Stones.”
Almost nobody is convinced by the constant appeals to virtue and rightness that permeate our culture and no argument is really invited. It isn’t new – Kurt Vonnegut told my college graduating class that we should hate more – but it is surely intensified by social media. Articles, segments, posts, and tweets are largely performance art for the already committed – to reinforce existing predilections in exchange for attention, adulation, and likes. Cable news and talk radio don’t exist to inform so much as to confirm and applaud the rightness of their various audiences, which will eagerly punish those deemed insufficiently pure. Twitter largely exists to provide a battlefield to attack and “own” the dreaded other, often anonymously.
It is astonishing for a culture to have so much invested in being moralistically right while having such an enormous proclivity for being wrong.
You’d think big-time journalists Brian Williams and Mara Gay (or at least the MSNBC producers) would recognize the difference between $1.53 and $1 million. Ironically, we also (and routinely) make stupid mistakes telling people they’re (their?) stupid.
Because we are so wrong, so often, and because avoiding error provides demonstrably more benefit than being right does, when we have the choice between being right and being kind, we should choose kind. Every. Single. Time.
We all have regrets – often horrible regrets - over things we’ve done and said. Whether we are religious or not, we all need grace, the sense that “there is now no condemnation,” per the Apostle Paul. I feel and think better of myself when I extend grace.
The things in my life that are best, are the most powerful, and are the most transcendent are all on account of who and what I love. I suspect that's true for most of us. Love burns bright and illuminates. Hate flashes hot and burns itself out – with far more heat than light. When I hate, I don’t feel or think myself better.
We shouldn’t back away from the truth, verily. We should proclaim it powerfully. But we should speak it in love (as the Apostle Paul also said). We judge ourselves and our friends by our intentions, outsiders by outcomes. It helps to pretend we’re among friends as often as possible. It makes us kinder. The King James Bible uses the wonderful word, lovingkindness, to describe this sort of gracious living.
The problem intensifies when we look backward into history. We should take great care neither to sentimentalize nor censure the past, foisting our perhaps transient values on those who lived in a different time.
Will asked a great question, one worthy of response. Our friend Thomas did some dreadful things. He was weak. He was venal. He was human. There is good reason to doubt him. He owned human beings as chattel. But he also wrote the greatest political document the world has ever known and served our country well.
We should love him for that and keep the rest in gracious context, despite our doubts. It’s the kind thing to do.
Issue 2 (March 9, 2020)