What A Week

SPY Price Chart

SPY Price data by YCharts

Look at the intraday volatility of this chart. Pretty amazing. The market needs Martin Luther King day off.  Right now, the only true trend is down. There aren’t any trends to hop on and ride as my friend Howard Lindzon likes to do.  Slowly but surely, some of the gang at Slope of Hope are getting short term bullish.  Next week, we might see a relief rally.

This sort of volatility doesn’t help any marketplace.  It makes investors nervous.  We are seeing the venture bubble deflate, but it’s no where near done yet.  Unlike 2001, the general public isn’t invested so it will be self contained.

If you are under the age of 40, don’t sell your 401(k).  Don’t try and pick individual stocks either.  Just toss your money into a passive no load mutual fund that replicates the market.  When you are 65 and actually need the money, the stock market will be higher then than it is today.

The important thing is not to get into the weeds. The economy is weak.  It’s been anemic since the financial crisis in 2008.  The “learnings” from all of this should be that the multiplier effect of government spending is 0.
US Real GDP Growth Chart

US Real GDP Growth data by YCharts

There is a trickle of opinion comparing the latest .25 point rate hike by the Fed to a similar move in 1937.  Back then, we were coming out of a Depression.  FDR utilized a massive government spending effort to stimulate demand.  People thought it worked, but in a Monetary History of the United States, that idea was debunked.  The .25 point rate hike isn’t the cause of volatility in the market, and it’s not causing a bearish bent to the market.

If we look around the world we see a theme.  All central bankers have been stuck on a 0% interest rate for a long time.  China has way overbuilt their economy and growth can’t keep up.  The EU has structural problems brought on by the welfare state and has no economic growth.  Brazil is a “shitshow” as my friend describes it.  Argentina is worse, and other countries in South America aren’t doing much better.  The drop in oil prices has hurt both Canada and Mexico.  The Middle East is a total mess, mainly due to poor foreign policy on behalf of the US.

Oil has room to run to the downside. Economies that rely on it are going to feel the hurt. The real price of oil adjusted for inflation is very very low. Copper is a leading economic indicator and it doesn’t show any strength at all.
^XOI Chart

^XOI data by YCharts

All the free money in the world doesn’t mean a thing when there isn’t any economic progress anywhere.

At the same time governments have been providing zero cost money, they have been doing something else.  Over the past decade, we have seen a rise in government regulations, government subsidies and government fingers in markets.  Maybe it’s time for them to cancel all these regulations and programs and butt out.

If we want to see economic growth, we need aggressive fiscal policy, not interest rate policy.  Fiscal policy should lean hard on making everything easier.  That means ending a lot of regulation, and cutting marginal tax rates for individuals and companies.  Zero interest rates only help the wealthy, corporations, and big banks that can afford to take advantage of them.

 

  • Once upon a time all government needed to do to stimulate the economy was…nothing. See: The Forgotten Depression, 1921: The Crash That Cured Itself. But since 1929 the government has been doing so much damage to the economy, the only way the government can help now is to actually do something — and that something is less than nothing. It needs to dismantle a lot of the stuff it’s been doing. Of course, that won’t happen. So we are doomed.

    • In this case, government has to do something. It has to shrink itself and lower taxes to get out of the way. Government is now a monolith impeding progress.