Markets are Crazy
I’ve listened to preachers.
I’ve listened to fools.
I’ve watched all the dropouts,
Who make their own rules.
One person conditioned to rule and control.
The media sells it and you live the role.
Mental wounds still screaming.
Driving me insane.
I’m going off the rails on a crazy train.
I’m going off the rails on a crazy train.
Crazy Train - Ozzy Osbourne
…..
The express purpose of this blog is to examine the chaos developing around us in the fields of politics, culture, economics and international affairs. In the realm of economics, the stock market is crazy.
Back in the 2007-2009 period when I was in Congress, we were observing all the manias that led to what we now know as the “great recession” or the “financial crisis.” Manias have existed forever, of course, going back to the “tulip mania” or the “south seas bubble” which were both hundreds of years ago. After each mania or bubble bursts, governments always try to impose some new regulation or control to keep it from happening again.
But you cannot change human behavior. My more dogmatic conservative friends in Congress opposed the TARP program and new regulation under the idea that “markets are rational” and we should let the markets work. Markets are rational. But, on each side of a market transaction are human beings that can be highly irrational and subject to emotions such as greed and fear. The market cannot correct for those emotional actions. Hence, we still have and will always have bubbles and manias.
That doesn’t mean we should do nothing to try and put some guardrails around the excesses. In my view, there are many excesses in markets now. These excesses were given the fertile ground in which to grow by the persistent printing of new money, giant federal deficits and artificially low interest rates of the last 10 years or so. These actions by the federal reserve and the last 3 presidential administrations were cranked up to fever pitches during the lockdowns. Free and easy money distributed liberally throughout society has driven many asset prices to levels not seen in this country ever. Even the bubbles of 1929, 2000 and 2008 were, by some measures, not as great as what we are seeing today.
The Federal Reserve (not the Biden Administration) finally figured this out about 8 months ago and is trying to let the air out of these balloons slowly. So far so good. But the “animal spirits” that create bubbles are still alive and well. According to the St. Louis Federal Reserve Bank, Americans have nearly $5 Trillion in “checkable deposits and currency” as of the end of last year. It had never been higher than $1 Trillion between 1988 and 2020. There is still a lot of money out there.
Since January, all kinds of assets that have no value or make no money have risen dramatically again. The bankruptcies in the crypto world keep coming with many more and bigger ones likely. Yet Bitcoin and other cryptos named after fictional animals are up nearly 50% since the first of the year. Companies like Bed, Bath and Beyond are almost sure to liquidate and the stock be worth zero yet said stock was up 69% this year until about a week ago. A Goldman Sachs index of companies that lose money is up 30% this year. And even many companies that make money have values historically high relative to their ability to generate cash flows.
In the meantime, oil giants like Chevron and Exxon post all-time record earnings and dividends and the stocks fall. This is partially because the ESG motivated investors won’t touch them no matter how much we all rely on those companies to heat our homes and fuel our travel or how much money they make doing that.
I could go on and on and on. People in markets either engage in investment, trading, speculation, or gambling. Warren Buffett invests. Some speculation is necessary for start-up ideas. Trading, in theory, provides market liquidity. But, gambling should be limited to Las Vegas. We have a lot of gambling going on in markets today which distort reality for the people who matter the most, which is the investors.
So, what is my point with all of this? First of all, these bubbles need to pop and the excesses need to be run out. This has always happened eventually and will happen again. A business has no value unless it generates profit and cash flow. Debt has no value if it is not paid back. You don’t loan money to someone expecting to get less back in 5 years. Real estate only has value to the extent that people can live there, play there or run a business profitably there. As in 1929, 2000 or 2008, wringing out this excess is not a benign process. A lot of people will lose a lot of money. Animal spirits will retreat, and the mood will turn from greed to fear.
The only alternative to this outcome that I can see, is to go back to stimulus and printing money, which will keep the bubble values up. But, it will depreciate the currency dramatically through inflation that will make 7% inflation seem like the good ‘ol days.
How do policy makers respond? This conservative Republican favors more regulation. Many see crypto as the wild west of investing, and they mean that in a good way. But a lot of people have lost money and more will lose a lot more money. Part of that is people just getting greedy thinking that a 20% return in a 1% world is risk-free. But part is out and out fraud on the part of the market makers. There is too much gambling going on in options and shorts and other things where you are betting on markets but don’t actually own anything. I remember when I challenged a high-frequency trader in a committee hearing when I was in Congress by suggesting there be a 1 second delay between one computer trade and the next. You would have thought I put a bullet in his heart. He was appalled that I could make such an unreasonable suggestion and said the liquidity of markets would be destroyed by this action. Remember, I was talking about 1 second. Is ownership of less than 1 second an investment?
Warren Buffett famously said, “be fearful when others are greedy and greedy when others are fearful.” Markets are still greedy and there is plenty of cash around to fuel that greed for a while. I am fearful.
Oh yeah, and then there’s the deficit and federal debt. But that is the topic for next week.
I hope we can get off this crazy train without going off the rails like Ozzy did.
I remain respectfully,
Congressman John Campbell
Drive Fast and Live Free.