"Any contravention of natural law, any tampering with the natural order of things, must have its consequences, and the only recourse for escaping them is such as entails worse consequences." – Albert Jay Nock
The U.S. business landscape when the 21st century began was remarkably different from what prevails at the present. Take a minute and think about it.
On January 1, 2000 GE was the most valuable company in the world with a market capitalization north of $500 billion. Another big name at the time was AOL. So large and powerful was the Internet and e-mail pioneer that its merger with Time Warner was held up for over a year by always backwards-looking federal authorities. Worldcom was seen as the future of communications, Tyco CEO Dennis Kozlowski regularly graced magazine covers as the “next” Jack Welch (Welch the then head of GE), and then Enron was seen by some of the wisest minds on and off Wall Street as a model corporation. This is but a short list of the businesses that were viewed as “blue chip” when the new Millennium began.
So while there are reasonable arguments that Worldcom was ahead of its time, that critics have chosen to gloss over some of the brilliant businesses within Enron, and that the legal prosecution of Kozlowski for excessive spending completely missed the exponentially greater value he brought to Tyco shareholders, there’s a useful message from the past that screams at investors of the present: past performance is no indicator of future performance. What mattered in 2000 is largely an afterthought nearly 19 years later. Of the corporations previously mentioned, GE is the only one in the news today, and its newsworthiness is rooted in how poorly the company is doing.
Which brings us to a front page Wall Street Journal headline from Friday. If the most prominent business newspaper in the world is to be believed, “Saudi Arabia Pumps Up Its Stock Market After Bad News.” With an eye on keeping the shares of Saudi companies buoyant, the Journal reports that “the Saudi government has placed huge buy orders, often in the closing minutes of negative trading days, to boost the market.” Later in the article, authors Justin Scheck, Bradley Hope and Summer Said added that “China and other developing countries have been intervening for years in their stock markets.” Their reporting is a reminder of why readers should cast a skeptical eye on what business reporters aim to convey, and it’s also a cautionary tale about the folly of drawing “correlations.”
Reporters do it all the time. Consider the so-called “Greenspan Put.” Supposedly the former Fed Chairman could protect investors from falling markets by virtue of reducing the Fed funds target. Those eager to find correlations pointed to stock-market rallies in 1987 and 1998 (after Greenspan reduced rates) to support their confident claims. But if there were a correlation, stocks would have also rallied in 2001 when the Fed Chair began pushing rates down. Except that they didn’t. They also didn’t in 2008 when Greenspan’s successor attempted to rewrite reality. It didn’t work. The U.S. economy was strong in ’87 and ’98, but not as much in ’01 and ’08.
Moving overseas to Japan, the BOJ has foisted endless doses of quantitative easing (QE) on its economy since the early 1990s, including years and years of “zero interest rates,” but there’s been no subsequent stock-market rally. Figure that the Nikkei still a little more than half of what it was in 1989.
All of this is a reminder that there’s no such thing as the government pumping up markets. To the extent that interventions result in stable or rising equity prices, the error is in presuming a correlation between the size-buying intervention and any subsequent rally.
To understand why the above is true, readers need only consider once again the U.S. corporations that were “blue chip” and market dominant when the 21st century began. Either they don’t exist today or they’re greatly shrunken monuments to the past.
Where it gets interesting is if we imagine where the U.S. economy would be right now if the federal government actually had the power to pump up markets as Scheck, Hope and Said naively assume they do. If so, imagine what a disaster the U.S. economy would be at present, along with its equity markets. The market leaders would quite literally be companies that investors for the most part forgot 15 years ago.
Implicit in the wholly naïve belief that governments can engineer rising market outcomes is that investors are so obtuse as to be encouraged by false support of the status quo. Except that they aren’t. Some call it “creative destruction,” but the greater truth is that economies and markets attain crucial strength from periods of weakness. It’s during those periods of weakness that the bad to mediocre are replaced by the good and great. Pumping up the present in football terms is the equivalent of the state of Alabama using taxpayer money to make Mike Shula coach for life of the Crimson Tide instead of firing him in order to hire Nick Saban, and in commercial terms it’s the feds pumping up the shares of Blockbuster so that there’s little capital available for what eventually replaced it: Netflix. Sorry readers, but investors aren’t this stupid. They respond very rapidly to what’s mindless, and they’re not going to be lured into owning (and bidding up) what rates being fired and/or replaced.
It’s all a reminder of just how childish is the QE narrative that continues to prevail about U.S. markets. To believe the wise, the stock-market rally that began in 2009 wasn’t an effect of American dynamism, but was in fact an artificial result of the Federal Reserve’s borrowing of $4 trillion from banks in order to mis-allocate those funds. What makes this more sad is how many conservatives buy into the idea that investors and markets are jaw-droppingly stupid, and susceptible to rally based on interventions that were logically inimical to economic growth.
The QE narrative from the right is as insulting to American talent as was former President Obama’s “You didn’t build that.” In this case, conservatives want us to believe that it wasn’t the genius of corporations like Alphabet, Amazon, Apple, Facebook and Microsoft (the corporate biggies of today, or better yet the market replacements for GE, AOL, Tyco, Worldcom and Enron) that drove the latest rally, but instead it was Fed stimulus.
Such a view doesn’t just insult American ingenuity, it also ignores just how desperately weak any economy would be if central banks could actually do what conservatives so naively think they've done. Indeed, imagine once again how sadly positioned the U.S. would be if what mattered in 2000 still did in 2018, all thanks to artificial interventions.
Having imagined what is horrifying, readers then might return to the quote that begins this piece. Nock understood what conservatives used to: intervention always and everywhere brings us much, much worse. Markets plainly know what conservatives used to, and that’s why the mildly sapient can dismiss the ongoing belief that the Fed "did it." Sorry, that's the stuff of fairy tales. Investors run with great speed from what elevates the past at the expense of the future. If the Fed could engineer rallies, then there would be no rallies.
