I was up early this morning sifting through the market stories.
- Asia: crash
- Middle East: crash
- Europe: crash
- USA: set to open
There's good news in all this loss. First, stocks were overpriced. At some point, they will bottom out and it will be time to start buying. Second, the Golden Age of the Central Banker seems to be over. And that is very good news.
The best financial blogger alive, Ben Hunt of Epsilon Theory fame, coined the phrase "Golden Age of the Central Banker." His notes, combining investing with game theory, will make you smarter.
Since 2008, the world has believed that central bankers run the economy. That's why the S&P 500 has been tracking the Fed balance sheet almost perfectly. It's why markets ignore business fundamentals, good or bad, and move up or down exclusively in anticipation or reality of what the Fed will do.
In short, people have lost faith in central bankers, as SocGen admits. And that's good news.
There are many reasons for the economy's lackluster recovery from 2008, but expectations that the Fed would do all the work for us was key. As long as The Bernanke or Yellen could snap their fingers and levitate my 401k, who cares? As long as CEOs could borrow money at zero interest and buy back their company's stock, boosting their own compensation, why do actual work?
As a result of easy money, US corporations have taken on record debt while capital investment in plant, people, and equipment is at a record low. Think about that for a moment. We've learned since childhood that, if you must borrow money, borrow only things that hold their value or increase your marketability. We borrow for homes and eduction and the tools we need to do our jobs. We don't borrow for consumption products and fun.
But that's exactly what US corporations have been doing since the great recession: borrowing spending money for fun.
The Cloudy Crystal Ball
I have no idea where the market goes today. Yellen could step in and buy S&P 500 shares directly. The Dow could end the day at 18,000 or 14,000. I don't know. Some say the S&P needs to drop about 50 percent to re-correlate with commodities. (See chart)
But the Wizard's been exposed. If the Central Banks intervene to prop up markets, people will realize that all's not well with the economy. If the Fed stays on the sideline (where it belongs), people will know that it's time to do the work ourselves instead of waiting for the Fed to shovel money our way. But there will be pain for a while.
The crash of 2008 shifted bad habits from Wall Street banks to Treasury and the Fed. Those bad habits will eventually cost us. And that payback could be starting.
The great news: we can fix this. We know how. We've done it before.