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Tapering: What It Is and Why It Makes Markets Shudder
I hope this link to a four-minute video works for you, whether or not you subscribe to the Wall Street Journal. It is as good of an explanation of the Federal Reserve’s recent behavior as I have seen. Both fair and fairly easy to understand, the video dives right into one of the sources of recent market volatility.
Many people express concerns about the power of the Federal Reserve. And, in many “news” and information sources, particularly in social media, the Federal Reserve chairman might as well don a pair of horns and a tail to go along with their portrayal of him as a devil of a character. The truth is infinitely more boring than they would have you believe. Similar to a referee in your favorite sport, the Federal Reserve is not a player in the big game. They have a chance to make a big impact, occasionally, with their call. They may change the course of the game. And if they “blow the call” or “make the wrong call” we, who are certainly in the game, may pay a short-term price. But usually, the Fed plays a role on the sideline.
The real deciders of interest rates, equity market returns, and the economy are the “Private Sector”, #1, and the government, #2. The “Private Sector” are the consumers, like you and I, and the corporations. Second only to the Federal Reserve, corporations are often portrayed as demons out to steal money from the consumers. This, of course, is vastly more interesting than the truth. That is to say, companies that do not deliver value fail. Devilish companies fail quickly, and slovenly companies may lumber along longer than many of us think they should. The truth is, companies deliver value–that is how they stay in business.
So the video in the link above, and one more time below, is a nice summary of one of the key factors affecting our portfolios in the past month (or so). If the Federal Reserve–the referee in our game–blows the call, then our game may change. We may, in fact, enter another short-term recession. So the equity markets are reacting, with increased mania, to the fear that the Fed does not know what it is doing. Once again, the truth is not nearly as interesting as the News.
The truth about the Fed’s behavior is unsettling, but unsurprising. The Fed does not know whether or not inflation is “here to stay” or whether it will actually stop increasing in the near future. Neither do you, or I, or anyone. If the Fed, as described in the video, “gets it right” then perhaps the results will be smooth. But the odds are stacked against the Fed. The track record is that the Fed is an imperfect referee, full of good intentions and poor results. Too late–say many–the Fed should have done something like this months ago. Too soon–say others–our economy needs more and higher paying jobs.
Please, consider taking the news you consume about the Federal Reserve with a grain of salt. After all, salt is still cheap and not subject to the inflation we see almost everywhere, almost every day. And know that there is one ultimate truth to this entire situation which always has been, and I believe is very likely to continue to be, true: the cure for higher prices, is higher prices.
Arizona is becoming a microchip manufacturing center at just the right time
An example might help. Right now, cars are expensive–more expensive than ever before. A huge problem with this situation is that we do not have enough computer chips. Many of these come from overseas and we all have heard the “supply chain” horror stories. So what is the solution? To make the chips in the USA. Indeed, massive factories are being built here in the USA to provide a solution to the problem. The higher prices make USA more competitive, and that brings new jobs, and more opportunity. As more products are made, the prices come down–to a more reasonable level–and we get new cars.
Samsung says it will build $17B chip factory in Texas
Plus, the new cars look pretty cool. Many of us will want to buy one. That, to me, is a virtuous cycle. In no way did the Fed either hinder or help this “invisible hand” of our markets. In spite of the uncertainty, the natural economy is finding a way to settle. So that is nice!
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