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Workplace Culture can be broadly defined as how employees describe their working environment. While some cultures will be defined naturally based on a small business owner’s leadership style or industry type, a lot of it will also be determined by the employees … Continue reading
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One evening in July, Lazard banker Matthieu Pigasse was in Congo’s capital city of Brazzaville trying to catch the last ferry across the Congo River for meetings in Kinshasa. In September, Lazard announced that Pigasse—who has advised on some of … Continue reading
Stocks and bonds are up, and the Fed is keeping rates down. Happy days continue, right? Well, not exactly. That latter bit about the Fed is an oversimplified notion and overlooks the Fed-created abnormalities in the capital markets. Let’s look first at an example and then review the problem overall:
The Wall Street Journal’s article, “Mortgage Lending Poses Puzzle” (online title, “Should Mortgage Lending Standards Ease?”) tackles the various issues confronting weak mortgage lending. It rightfully notes that the fallout of mediocre new home sales growth on the economy, employment and income growth (also see “Home-Sales Growth Is Wide, Not Deep”).
The article poses two possible reasons for slow mortgage lending: lenders’ conservative postures or weak demand. But those presume normality. At the heart of the slowness are the issues about abnormality raised towards the end of the article.
First…
“The people that are not middle-of-the-fairway borrowers are pretty much shut out today,” said Sean Dobson, chief executive of Amherst Holdings in Austin, Texas. Amherst owns a firm that has bought and rents out 5,000 single-family homes across the country.
Many borrowers haven’t recovered fully from the recession. “You need both liquid capital markets and a healthy, financeable borrower base, and we really don’t have either,” said Mr. Dobson. Mr. Stenback says the problem isn’t overly tight credit but rather the lack of income growth.
Second…
The magnitude of the subprime-auto-lending expansion now is much smaller than it was for mortgages leading up to the housing crash. “But something has to give. Income growth needs to improve, or lenders will eventually shut off the credit spigot,” Amir Sufi, an economist at the University of Chicago, said before a Senate panel last week. Ultimately, he said, relying on easier credit won’t sustainably generate economic growth.
That last point bears repeating: “…relying on easier credit won’t sustainably generate economic growth.” And yet that strategy is what the Fed has attempted for these many years.
Now to the major problem…
Most of what we read and hear today applies normality-based reasoning and analysis. Thus, discussions of the Fed shifting gears takes the position that, because the moves are slow and follow lengthy deliberation, the effects will be moderate and positive. However, this analytical approach is flawed because the capital markets are in a historically unprecedented position produced, not by extreme human behavior, but by extreme central bank maneuvering.
It’s understandable that the subject gets little mention because of the time element. With the Fed-created abnormally low interest rates now in their sixth year, it feels like this is normal. That’s why virtually every article talks about the Fed’s decision as being whether or not to raise rates. The accurate description is whether or not the Fed will stop holding down rates and allow them to rise to a normal, market-determined level.
Note that last item: “market-determined.” The Fed hasn’t simply tweaked short rates. It has ignored the natural capital market’s premier strength: determining resource allocation. And that key process starts with capital (money) allocation based on interest rates. By altering this cornerstone, the Fed has altered the entire foundation, producing, among other effects, a wealth shift from the beneficiaries of higher short rates (think savers) to those who have the wherewithal to take advantage of cheap money (think Wall Street).
A seeming beneficiary of cheap money is the banking system, and this is where we get into seemingly overly conservative lending. Yes, the banks have access to low cost (or zero cost) money, but they have four issues that keep them from lending it to anyone willing to pay a higher level of interest.
The bottom line
The move up to normal, market-determined interest rates is coming. Will the shift bring joy, heartbreak or “meh?” It’s hard to tell, but one thing is certain: there is risk that the good effects produced by the abnormally low rates will be undone to some extent. Conversely, and happily, the restraints and bad effects will be lifted.
As investors, we can take advantage of the general lack of focus on today’s abnormalities to get ahead of the shifts coming. Positive examples are stocks of homebuilders, banks and consumer companies. Plus, Wall Street – its success is not dependent on the abnormally short rates, but rather on change.
On the risk side, a key consideration is likely to reappear: inflation. When all that money sloshing about begins to be spent and lending picks up, creating even more money, conditions will be ripe for prices to rise throughout the economy, not just in the stock market. A danger? Not for quite a while. After wallowing in a slow growth environment, rising prices, along with employment and incomes, will go through a lengthy period, viewed as beneficial and a confirmation of normality having returned.
Of Course, you could waive all of this as mundane nonsensical speculative babbling and rest assured, I hope you are right. But something definitively tells me otherwise. Time, as usual, will show.
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As I glare at the ball then the goal. Ball again, then goal. I started sprinting up to the multi colored ball. I strike it perfectly. Perfect follow through. The inside bend curving the ball just right. As I watch … Continue reading
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The World Bank released its latest Global Economics Prospects Report this month, and it suggests sub-Saharan Africa will again be among the fastest-growing regions in the world. Seven countries, in particular, will lead the pack. According to the World Bank’s … Continue reading
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Running a small business can be tough. Even beyond the day-to-day management of employees and inventory, there are a lot of expenses to worry about. You’ve got rent, payroll, merchandise, office supplies and so many other expenses, it can become … Continue reading
In the spirit of not putting all their eggs in one basket, which I totally agree with many fellow entrepreneurs seek cheap-to-get-in, adequate returns investment routes for that beloved retirement capital. That’s when ETF come in the equation and at … Continue reading
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Futures Trading: The Hardest Easy Money You Will Ever Make For years people have swarmed to the Futures markets, hoping to find the holy grail trading system and to get rich overnight. If you really believe there is such … Continue reading
So here are some other great ideas to successful business ideas in Africa following Serie 3 blog which was my most clicked blog of 2013. Some of you emailed me to expand so here we go: Path #4 – Closely watch … Continue reading
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