It’s Monday, the best day of the week. Just kidding. Mondays are terrible. Everyone knows that. But here’s some nerdy stuff to get your week started on the wrong foot:
1 – The Next Crash is Always Around the Corner. Here’s a great new paper by William Goetzman, Dasol Kim and Robert Shiller talking about market crashes. In it they show that the probability of a market crash is actually very low, however, individual investors and institutional investors worry disproportionately about crashes and even think they occur much more regularly than they really do.
Of course, this has been on full display for the last 7 years. How many times have we read about how the next 2008 is right around the corner? I suspect the impact is even more powerful right after a big crash where recency bias has such a strong impact on memories. It’s all a bit ironic though. Investors can’t seem to think past the next 12 hours or months, but an event that happened 7 years ago will keep many of us from ever entering the market again….
2 – Ben Bernanke Calls Helicopter Money What it Really is – Fiscal Policy. Here’s another great blog post by the world’s hottest new financial blogger, Ben Bernanke. In this one he explores the idea of of helicopter money. Of course, I’ve talked about this a lot over the years. I’ve always refuted the idea that the Fed really has a helicopter. That is, it doesn’t technically have the ability to drop money into the economy without taking something else out of the economy. So, when the Fed implements something like QE it swaps existing assets for new ones thereby taking one asset out of the private sector and swapping it with a reserve deposit. I’ve always said this doesn’t do much which was an extremely alternative viewpoint 7 years ago and one that turns out to have been right.
Anyhow, Bernanke goes on to explain what helicopter money really is:
a “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock.
Perfect. He added:
When monetary policy alone is inadequate to support economic recovery or to avoid too-low inflation, fiscal policy provides a potentially powerful alternative—especially when interest rates are “stuck” near zero.
Okay, so Central Banks can’t go it alone and monetary policy clearly hasn’t worked that well. So, why haven’t we gotten that tax cut yet????
3 – Wall Street Wages Double in 25 Years as Consumer House and Stock Flipping Surges! Okay, I made up that headline as an alternative to this one on Bloomberg:
“Wall Street Wages Double in 25 Years as Everyone Else’s Languish”
There’s a certain irony in the idea that a Bloomberg reporter is writing about Wall Street pay inequality. I mean, Bloomberg is a firm that was built almost entirely on trading activity and selling information to reap the benefits of that trading activity. And at the heart of Wall Street pay is the surge in overall financial activity in the US economy. After all, Wall Street pay isn’t a manna from heaven. It’s the result of high demand for Wall Street’s services.
So, bankers and all those evil people in New York make a lot of money because other people really value their services. Just look at the surge in trading activity or housing turnover in the same periods. We’ve seen the average holding period of stocks plummet from 7 years in 1940 to just one month in 2014. We have entire industries built around flipping your home and speculating in stocks. And who earns the profits from this? Wall Street firms who act as the middleman, of course.
Is it at all rational? No, I suspect we’ll one day look back at this period in financial speculation and wonder what the hell we were all thinking. But make no mistake – if you want to reduce Wall Street pay then reduce your own speculative activity. When the house flipping shows and the E-Trade stock trading commercials are gone we’ll know that people’s behavior has returned to something more rational. Until then, expect the biggest beneficiaries of all this financial speculation to be the middlemen who earn a profit from it regardless of whether you win or lose.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.