The Market is Not on Your Side

The Market is revered.  I’m talking about The Market, with a capital T and capital M. It can’t be beaten so don’t try. It can’t be forecasted or predicted. It cannot be tamed.


Am I talking about The Market for stocks? The Market for bonds?  For houses, tulips, interest rates?


Yes.  All of the above.


The worshippers of The Market believe it is an intelligent construct – a global neural net of all the smartest people in the world.  Its power expands beyond the sum of the parts to efficiently allocate resources toward their optimal use.


While The Market is the most powerful force for human progress in the history of the world, what is most overlooked is that it is a force without a soul.  There is no altruistic prime directive which drives it.  It has no agenda and it doesn’t care about you or your bank account.


The market isn’t smart.  It’s f’in stupid.  That’s why smart people look foolish trying to game it.


Take the over-quoted line from Lord Alfred Maynard Keynes.

“The market can remain irrational longer than you can be solvent.”

Or my own spin, with apologies to Mark Twain

“Don’t try to outsmart the market because it will drag you down to its own level and beat you with experience”


So that brings me to a topic of popular derision. Central Banking in the United States. The Fed is the most common scapegoat for people who lose at investing…

“If only the Fed wasn’t artificially propping up the Stock Market…”

… or keeping the economy from achieving utopian levels.

Furthermore, the common refrain amongst the Libertarian crowd, (those that worship most passionately at the altar of The Market), suggest the Fed is sacrilegious for setting a short-term interest rate.

“The Fed has no business setting the price of money! They don’t know more than the market!”

(I should really put that bold and in all caps)


But guess what.  At least The Fed is on your side.  The Market for money (interest rates) is one of the most powerful forces in the economy. While The Market for stocks mostly impacts the top 1%, The Market for money impacts everyone – both for the good and the bad.


We saw in 2008 what happens to people when The Market for money breaks down.  The economy ground to a halt.  Money wasn’t moving anywhere.  Andrew Ross Sorkin in his epic book Too Big to Fail brings up the example of GE having trouble finding short-term money for payroll.  That is insane.


More important was what we didn’t see in 2008.  We didn’t see the complete destruction of our financial system.  We didn’t see unemployment go up to 25% like we had in the 1930’s.  We saw dozens of bank failures – we didn’t see thousands.  The fact is that this is due in large part to a central bank that acted in its role of ‘lender of last resort’.  The Market was ready to raze the whole complex and start over.  That’s what markets do.  They grow, they stagnate, they break.  The Market does not come with a warranty or a guarantee of immortality.


The Fed is not a perfect body, but it has something The Market lacks.  It has a soul.  And it’s guiding principle is to make sure that a soulless market for money doesn’t crush main street into oblivion.  The Fed’s mandates of stable prices and full employment run counter to nature of a market which, if left unattended would go about its boom and bust cycle regardless of the body count left in its wake.


So to the people who say “There is no way a group of nine economists should be trying to manage the market for money!” I reply, “Thank goodness they are.  Who knows where our country would be if it were left to the vicissitudes of a market prone to raging temper tantrums.”


Let’s go back and check the stats.  The list of economic depressions in the United States is as follows:


Panic of 1797 – Land bust following speculative boom

Depression of 1807

Depression of 1815-1821

Panic of 1837 – Banking collapse following speculative boom

Panic of 1857 – Same

Panic of 1873 – Same

Panic of 1893 – Railroad collapse following speculative boom

Panic of 1907 – Stock market crash following speculative boom

Depression of 1920

The Great Depression 1929 – 1939


And that’s the list.


So why did we average one economic depression every 15 years until 1939, and have not seen a single one since?


Well if you have been paying attention you could probably guess where I am going with this.  After the panic in 1907, in which J. Pierpont Morgan single handedly saved the US economy from total collapse, law makers thought it might make sense to finally establish a central banking system to act as lender of last resort.  After all, you couldn’t always rely on the largess of a financial Titan like Pierpont.


So while the Federal Reserve Act of 1913 established the structure of the Fed, it took until the Banking Act of 1935, in the midst of the Great Depression, for the Federal Reserve and the interest rate setting Federal Open Market Committee (FOMC) to take its final shape.  Curious that we have not seen a depression since.


To reiterate: One depression every 15 years before the Fed.  ZERO in the 85 years after.


Read about the Great Depression.  Take 5 minutes to read the Wikipedia article.  Better yet, read up on any of the other depressions that laid waste to our ancestors in the 1800’s.  Yes, the march of progress for that century was incredible, but the pain and suffering endured to get there was equally staggering.


I have not fully understood the pillorying of the Fed until recently.  I was listening to the Michael Lewis podcast, Against the Rules.  If you haven’t listened to it, I strongly recommend you do.  It is a series that examines the growing animosity between Americans and the people who are tasked with enforcing the rules.  It starts with looking at why everyone hates sports referees. And, while the refs are getting better, athletes, fans, and coaches seem to clash with them more.


The Fed, acting as a governor on The Market, in addition to its role as regulator, fills a similar role.  Despite a staggering record of success and a recent example of back-stopping the worst economic crisis since the Great Depression, people still need to have a bad guy to blame.


Lost money in the market? It’s the Fed’s fault!  They are manipulating The Market!

“Get off your knees ref! You’re Blowing the Game!”


What does this mean practically speaking?  What is the advice?


Stop worshipping at the altar of The Market.  Recognize that The Market owes you no debt of fairness and offers no promise of success – long-term or otherwise.  Markets tend towards progress but the natural path requires volatility.  Boom and Bust.  Rinse and Repeat.


We still have the boom and bust nature of markets with us, but at least in the last 85 years we have substituted the word depression for the word recession.  Our lows have not been nearly as destructive to the overall economy.  That’s because we have a Federal Reserve system which is designed to act as a break-water to hold the most destructive waves at bay.


Is it possible that in their attempt to hold the sea at bay, the Fed is unknowingly allowing an even greater force to form?  One that will overwhelm any chance of backstopping the economy?  Sure it is.  But that doesn’t mean you should just let nature destroy at will.  Your alternative is to move off the grid, away from danger.  Maybe that is the Libertarian utopia… millions of independent souls living on self-sustaining plots and prospering off of a giant barter system (built on blockchain!).  For most of humanity that outcome isn’t exactly ideal.


So by all means, continue to harness the power of The Market.  The Market for stocks is an incredible wealth creator, as long as you take heed in what game you are playing.  I wrote in How to Win at Investing that your success shouldn’t be based on outsmarting or ‘beating’ The Market, but rather using it to accomplish your goals.  Harness its power of progress and ride the waves higher.  Just remember that the best results the world has seen come from powerful markets that are governed by strong rules and regulations.  Rules and regulations lower the probability of your portfolio blowing up – or the economy blowing up.

The Fed is on your side and trying to protect you.  The Market has no such loyalties.


Until Next Time…

A man said to the universe:
“Sir, I exist!”
“However,” replied the universe,
“The fact has not created in me
A sense of obligation.”
― Stephen Crane, War Is Kind and Other Poems