Readers: I am looking for someone to do part-time administrative work, reach out to me if you know someone great. Also, I know we are all deluged with information, so if this helps you cut through the noise (my goal) help me grow this by forwarding it to friends and let me know what topics I can help you by addressing. Enjoy!
Money can make us a bit crazy. Poverty is terribly constraining in ways big and small. Most people, statistically the middle, feel they don’t have enough money.1 The super wealthy liberate themselves from those concerns but sometimes lose something in the process, like shared experiences, be they supermarkets or airport security and, as a result, risk becoming detached from reality. There is no easy solution.
Chekhov has a character declare the following in Gooseberries.
Money, like vodka, can do queer things to a man … One day when I was inspecting a drove of cattle at the railway station, a cattle dealer fell under a locomotive and it sliced off his leg. We carried him in to the infirmary, the blood was gushing from the wound—a terrible business, but he kept begging us to find the leg and was very anxious about it; he had twenty rubles in the boot that was on that leg, and was afraid they would be lost.
There is a bit of the cattle dealer in many of us, at least in me. The anxiety comes from the fact that we desire stability but money refuses to cooperate, constantly changing shape. A stock or a bond or a house is priced based on what will happen ten years in the future. In the effort to figure out what is going on, it is easy to mistake the big for the small and vice versa.
This uncertain future is in flux while human nature is not. Chekhov’s stories resonate even though the world he wrote about is all but extinguished. He wrote Gooseberries while dying from tuberculosis. Antibiotics, invented twenty-four years after his death, largely eliminated that disease. In his life, Russian stocks kept pace with US ones. Not long after he died, the Russian stock market closed followed by the 1917 Revolution and, later, Stalin’s bloodletting.
Despite thousands of years of experimentation, we have yet to figure out a system of governance or economic management that reliably produces better than least worst outcomes. You don’t need to look far. The US nearly succumbed to a coup, the central bank has lurched from the gas to brakes, inflation is high and climate-change triggered drought grips the land.2
Recent Past
The past two years illustrate the challenge of getting the money part right, which should be simpler than getting the political part right. The money printing is abstract, the central bank creating zeros on a computer. We notice the consequences of the printing (inflation) more than the printing itself. That said, the chart below of what’s known as the Fed’s balance sheet shows the massive expansion and recent contraction in printing.
These money shifts impact our lives. Going into the pandemic, in the US if you had $100 in the stock market, it quickly dropped to $64. Beyond feeling like you might die, you also felt suddenly less financially secure, the anxious cattle dealer. Why did the stock market stop dropping? Because the central bank printed and, depending on the country you live in, emergency aid was authorized, some of which also ended up in the stock market.
The $64 jumped to about $150 by early this year, as you see below. The risk of dying from Covid retreated and, on top of it, you were wealthier than when this whole saga began. Bonus!
Now we know that much of that rally was based on fluff, stocks with nice ideas and no earnings. Then external forces shifted unexpectedly. Russia invaded Ukraine, Xi locked down China and, in combination with the money printing, inflation shot higher. Now central banks are rapidly reducing their printing and once again the markets are topsy turvy. The $150 you had at the start of this year is worth just $120.
Timing a Turn
One hypothetical solution is to ignore these oscillations. If the world stopped right now, you are $20 better off for having sat still. But the world never stops. Stocks for the long run works really well…in America. In countries like Russia and most of the rest of the world, it hasn’t worked. Sometimes you need to bail completely, which is why political perturbations don’t matter that much for savers but revolutions do. In that sense, the cattle driver is right to be anxious.
Tracking the Jan. 6 hearings, a significant portion of the US is angry enough to toss rule-of-law out the window. And it isn’t only in the US. There are the elections in France. I learned in a discussion this week that roughly 40% of the Hong Kong judiciary/law enforcment supports Chinese rules that abandon Hong Kong’s rule-of-law.
Inflation matters not just for markets but also for confidence in the political system. I can’t talk about what is going on without getting a bit geeky. Inflation is a rate of change concept. That means if the price change of the things we measure stays high, $5 gas, but is unchanged (still $5 gas), the rate of inflation falls to zero. Poof, inflation concerns disappear. It’s sort of like sprinting, the faster you go the harder it is to go yet faster. So to guess if inflation will turn down you need to look at what the rate of change is at the components of the economy.
Keep reading with a 7-day free trial
Subscribe to Things I Didn't Learn in School to keep reading this post and get 7 days of free access to the full post archives.