Making American Investments Simple Again
Hold on to your hats while global stock markets gyrate – and don’t become a panic-selling fool – because this week’s equities roller coaster is a sure sign the world is recovering from the secular stagnation orchestrated by Ben Bernanke and Barack Obama. In fact, the US economy is just now returning to the old normal: when free-market investors could expect 5% average annual rates of return from an investment portfolio that typically consisted of stocks, bonds, and real estate.
It is also time to see Obama and his economic advisors for the mental midgets they were when they declared 2% GDP growth rates and wage stagnation the new normal. Yes, they did just that: Larry Summers proclaimed 3% GDP growth a thing of the past – right before his declaration that Harvard women could not compete in engineering with men. History will remember the Obama presidency for its mishandling of the economy. At a time when bond markets and real estate needed hands-on restoration, Obama opted to punish the lending industry and ignore struggling homebuilders.
Furthermore, it is time to call out Bill Clinton for his role in the 2008 housing and financial crisis, because he laid the foundation. He established the 1995 Community Reinvestment Act (CRA), which pressured banks to lend in low-income neighborhoods, and he repealed the Glass-Steagall Act, which prevented securities firms and investment banks from dealing – and investing – in non-investment grade securities. To wit, the CRA created the boom market for sub-prime mortgages that targeted the lowest economic quintile, and repeal of Glass-Steagall invited invisible bankers to deal and invest in non-investment grade mortgage-backed securities.
While it is true Clinton was president during a glorious economic era, it is not true he was responsible for the technology boom or even managed the economy well. The tech bubble obscured the exodus of US manufacturing jobs to Mexico and Asia – and Democrats ignored the implosion of small towns in red-state America. The tech wealth machine also convinced Democrats higher taxes and spending were not a drag on the economy: providing them with a fleeting example to refute fiscal conservatives. Finally, “new economy” Democrats (mostly coastal elites) proclaimed recessions were a thing of the past. That’s almost as dumb as Al Gore proclaiming himself the inventor of the Internet.
The tech bubble burst, the economy slowed, and Al Qaeda attacked Washington and New York: widespread panic threatened global financial markets – and central bankers over-reacted. Alan Greenspan flooded the world with liquidity: steadily dropping the federal funds rate from 6.5% (in 2001) to 1% (in 2003). Greenspan wanted to protect the US economy from collapse, but he was pouring gasoline on the biggest financial bonfire of all time: super-risky (sub-prime) mortgages that were bundled into super-risky structured products that nobody understood, but action that everybody wanted!
By 2008, the Great Recession arrived, and real estate and bonds were left for dead by the investment herd. Ben Bernanke replaced Alan Greenspan as Federal Reserve chairman, and intervened in financial markets with quantitative easing (super-low federal funds rates), repressing the bond markets. Central bankers in Europe and Japan followed his lead, forcing investors into stocks and hedge funds (that played in junk bonds, real estate and commodities). The good news was asset prices did rise: the bad news was workers and the real economy stagnated.
While the Trump Stock Bump has been personally rewarding, super-low interest rates are not good for the long-term economy because they are now highly inflationary. Trump delivered on his promise to cut taxes and business regulations; thereby boosting GDP growth rates, employment and wages. Employee shortages are popping up in industry after industry; therefore, Federal Reserve chairwoman Janet Yellen was wise to raise interest rates – because inflation is just around the corner. The investment herd understands asset prices must reset as advanced economies return to old normal monetary policy (real interest rates) – and this has resulted in volatility and interest-rate risks in the stock markets.
The US economy is as strong as it’s been since 1999. The Republican mix of tax reform and deregulation are providing fiscal stimulus that will drive economic growth, allowing the Bernanke-Yellen monetary corrections to continue without stunting economic growth. Personally, I long for the “good old days” when I was invested in a basket of assets that included stocks, bonds, and real estate. I enjoyed getting conservative annual rates of return that exceeded 5% - without having to tie up money in a hedge fund for five years. What could be more democratic than individual Americans investing on their own in a bank CD, individual stock, or a piece of property, without having to pay some “expert” in New York or Charlotte in order to have adequate retirement income?