The Doors of Perception
“In between the things that are known, and unknown, lie the doors of perception.” Jim Morrison was often revered and feared in equal measure. In the world of financial markets, where varying perspectives may reveal hidden truths that govern our economic reality, there are other voices that may carry the knowledge we need about what’s coming next.
Economists, journalists, and central bankers, likely have the worst track record of predicting the future. Yet this is where we go to for guidance.
I respect our local NZ economists, but they’re no exception to the rule. Will interest rates really fall back down again next year and will it be ‘business as usual’ after that with property? I’d like to believe that, but…
Central Banks: A bunch of Muppets, or The Puppet-Master?
A common narrative paints the U.S. Federal Reserve as a controlling force, wielding the sword of quantitative easing (QE) to drive asset prices to unparalleled heights. To be honest, this is my paradigm. If you can control the quantity of new currency being created (indirectly), AND if you can influence the cost of credit(interest rates), then…
Those who control the money, control the world
It’s a nice base case to hold as it can explain just how, since the 2008 Global Financial Crisis, asset values have been on a relentless trajectory upwards to the right. Yet, this perception may be misguided, at least according to Hugh Hendry (The Acid Capitalist and former hedge fund manager) and others.
Even Jerome Powell himself appears to take credit for influencing markets:
Perhaps all this is a mere shadow play in a world with even more potent and mysterious forces at work?
De-globalisation and Neo-Mercantilism: The Real Culprits?
Heading through the doors of perception again, we encounter a some serious global shifts: Specifically the retreat from globalization towards a form of neo-mercantilism. This shift, rather than the Fed’s actions, might be the true source of asset-price inflation (again, according to some).
The offshore, non-sovereign issuance of USD through the Eurodollar banking system further confounds our understanding (or my understanding at least). This complex web of international finance highlights how the Fed may be rendered impotent in this fight, lost in a labyrinth of global capital flows.
Housing Market: A Glimpse of What’s to Come?
The U.S. housing market offers clues to what lies beyond the horizon. Many American households, cushioned by 30-year fixed-rate mortgages, remain insulated from the financial tremors shaking the rest of the world. This divergence hints at a possible correction in jurisdictions more exposed to short term mortgage rates (NZ anyone?), a harbinger of change that demands our attention. US households can likely withstand the heat longer than the rest of the world.
Banking failures, and big bank failures at that, are evidence that not even the US Fed foresaw these series of unfortunate events brought on by their decision to hike rates at break neck speed. The case for muppetry is growing daily.
The Return to ZIRP: A Path to Normality?
The turbulent seas of economic uncertainty may only be calmed by the return of a Zero Interest Rate Policy (ZIRP). We need the treatment for inflation to be over, and over fast. Already in New Zealand, we’re seeing households really struggle with affordability. Yes, we’ve been here with interset rates, but not with the levels of debt we have now. The only relief will come when interest rates settle back down (closer to 4-4.5%).
In a world adrift, this is the way.
Conclusion: People Are Strange
In the poetic words of Jim Morrison again, “People are strange when you’re a stranger.” In today’s financial landscape, the stranger is really anyone who dares to challenge the prevailing narrative. This strangeness carries risks, but it also opens doors to understanding, wisdom, and opportunity to aim for a return that comes about by thinking through things differently.
For the everyday investor, the doors of perception await. Will you step through and explore the unknown?