When I was first introduced to macroeconomics in 1967, the most extensively used economic textbook was written by Paul Samuelson and it was our bible. Samuelson taught us about the most basic economic laws. The most prominent ones were the law of supply and demand, the law of competition, and the law of self-interest. Adam Smith might have been the one to originally coin those ideas, but Samuelson was the one who explained them to generations of students.
Since the last U.S. presidential election, it can be argued that what Smith referred to as natural economic laws have been turned upside down. The current period is not economics as usual. For as long as I can remember, the flow of economic data, in conjunction with what members of the Federal Open Market Committee say about monetary policy, have been the standards by which interest rates have been set. Certainly, events have on occasion interfered with this natural market force — for example, the Y2K panic, the 2006 housing boom, and the expansion of quantitatively easing (the process by which the FOMC purchases long-dated government-backed securities to hold down interest rates) — but these exceptions are episodic and rare.
Now, however, it appears that the overall context of the economy, interest rates and even the equity and fixed-income markets are being colored by other “special” events, like congressional probes and a special prosecutor looking at Russian involvement in our presidential election.
Investors, not yet fully recovered from the Great Recession, have held onto trillions of dollars in cash, and when they do decide to invest in markets they are choosing investment vehicles with low management fees and daily liquidity. The “old days” of investments in long-term mutual funds with active management, i.e. individual stock selection, appear to be going the way of the dinosaur. Today, institutions and retail investors alike are opting for electronically traded funds, or EFTs. These EFTs mitigate individual stock risk by buying “baskets” of like securities, which provide market returns and readily available liquidity.
Our markets, whether short- or long-term investments, energy, consumer goods or commodities, are not reacting in predictable ways. Economic data such as the unemployment rate, at 4.3 percent; GDP, running between 2 percent and 2.25 percent annualized; and inflation, running at sub 2 percent; have taken a back seat. The Trump administration’s promises for reduced regulatory burdens on business and both personal and corporate tax reform have driven markets higher. Now with the appearance that we are a year or more away from anything happening in Washington, at least on these subjects, markets are beginning to react to geopolitical events in Europe, the Middle East and, most recently, North Korea. These international events and the markets’ reaction to them have been further complicated by the congressional probes and domestic issues like the recent violence in Charlottesville, Virginia.
The natural economic rhythm has been turned on its head and even Smith’s law of self-interest seems compromised: consumers are at a crossroads in assessing their own personal self-interest. So where do we go from here and how does an individual just trying to understand it all respond?
As a full-time market-watcher and a student of human economic behavior, I recommend the following:
- Relying on proven professional investment advice.
- Taking regular breaks from watching Fox News, CNN and MSNBC.
- Avoiding reacting to to daily market swings; investing is a long-term project.
- Remembering that Smith’s economic laws are, in fact, laws — not theories. They will withstand the test of time and economic order will return.
Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.