Mind on Money: Navigating the ‘new’ market

Mind on Money: Navigating the ‘new’ market

A couple weeks back I received an email about my January 1st column. The reader, Dale from Westville, opined, “I really wish you would take time in your column to explain what all the free money has done to the markets. The stock buyback tricks used by businesses to artificially inflate their stock prices and compensation. I trying to navigate the 'new' market conditions and think most investors would agree it hurts.”

Thank you, Dale. I felt like I had been pitched a nice slow pitch right over home plate. My pontification wheels started turning, I needed to address this request my way without writing a manifesto. So here we go.

First, we need to start by quickly visiting a couple major schools of economics. We’ll start with our friends the Keynesians.

The Keynesians postulate the State (aka the government) can manage the levers of the economy (supply and demand) to smooth out the business cycle. Demand is supported through public spending, and supply through targeted tax and business subsidies. The highest profile example today of Keynesian economics, in my opinion, is Chinese socialism. Keynesian economics can be reassuring as it promotes a supportive “higher power” in the form of wise State economists and policy makers, safeguarding the economy from depressions and market collapses. Unfortunately, this faith in a central planning higher power has never proven effective or sustainable in the real world, and Keynesians have been unable to move us beyond the business cycle in the form of market bubbles and crashes.

Moving upward along this chain of logic, is the newest arrival to the economics game, the Modern Monetary theorists (MMT). I think of the MMT school as capitalism-flavored Keynesians on steroids, as this school further postulates a State borrowing and spending in its own fiat currency, which it produces, can borrow and spend with impunity, not with a focus on budget concerns, but rather on achieving the goals of full employment and optimal prosperity in the economy. MMT postulates if a government borrows in the currency it also creates, it can never fail to pay back the currency that it owes to creditors because it can just “make more money.” MMT theorists would say the State is limited in money creation and spending only by the materialization of inflation or by political affairs, not by solvency concerns. To me the highest profile example of MMT is clearly the recent COVID period, when to address the economic damage caused by lockdowns, the U.S. expanded the national debt by $10 trillion and the amount of money in the economy (M2) by 32% in just two years (source: Federal Reserve). This new theory is still playing out, as inflation has clearly emerged in our economy, and a mighty political struggle against “central planning” in general seems to be emerging worldwide.

Which brings us to my favorite school, the Austrians. The Austrians observe that economies are ultimately driven by a myriad of individual choices, and State attempts to promote certain outcomes in the economy through spending, taxes and manipulation of interest rates inevitably contribute to the boom-and-bust business cycles repeatedly experienced. The Austrians postulate this boom and bust cycle is driven by the State mispricing capital (aka interest rates) leading to poor investment choices on behalf of individuals, investors, businesses and governments. Booms occur when cheap money drives the prices of all assets higher, even poor investments, and busts (recessions) occur when logic ultimately prevails and the economy must reabsorb the mal-investments in form of defaults, firm failures and falling asset prices. The Austrians would say MMT is only the latest in a long history of States attempting to borrow and spend their way to prosperity, which will surely lead to the inevitable bust cycle.

Which bring us back to Dale. A recent survey of economists published in Money magazine indicated 70% are predicting a recession in 2023. The question to me is, why? I think the answer is more aligned with the Austrians than the MMT Keynesians in that I believe we are all collectively sensing a whole lot of misinvestment which was prompted by the MMT spending binge of the past three years. It's easy to see this misinvestment through the filter of our particular ideology biases, such as “greedy” corporate executives using cheap money to buy back stock, or “incompetent” politicians throwing money at unproven green energy projects, or “crazy” Zoomers trading cryptocurrency on their phones, ultimately however we collectively kind of sense the misinvestment and are waiting for the bill to come due as logic eventually prevails.

So how do we navigate the “new” market conditions referenced by Dale? Maybe we first accept we may be approaching the part of the business cycle that isn’t new, but rather observed by the Austrians time and again, the bust. In the bust stage of the business cycle, we want to be very careful about the prices we pay for assets (stocks/real estate), and very careful who we lend money to (bonds). We want to play defense with our personal financial habits, maintaining strong balance sheets by holding more cash and borrowing less. Perhaps most important however, we want to remember if cheap money booms promote speculation and misinvestment, then the reckoning bust can reveal true value and opportunity, requiring diligence, patience and logic to endure and prosper.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.

Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.