Skip to main content

The Price for Caring About What Others Think of You

As the father of five who cares deeply about my kids I spend a great deal of energy and thought on how to best raise them and set them up for a great life.  One recurring theme, especially with the younger ones, is trying to get them to have the strength of their convictions to be and to act according to their own desires without caving to peer pressure.  I explain to them that they each have a journey that is unique, and that life is about discovering that journey, learning the particular lessons that life has in store for them, and honing themselves as individuals.

I also emphasize the basics of spiritual and communal teachings to insure that they don’t become narcissists and uncaring of those around them, but when I see them mimicking their peer group without having their brain turned on it really upsets me.  I don’t want my kids to live a life calibrated as to what others think of them.  What purpose would their lives be?  What contributions could they possible make?  How could they ever achieve any modicum of greatness?

All this brings me to Janet Yellen – weird, right?  In December, in the face of no global inflation and the obvious threats of deflation from a wobbly China, collapsing oil prices and other commodities, the overhang of unprecedented levels of global government debt, and no wage growth in decades, Ms. Yellen raised the Fed Funds rate 25 bp and hinted strongly that this move would be the first of a series of such moves.  Most economists agreed that 2016 would bring with it about 8 such new upward interest rate adjustments and Ms. Yellen said nothing to refute this outlook.

When asked why this increase had to occur in December, most economists and observers responded with the inane response that would make me furious if spoken by my 7 year old or my 13 year old – She had to do it to save face; the Fed’s credibility was on the line.  In other words, Ms. Yellen chose to do something remarkably dumb, which had no possible benefits and significant possible costs, because she feared what others would think of her if she didn’t.  She feared that, having talked all year about raising rates and not doing so, that if she didn’t do something at all in 2015 that no one would believe that she or the Fed was tough.  It is well documented that she was watching carefully to see inflation heading near or surpassing 2% before increasing rates, and, despite incredible and unprecedented efforts by the Fed to manufacture inflation with ultra easy money policies, this benchmark has not been reached anytime in the recent past, nor will it be reached soon.

Now, predictably, the stock market is wobbly, the high yield debt market is wobbly, fund managers are wobbly, global markets are frighteningly turbulent, and China is in a very difficult place trying to balance slowing economic growth, growing bad debt and vulnerable financial system, and major currency challenges that are surely exacerbated by the stronger dollar and their desire to maintain some form of a dollar peg.  Of course, not all of this can be blamed on Ms. Yellen and her 25 basis points and misread of the world economy, but clearly she didn’t help things.  And, all of this because the most powerful person on earth was worried about what others would think of her.

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.