Yesterday, a small landmark was passed.
A tweet this morning:
‘For the first time since the financial crisis, the 3-month Treasury yield has surpassed the yield on the S&P 500.’
Small investors look for big, risky gains. The big money aims for small, safe ones. As long as the big money could earn more from S&P dividend yields than from short-term Treasury yields, it’s stuck with stocks.
Now, it’s not so sure.
This is not a new era. But it is the return of an era that has been missing for nearly a decade — a time when you could earn a decent return from your savings without taking the risk of owning stocks.
As investors get reacquainted with this old friend, there will surely be some reminiscing…including memories about what happens when rates rise back to a ‘normal’ range.
Remember, understanding Fed policy since 1987 is as easy as 1,2,3. It consists of the same three mistakes: 1) Make credit too cheap for too long. 2) Raise interest rates until the market crashes. 3) Cut them sharply in a panic.
Investors will recall how stocks plunged when the Fed last made its famous Mistake #2 in 2005—2007 — raising rates after holding them down too low for too long. They will wonder if the Fed isn’t doing it again with its quantitative tightening (QT) program…however timid it may be.
They’ll believe, as we do, that the Fed will come to the rescue with its Mistake #3, reversing QT and taking up quantitative easing again. And they’ll wonder, as we do, how effective their rate cutting will be when they have so few rates to cut.
Painful memories — repressed since the bull market began in March 2009 — will resurface.
Investors will remember how their stocks were cut in half in September 2008…how they tried to refinance real estate loans, but couldn’t find a willing lender…and how they wished they had sold out and retired in 2007.
‘Are you out yet?’ the old-timers will ask each other, as the rate on the 10-year T-note breaks over 3% and heads to 4%.
‘You should be…’ will come the advice.
Power of scale
But we leave the markets for a moment to focus on a much-overlooked and poorly understood phenomenon: scale.
Some things work well on a small scale. On a large scale, they don’t work at all.
If you have teenagers, for example, you could let them have a few friends over for a small party. The affair might be passably agreeable, with no broken lamps or bones. But don’t invite hundreds of them. We can almost guarantee it will be a disaster.
Likewise, you may love your spouse dearly and happily. But don’t try to love other spouses at the same time — it will only cause trouble.
We are noticing the effect of scale here in Ireland. It is a small country on a smallish island with a population of less than half the population of Los Angeles county.
The pace of life is different. The quality of life is different. And the news is different.
‘We don’t know how lucky we are.’
We were having a drink with an Irish friend, sitting on the terrace of the Cliff House Hotel, when his comment triggered this cogitation.
The Cliff House is perched on the side of a steep hill, keeping watch over Ardmore Bay. On the other side, neat, green fields, squared off with hedgerows and lines of trees, lay in the distance.
It was about 65 degrees. The sun shone brightly in the late afternoon, punctuated by an occasional passing cloud.
‘Yes, it is very pretty here.’
‘I don’t mean that, I mean…I think it’s hard for Americans to believe that there are places like this, where you’re not afraid of getting murdered.’
‘When I go to the US, I always feel a little nervous. Of course, I’m always in a big city. Like Baltimore. There are police sirens all the time. And panhandlers.’
‘You have to keep an eye out and make sure you stay in a good neighbourhood. And when you read the paper, you’re kind of amazed at how much awful stuff is going on.’
‘Here, about the worst thing that happens is a couple of guys in Dublin getting drunk and crashing their car into a stone wall at two in the morning. And it’s a national scandal.’
Perverts on the loose
In the Irish papers recently was a story — over several days — of a pair of perverts who were on the loose. They had long criminal records, including sex with minors, and were wanted by the police.
The police — who do not carry guns — put out an alert warning people that the two had been spotted in County Donegal. More reports came in that they had been seen in towns in the north of the country.
At some point, local people seemed to have taken the law into their own hands. The two men were found tied to a park bench, covered with what looked like motor oil.
We pass this along with neither approval nor disapproval. We merely note that it is a different approach to law enforcement than we would find in Los Angeles County or Baltimore.
Some of the difference is probably the consequence of the much larger scale of US society…
…which we will explore more fully anon.