They say there are those that are lucky enough to be born smart, while others are smart enough to be born lucky. I definitely fall into the latter category. I met my wife in University. I got my job on the institutional equity desk of Canada’s largest bank when I was 23 years old. We started my career together as young adults. As fortune would have it, I had the perfect seat for the coming computerization of the equity markets. I was also lucky enough to be at one of the few big dealers that had a direct drive payout. Within a year or two, my trading career was blooming, and I started to make a little money. When I turned 26, I married my wife (I know it seems young now, but it didn’t at the time). Then the markets got really busy (the dot com bubble was about to take off), just as I was given the responsibility of the main risk trader for the equity derivatives group. Next thing I knew, I wasn’t just making a little money, but a lot of it. Way more than some 26 year old punk should have ever made. My wife, who had some boring job at the local Toronto newspaper, realized that her salary was a rounding error, immediately quit.
She quickly found us a home to buy (I wanted the cottage first, but that would come a couple of years later). After checking off that box, she found herself 27 years old and not much to do. She wanted us to travel, but it was 1997 and the market madness was in full swing. Her husband would come home exhausted after all the stress of a long day of trading, collapse into bed, only to bolt upright a few hours later in a sleep talking nightmare where he would scream “sell it an an eighth! hit the bid! sell it!” Even with the stress, there was no way he would take off time to see the world. So she recruited friends and family to travel with her. Brad Pitt’s Seven Years in Tibet had just hit the big screens, so along with her husband’s little sister, they headed to Tibet and Nepal for a trekking adventure. Other trips followed, but not everyone could pick up and leave all their responsibilities.
My wife’s plan was to get all this out of her system before the kids came. At this point you might think that my wife is high maintenance, but in fact she is the exact opposite. She never wanted the big lavish lifestyle, and would have traded all the money for a little more time with her husband. But given that her husband was (is?) a jackass, she was often alone and tried to find things to do before the family started. So she started buying all the things she had dreamed about as a teenager. Fancy clothes, expensive shoes, designer bags, she went down the all-too-well worn road of neglected Bay Street wife.
Some people spend a lifetime trying to spend away their sadness. Others figure out the futility of their behaviour only when they are retired and their family has long gone. They realize that although they made it in a monetary sense, they missed the best years of their family in the pursuit of money.
My wife is infinitely more mature and wise than me. It took her about a year of trying to spend her way to happiness before she realized her foolishness. For me, I am still trying to remember that lesson. My wife entered this stage of her life earlier than most, and left it even more quickly. After that first (and last) year of fancy stuff, apart from the occasional pair of expensive shoes, she has never looked towards material goods as a way to make herself feel better.
At the beginning of 1999, after having got it all out of her system, she decided it was time to start a family. My wife got pregnant and we waited the next stage of our lives to begin.
How the heck did I get here?
Although my wife had decided that fancy clothes would not make her happy, she was still a young woman with a strong sense of her own identity. Our three kids had not yet sapped all desire to be cool out of us. My wife decided that she should get some artsy photographs taken of herself towards the end of her pregnancy. You know the type, the big belly, semi-naked photographs in black and white.
My wife booked an appointment at one of the higher end photographers and met with him for the initial consultation. She asked me about it, but as usual I was too busy staring at the screen and simply mumbled something like “sure honey – whatever you want.”
A few weeks later she reminded me that the photo shoot session was coming up. Of course, I completely forgot. The day of the shoot, scrambling out of the office after the close, I headed uptown to “help” her with the photoshoot. Or so I thought.
To this day, I still don’t remember how it all happened. I got to the photographer’s and was still thinking more about the markets than anything else. I thought I was just there so that my wife wouldn’t be alone, semi-naked, with some strange photographer. The next thing I knew she was completely naked, big huge belly exposed, with just a sheet barely covering her private bits. Ok, I thought to myself, wasn’t expecting this, but if that’s what she wants… The photoshoot continued, and then the next thing I knew there was no sheet. Ok, now this is getting a little weird. I looked over to my wife. She did not seem at all put off, so I guess this is what’s happening… Then the photographer looked at me and said, “now it’s time for the couple shots.” Whoa! Did I agree to this? I desperately tried to recall all the conversations with my wife about the photoshoot – I couldn’t remember “couples shots’ being part of the deal, but to be fair, all too often I was speaking to her while sending in waves of buy programs and wasn’t paying that much attention. The photographer instructed me to take off all my clothes. Seriously? All of them? I asked why I couldn’t leave on my boxers. He told me that the shots required me to be fully naked. I looked at my wife who gave me a ”what are you doing – stop being such a wimp and get naked” look. So after receiving assurances that there would be no pictures of my junk, I got undressed. And the next thing I knew, there I was, sitting in some studio, completely naked with my 8 and half month pregnant wife, having some artsy photographer taking pictures of the both of us.
After the photoshoot, we got dressed and headed out the door. There was a strange silence in the car ride on the way home. Finally, I started giggling and asked “did that just happen?” My wife started laughing too, and confirmed that it was not a dream. I asked if that was planned, and she admitted that she hadn’t known what to expect. It had simply “progressed.”
The Fed simply “progresses” as well…
Today the Fed meets to decide monetary policy for the next month or so. They are widely expected to leave rates at 0% for another meeting. I can’t help but take a moment to reflect on how we got here. We are now in the sixth year of zero rates.
Surely this was never part of the plan. When Bernanke lowered rates to zero in December of 2008, it was supposed to be an “emergency measure.” They never planned on leaving them at zero for the next fifty Fed meetings. I guess like I never planned on getting naked for a photoshoot with my pregnant wife, the Fed’s perpetual zero interest rate policy just sort of simply “progressed” as well.
And although I can understand how it happened, we have now hit the point where the Fed is too scared to say enough is enough. Just like I was too timid to say; “I am getting my clothes on and heading out” because I wanted to make my wife happy, the Fed is too scared to raise rates because they desperately want to keep the markets happy.
They have blown the biggest financial asset bubble that has ever existed, and are now hostage to those severely stretched valuations. Although they won’t admit it, they are afraid of what will happen when they stop feeding the markets the diet of overly easy interest rates.
Don’t think for one second the Fed is not all too aware of the relationship between financial asset prices (like the S&P 500) and the size of their balance sheet.
There is a reason that governments don’t negotiate with terrorists. If they do, it only encourages more terrorism. Negotiating might save the first few hostages, but over the long run, it puts many more innocent people at risk.
Which is why the Federal Reserve should have never used the so called “wealth affect” as a policy tool. When they lifted financial asset prices they hoped that it would kick start the real economy. When it didn’t work, they simply did more, levitating financial assets all the higher. It still barely affected the real economy, but now we have these financial assets that are in the stratosphere.
And just like the Fed was convinced that the wealth affect would kick start the economy, they are equally worried that a negative wealth affect would sink it.
As we have approached the previously communicated economic conditions necessary for the Fed to remove the “emergency rate” rate of zero, the Fed has continually moved the goal posts. Every time we get close, they pull the ball away.
They give lip service to the idea of raising rates, but they are simply too scared of how the markets will react.
Remember Einhorn’s $250,000 lunch with Ben Bernanke? How can you forget David’s conclusion that the Fed did not have even a remote sense of a long term plan? Einhorn’s opinion is that the Fed is merely putting one fire out after another.
The Fed went into the previous crisis with good intentions. They didn’t nefariously blow this massive bubble. But that ended up being the result. They have allowed things to progress to the point where there is no good way out. This will end badly.
This dilemma was no more planned than my naked pictures with my pregnant wife. But let me tell you the final chapter of that story. Just like the Fed hasn’t thought through all the unintended consequences of their easy money policies, my wife and I hadn’t thought through all the consequences of those pictures. After picking them up, we took the nice tasteful one and hung it up in our home. The racier artsy ones were quickly put in the closet, with us both vowing to never speak of them again. I thought the saga was over.
Then one day, completely out of the blue, one of my buddies from the bond desk wandered over to my seat at work.
“I was walking along Mt. Pleasant the other day and you will never guess what I saw”, he said to everyone seated around me. When no one took the bait, he simply continued, “yeah, so I am walking along the street and I pass this photography studio. They have a couple of pictures in the windows. You know, pregnant belly shots. Except there is a picture of a couple. They are both naked and her husband has his arms wrapped around her. Well, I almost passed it, but then I realized that I recognized the dude in the picture…. Kevin, you never told us about your second career as a nude model…”