“The Past is Never Dead”

Often times when I’m writing these pieces, I reflect on the letters I’ve written in the past. Notably, when the stock market is riding a wave of optimism and euphoria is the mood du jour, I remember the notes written during the bad times. A few weeks back I was recalling the notes written in March of 2020. Fear gripped not just the markets but pervaded every aspect of our lives. When I was remembering those letters, I was happy that we weren’t in that moment any longer, but I also knew that we would be once again. Maybe the fear wouldn’t have the same existential feeling, but the fear would be there, nonetheless.

Markets are essentially about human behavior. Emotions and behavior can be volatile, but they also tend to exist within confines. Like waves cresting and crashing. Famed early 20^th century trader, Jesse Livermore said, “Speculation is as old as the hills…Whatever happens in the stock market today has happened before and will happen again.” The good times, like the bad will never last. In recollecting those letters from March 2020, I knew letters recapping market turmoil would have to be written again.

When William Faulkner wrote, “The past is never dead. It’s not even past,” he seemed to echo what Livermore before him had said. He understood that what has come before will come again. But those simple nine words cut even deeper. It reminds us that it is the scars of the past that we can’t escape that cause the repetition. After all, nostalgia is a pain of lost youth and happier times, and resentment is a “re-feeling” of an old wrong or wound.

Year to date stock market declines seem to be a result of exactly this fact—scars from the past being re-examined. On the one hand, we have Putin’s attempt to reassemble lost territories and lost glory. On the other hand, we have markets recalling the market reaction of 2018 and the last time the Fed raised interest rates. Seeing how these things are playing out, maybe these aren’t scars at all, but scabs we pick at and won’t let heal. The Fed has never really been able to extricate itself from an accommodative interest rate policy—it always seems too slow and too late. As a result, it keeps digging itself deeper and deeper into a hole without a ladder. Russia’s invasion of the Ukraine, with its potential to disrupt commodity prices, only exacerbates the problem of rising prices.

At yesterday’s open the stock market was in a free-fall following Russia’s invasion of the Ukraine—a free-fall that was halted by a tremendous rally to recoup all the losses and then some. But at the open the Nasdaq 100 and the Russell 2000 were down over 20% from all-time high. The S&P and the Dow Jones Industrial Average were down over 10% from their all-time highs. Market’s may have recovered from yesterday’s onslaught, but the problems still remain. Financial markets love to talk about the “Fed put”—this notion that there exists a line in the sand, a percentage market retracement, where the Federal Reserve will come to the rescue. With markets at or near “correction” territory and the Fed still not having made any changes to asset purchases or interest rates, it makes me wonder how far the Fed can get into raising rates before it will reverse course. That is, of course, if the Fed still behaves as the market’s backstop.

Each time the Fed chooses to leave rates at dangerously low levels it encourages reckless behavior. Low rates are essential for all ventures that benefit from leverage. If inflation is running at 7% and mortgage rates are 4% why not lever up and buy as much property as I can? While this behavior is fraught with peril it is the behavior that the Fed is encouraging. As previously mentioned, in the past 20 years, each time the Fed has attempted to raise rates it has spooked the markets to the point that it reverses course and becomes even more accommodative than the last time. Fed actions seem to have a diminishing return, so it takes more and more to get the desired response.

Last letter I argued that the Fed needs to act strongly to attack the inflation problem before it chokes off the economy. Now, with the Ukraine problem and stumbling markets I worry that the Fed will use this as an excuse to act meekly. My personal belief is that if you work in D.C. you engage in the sport of can kicking. Why fight a battle that may spill blood when that battle can be fought after you’ve served your term? Perhaps that is how Russia ended up in the Ukraine and why the Fed’s monetary policy has eroded the purchasing power of your dollar.

Thanks for reading,

Zach and Dave

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