Market Commentary | October 2019
The Last Chapter in Lend and Spend
Over the long term, the stock market provides a true opportunity to build wealth, which creates opportunities for investing in nonfinancial assets – a grandchild’s education, helping an adult child through a rough patch, travel and new experiences, support for local charitable organizations making an impact. Having these life opportunities are what we mean when we invoke our tagline – Invest in Living.
In order to realize these long-term benefits, we accept risk. We accept the short term fluctuations – and the uncertainties – of the markets and the economy. Today, there is a spreading consensus that the short term in the market is becoming riskier. “The global economy is now in a synchronized slowdown,” says the new head of the International Monetary Fund, Kristalinia Georgieva. Europe’s current recession, the ongoing travails of Brexit, and overall trade uncertainty have contributed to gradual economic weakening all over the globe during 2019. We don’t disagree. While two years ago most economies were accelerating their growth, now most are slowing down.
For many years, the Fed and other central banks have been setting very low interest rates in order to spur economic activity, and attempting to forestall any dramatic drop in the value of financial assets. Low interest rates mean that banks are motivated to make loans to earn a higher rate of revenue, which puts some of their assets (customer deposits) back into the economy. When additional capital is lent to local and regional businesses by banks, this stimulates more growth: the development of new products, expansion into new markets, hiring more employees to staff new projects. This is part of capitalism’s intended cycle – banks pay customers interest on their savings, and then lend it out at higher rates to business and borrowers who then create economic activity.
But now – negative interest rates?
“Lend and spend” is the catchy slogan for the desired impact of lower and lower – even negative – interest rates. They intend to encourage banks to lend, and consumers to (borrow and) spend. But negative rates – whew – that’s a hard concept to wrap your mind around in a capitalist system based on continuous, steady growth. It is a logical extension, though, to the excessively stimulative monetary policy we’ve had not just for the last ten years, but for decades since the leaders of the Fed have tried to manage monetary policy to avoid recessions entirely. Alan Greenspan, chair of the Fed between 1987 and 2006, created what was known as “The Greenspan Put.” This was an expectation on the part of financial markets that he would provide stimulus through monetary policy to avoid any significant decline in asset prices. Many argue that these policies were a primary cause of the subprime mortgage crisis that morphed into the much broader price declines affecting all asset classes in 2008.
Lend and spend’s dark side
Yes, additional bank lending can create more business activity, and yes, reduced borrowing costs for consumers enable them to borrow more cheaply, and spend more. There are some pretty negative side effects, though, both for individuals and for the economy. For one, it encourages a buildup of debt. As of the beginning of 2019, total global debt had increased to 318% of global GDP from 213% in 2008. More leverage means more risk. In addition, it can create an expectation that money, goods, and services will continue to get cheaper and cheaper – and lead to a spiral of less economic activity and lower growth.
We are not in favor of negative rates. We believe price downturns and economic declines are part of a rational business cycle. There are times of growth, and times of contraction. Historically, the overall trend has been one of growth, and the periodic declines help support the next phase of growth. In the same way that “bubbles” create distorted prices on the upside, these normal periods of decline often create temporary price distortions on the downside and significant opportunity for the portfolios of long-term investors.
Another impact of the ups – and downs – of the business cycle that we see as especially salient today is maintaining an equitable balance between the interests of investors and workers. Policies developed during past economic downturns have created or strengthened the safety net for the rest, and that helps bring more equity overall. Those without capital reserves are provided with other benefits – Social Security, Medicare, and food stamps come to mind. Today we have a dramatic and increasing lack of equity – and heated controversies debating needed change, such as the recent determination in California that gig workers are employees rather than contractors. This bill will effectively extend benefits for workers considered basic in other industries – sick pay, for example.
Going forward: positioned for growth – with a cautious attitude
Our perspective on risk, then, includes both a commitment to the long-term benefits of stock investing, and a concern about current risks. Very high asset prices, as well as a low level of financial equity across the population, makes financial markets riskier. Our approach to portfolio construction reflects the need for this balance. We are always considering the preservation of capital as well as the investment of capital, so we can most effectively grow our clients’ resources over time.
Please be in touch with questions or concerns. As always, we appreciate the opportunity to work with you, and we value the trust you put in us.
 Kristalinia Georgieva, IMF Chief, quoted in “IMF and World Bank’s New Leaders Warn of Deteriorating Global Outlook,” Josh Zumbrun, WSJ online October 8, 2019.
 David Malpass, World Bank President, ibid.
 Les Nemethy, “Debt Levels: Have We Learned The Lessons of 2008?” Seeking Alpha, January 29, 2019.
Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast.
– Robert Rubin