On the surface we can understand why the Fed didn’t act on Thursday. All the standard evidence says deflation is a bigger worry than inflation. Even a small step is arguably a step in the wrong direction. China is slowing. We get it.
We’ve long believed that the Internet and its associated applications collectively represent one of the most deflationary forces in history. Driving home from a Georgetown finance conference on Friday, we heard Jim Cramer—whom we like and respect even with his antics—talking about this. With a mix of matter-of- factness and sadness he talked about how the main purpose of all the innovations going on at the convention he attended were designed to fire people.
This is, of course, a very slippery slope. Progress cannot be stopped. But there are times when you have to wonder if it contains some of the seeds of its own destruction. The income-inequality issue has become a political dividing line, but it really shouldn’t be one. When too much income goes in too few bank accounts, the economy’s wheels turn slower and slower. Even the people who dispute this probably end up worse off. But again, progress cannot be stopped.
At the Georgetown event, which examined market structure, a related point kept coming up. Are we putting too much emphasis on speed, at the cost of doing things right? The early trading period on Monday, August 24th was front and center.
Another question, one we have pondered and written about, relates to ETF’s and passive investing more generally. What concessions have become necessary? Participants recognized that you can’t trade ETF’s properly if the underlying components are not active. Some wanted ETF users to ease up their demands for liquidity, particularly the industrial-strength users. Others would have none of it. The tail has clearly started to wag the dog.
All these forces mean rates should be low. Should they be this low? Is there a nagging sense that things would be better if they felt less artificial? Are they perhaps less artificial than they feel.
Lots of questions. We’re just the humble convertible bond market.
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).