Where Are All the Austrian Scholars' Yachts?
At present, more than a few are riddled by the near-term health of the stock market. They are because the economic news gets worse and worse. So why the somewhat ebullient stock market?
The answer is fairly simple. Markets never, ever price in the present. They’re always a look into the future. Bad as things are right now, there’s a growing desire on the part of politicians to end economy-asphyxiating command-and-control in response to the new coronavirus.
So with light perhaps at the end of the tunnel, investors are seemingly pricing in the possibility that the future will look quite a bit less like the present. And that’s a reasonable supposition. Figure that Americans are a resilient bunch. Politicians and policymakers have been getting us into all manner of economy-sapping wars and causing financial crises (think the bailouts and other interventions that spooked the hell out of markets in 2008) for as long as the U.S. has existed. Yet Americans keep bouncing back.
Looked at in terms of the present, the virus that caused politicians to panic doesn’t seem to have been nearly as deadly or illness-inducing as was assumed. Since it wasn’t, the most important driver of progress – human capital – eagerly awaits a resumption of production. When the Americans get started again, watch the U.S. economy take off.
Despite the seeming logic of the market’s rally, it’s difficult for some analysts to ever ascribe progress, or future progress, to stock-market health. Those most skeptical tend to be part of the Austrian School.
Mark Thornton is one of those Austrian skeptics. A senior fellow at the excellent Mises Institute, Thornton has claimed that Austrians like him have predicted every contraction and meltdown of the last 100+ years. Thornton doesn’t really mean that. He’s too smart. If Austrians could actually see around the corner as they contend, they’d all be driving Ferraris and trading stocks on massive yachts. Those who can see clearly into the future even very occasionally are generally centimillionaires or billionaires.
Which is why it’s surprising that Thornton and other Austrians think as they do. Free market believers to the core, they operate as though the deepest markets in the world (U.S. equity markets), markets populated by the world’s most sophisticated investors, are “rigged” as it were; equity prices a creation of the Fed rate machinations. Readers can rest assured that the witless minds at the Fed lap up all the mysticism errantly thrown their way.
As Thornton sees it, the main driver of modern stock-market health has been the Fed. Supposedly the Fed’s artificially low rates boosted equity prices. In Thornton’s estimation, Fed rate cuts equal artificial equity rallies.
Except that they don’t. For one, it’s reasonable to assume Thornton would nod his head to the basic truth that if the Mayor of Auburn (where he resides) were to decree apartment rents $100/month max, that there would be very little apartment supply there. To then presume that the Fed, merely by decreeing “cheap credit,” can make it cheap is not something one would expect Thornton to take seriously. Paraphrasing Mises himself, “we borrow money for what it can be exchanged for.” Implicit in Thornton’s view of the world is that the Fed can decree easy resource access. Not a chance.
Thornton and other Austrians will say the Fed can create dollars, but that’s not the same as creating credit. If so, every central bank in the world would aggressively print money as a way of summoning real resources. Except that there would be no takers; unless Thornton thinks market actors are so dense as to readily exchange real market goods for paper, and without regard to what the paper will subsequently command in the marketplace. Not very likely.
Much as Austrians want to believe that the Fed just aggressively runs the printing press on the way to abundant credit, the reality is quite a bit different. This isn’t a defense of the Fed. It’s just common sense. The dollar is globally accepted precisely because it’s reasonably trusted as a medium of exchange. If the Fed were in constant devaluation mode, which is what Austrians contend has been the case since 1913, the dollar would have long since been replaced as the world's most accepted medium of commerce. Market participants aren’t nearly as dense as some in the Austrian School imply.
Furthermore, if zero or low rates were the path to soaring stock markets as Thornton et al assume, Japan’s stock market would have outperformed all other global equity markets by many miles when it’s remembered that the BOJ has kept the rate it targets near zero since the 1990s. Except that the Nikkei is still well off of highs last experienced in 1989.
What drives market rallies isn’t the Fed, or any central bank. Think about it. The Fed was aggressively cutting rates in 2001, with no subsequent stock-market rally. Markets are too wise. Lest readers forget, the most valuable companies in the world at the time were GE (#1 at $585 billion), Tyco, AOL, Yahoo, Worldcom, Enron….Readers perhaps get where this is going. If central banks could prop up markets as Austrians contend, they would be propping up the past. In other words, if the Fed could prop up markets then markets would constantly be correcting downward.
Still not convinced? Oh well, consider that when GE was the world’s most valuable company, Microsoft was on the verge of a flat stock price for years after the DOJ’s attempts to break it up, Apple was crawling slowly out of near bankruptcy, Amazon was rushing toward a single digit stock price to reflect its unprofitable selling of books, DVDs and CDs, Google was largely unknown, and Facebook didn’t exist. Mark Zuckerberg was still in high school….Those companies are now the five most valuable in the world.
To believe Thornton’s Fed thesis is to believe that the Fed not only created artificially low rates, but the fourth-rate minds at the central bank made sure that buyers ignored the blue chips that ushered in the 21st century, only to make sure the Fed froth found companies that, with the exception of Microsoft, few thought had very good long-term prospects. No chance.
What is reasonable is that while the biggest 100 public companies in 1975 accounted for 49 percent of all the earnings of all public companies, nowadays the top 100 can claim somewhere north of 85%. What’s driven the modern stock rally is what drives them all: brilliant companies. As technology soars into the stratosphere, the best companies can meet the needs of ever more people around the world, and this shows up in their valuations.
Give it time, but soon enough it will be accepted wisdom that the Fed is not nearly as important as so many believe it to be. Evidence supporting the previous claim? The dynamism of the U.S. economy itself. If those in the Fed’s employ could really rig markets, readers can rest assured that there wouldn’t be markets to rig.
Austrians who claim to see tomorrow today can cancel their yacht orders. Wise as they are, the vision they claim to possess quite simply doesn’t exist.