The Situation: On the Foolishness of Crowds

The Situation on Thursday considered the latest ghost investigation the Justice Department and FBI have taken up to harass Obama- and Biden-administration officials.

Today I want to step back and ask a few basic questions about the relationship between The Situation and the American economy—conceding at the outset that I am not a macro-economist:

• Do you feel better off now than you did at the turn of the year?
• Do things—things like your job and your financial life—seem more stable?
• Does it seem to you that things are just chugging along?

If the answer to these questions is no, consider how out of step you are with the financial markets these days. Yeah, there were some nervous days in the markets when President Trump declared it Liberation Day and slapped tariffs on just about every country in the world. But that quickly passed. And overall this year, the equities markets have done, well, just fine.

Take your pick of which market you want to consider. The Dow Jones? Up almost six percent. The S&P 500? Up almost nine percent. The NASDAQ? Up even more than that. Indeed, the markets have taken a good look at all of the chaos Trump is wreaking and shrugged.

Fiscal cliff, you say? Pshaw, they respond.

Recession fears? Whatevs.

Worried about tariffs? Priced that in long ago. That’s so April.

Deconstructing the rule of law in America? Meh, say the markets.

ICE-driven inflation? Sigh and buy, the traders say.

Massive new debt that puts America in a supposedly untenable fiscal situation? Snore. 

It’s almost like the markets don’t think governance matters.

And it’s not exactly like the last six months have provided abundant evidence that it does matter, that bad governance produces terrible short-term outcomes (assuming you don’t happen to be an HIV-positive child in Africa, a federal worker, an undocumented immigrant, Harvard University, a law firm or newspaper, a small-business owner whose business depends on imports, or a patient with a long-term chronic condition who was hoping for new treatment options). 

Indeed, hiring has remained relatively strong. Prices are high, yes, but inflation is not exactly surging. The sun seems to be rising every morning in the East and setting in the West. Sure, it’s hot out, but you can’t blame Trump for that. His gutting of clean energy funding hasn’t even produced any new emissions yet.

Suffice it to say that the markets don’t think we’re on the precipice of some kind of cataclysm, and while we’re bombarded with forecasts of disaster, those always seems to be a few weeks or months off, and there doesn’t seem to be a lot of objective evidence yet that the markets are wrong—economically speaking, at least—to whistle past this particular graveyard.

All of which has me stewing over one question: Is the crowd foolish or does governance really not matter? 

The question, of course, isn’t quite that stark. It’s possible, of course, that the market is asserting that governance doesn’t matter much in the medium term, and that this is a correct assessment of the impact of Trump’s hand-waiving economic policies, but that the markets will correct—suddenly or gradually—as the longer-term picture darkens. 

Such nuance aside, however, it’s hard to escape the view that the markets are betting that at least the medium term picture doesn’t depend on a healthy rule of law, stable known tariff rates, or fiscal sanity. It’s hard to escape the view that the markets are betting on American economic performance in a world in which the president can waive the application of business-oriented laws passed by Congress and upheld by the Supreme Court—and in which nobody does anything about it. It’s hard to escape the view that the markets are betting that an administration’s systematic effort to create an American labor shortage by deporting a large segment of the work force won’t create systemic inflation. It’s hard to escape the view that the markets are undeterred, at least in the short term, by the administration’s open posture of government by extortion and bribe-seeking from industry. And it’s hard to escape the view that the markets think that the independence of the Fed is for wusses—as long as the undermining of that independence doesn’t take the form of outright firing. 

Now I am neither a market analyst nor an economist, and I’m certainly not your financial adviser.  But the idea that economic performance and the rule of law are unrelated is just not true. For that matter, it is simply untrue that the kind of games Trump is playing with the economy don’t have negative consequences. Even if we posit that the debt-to-GDP ratio the United States is capable of sustaining is way higher than that of other countries and that it’s much higher than we have heretofore imagined, it isn’t infinite. If policy and kleptocracy really have no impact, there’s no reason why the United States should have performed better than Argentina or Mexico over the last bunch of decades. Government by lol-nothing-matters just isn’t plausible in the realm of economics.

So let me lay my cards on the table: I think the markets are crazy right now. It just isn’t analytically defensible that a bitcoin is worth nearly $120,000. It’s not analytically defensible either that the combined value of the stock market is growing solidly against the backdrop of economic policies that a wide swath of reputable economists describe as reckless and that change, in any event, near-daily. And it makes little sense—at least not to me—that the economic performance of the United States just seems to motor along through The Situation as though, lol, nothing in the policy space really does matter, thus reinforcing the crowd’s confidence in its own foolishness. 

But therein lies the hitch. Because I’m not out there selling the market short either. Being a good long-term investor, I leave my investments alone—properly diversified, of course—and I ignore short-term trends, no matter what I think of them. I don’t kid myself that my analysis will outperform the combined analytic insights of gazillions of institutional and individual investors.

Which is to say that no matter how much this all makes no sense to me, no matter how much I am inclined to write a column saying none of this makes any sense, I am also, at least in my revealed preferences, part of the problem—just one more fool in a very large crowd of fools, whistling past what is obviously a graveyard and listening to week after week of what we all know to be economic nonsense and not shifting course. And I am behaving like a fool all in the name of responsible long-term investing.

The Situation—which will have no impact on anybody’s 401(k) portfolios, I promise—continues tomorrow.