This Is Your Market. This Is Your Market On Drugs. Any Questions?

An authoritative figure pulls a chicken egg from a carton. He holds the egg up for the television viewer to see.

“This is your brain,” he announces. Then he points to a frying pan and says, “This is drugs.”

The man cracks open the egg on the side of the pan. He then spills the viscous contents into the skillet and allows the slop to sizzle. “This is your brain on drugs”.

He waits for a second or two to let the imagery sink in. Then he stares into the camera knowingly and remarks, “Any questions?”.

egg

Young people in the 1980s, myself included, lampooned the iconic public service announcement. And why not? Most of us enthusiastically experimented with marijuana and alcohol. Others used pills, cocaine, and heroin.

It wasn’t that we had dismissed the notion that drugs damage brain functioning. We were living for the moment rather than thinking about our futures. What’s more, we made a collective stink over the difference between use and abuse.

Are today’s investors able to make the distinction between the use of economic stimulus and its perversion? I doubt it.

Monetary policy stimulus (e.g., rate cuts, quantitative easing, etc.), as well as fiscal stimulus (e.g., infrastructure spending, tax cuts, etc.), helped the U.S. get out from underneath 2008’s Great Recession. Yet easy access to ultra-low borrowing costs for an extended period in the 2000s fostered the housing bubble. The same misapplication of monetary policy in the 1990s nurtured the technology balloon.

(Click on image to enlarge)

fredgraph

Eric Hickman at Adviser Perspectives recently demonstrated stimulus use, overuse and eventual recession going back to the late 1980s. The Fed makes an effort to wean the economy off of lower-than-normal rate policy by raising its overnight lending rate. The activity causes shorter maturity Treasury bond yields like the 2-year to rise faster than longer-term yields like the 30-year. The yield curve flattens. It eventually inverts, prompting the Fed to start cutting rates. A recession begins shortly after the easing begins in earnest. 

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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Wendell Brown 1 year ago Member's comment

Gary, sounds like I need to be madly hedging, if you were allowed to suggest, what would you suggest? I'm not a gold bug...

Adam Reynolds 1 year ago Member's comment

Hey, thanks for all the '80s references! And you do have 1987 in the chart but I'd be curious to see the lead-up to that black monday....