This issue marks the centenary of Barron’s, and it shocks me to realize that my time in financial journalism covers a majority of that span, if only b
This issue marks the centenary of Barron’s, and it shocks me to realize that my time in financial journalism covers a majority of that span, if only barely. It was almost exactly 51 years ago that I was hired by the New York Times financial section as what was called in those less-enlightened days a copy boy. What I didn’t know at the time was that I would become a witness to economic and financial history.
Part of that was the technology that changed so much of the U.S. economy. I vividly recall the newsroom of that era; it was much like those you’ve seen in countless movies, with rows of desks and typewriters (and bottles in reporters’ drawers). Less familiar was the composing room, where molten lead from linotypes would progress in various steps to the dark, satanic mills, to lift a phrase from the poet William Blake, where the presses ran. Except for actually printing paper copies of Barron’s, all that now takes place within reporters’ and editors’ computers (with lattes supplanting hooch).
A week after I was hired—I was still a freshman in college—the Penn Central Railroad filed for bankruptcy, the first of a long string of financial crackups that would mark, and in a sense make, my career. By 1980, when I arrived at Dow Jones, the publisher of Barron’s and The Wall Street Journal, interest rates hit their historic peak above 20%. The monetary squeeze would trigger a debt crisis for Mexico and its U.S. creditor banks. But that also would break the back of inflation and lay the foundation of the great, generational bull market that would follow.
The bull market was interrupted briefly by Black Monday, Oct. 19, 1987, when the Dow Jones Industrial Average suffered a record one-day plunge of 22%. How that came about can be told now. The weekend before that fateful day, then-Treasury Secretary James A. Baker 3d was interviewed by Cable News Network and informed world markets and other central banks that the U.S. would let the dollar fall, rather than permit a further rise in interest rates that could threaten the recovery and the stock market. My future wife, Deborah Marchini, then CNN’s Washington business-news correspondent, and her bureau chief interviewed Baker. Before the crash that interview would help precipitate, we left on a long-deferred European vacation, which meant we both missed the market event of the decade (which she rues to this day).
The longer-run importance of the market upheaval was the response by policy makers, especially the Federal Reserve. Then chaired by Alan Greenspan, the central bank cut interest rates and pumped money into the financial system. That reflected his longstanding view that stock prices would strongly influence business decisions. In fact, the economy hardly missed a beat after Wall Street’s paroxysm.
Financial markets would nevertheless anticipate in subsequent decades that the Fed would ease policy in response to reversals. After a series of rate hikes in 1994 led to another Mexico debt crisis and a financial debacle in Orange County, Calif., the central bank quickly reversed course. And following the 1998 Russian debt and Long-Term Capital Markets tailspin, the de facto “Greenspan put” to support markets was established, even though the real economy didn’t need help, as I wrote at the time.
That begat the fin de siecle dot-com bubble, which burst after Barron’s seminal analysis in March 2000 of the internet wunderkinders’ furious cash burn. The Fed’s slashing of interest rates to a then-historic low of 1% and subsequent telegraphing of its intent to move rates back up at a glacial pace helped inflate the housing bubble during the first decade of the new century.
Throughout this period, MacroMavens’ Stephanie Pomboy was the Cassandra who warned about the pumping up of the housing bubble and the danger it posed to the financial system. And like those of the mythical figure, her prescient warnings went unheeded until the collapse in 2008 proved her right. The bursting of that bubble resulted in the financial crisis, leading to the bailout of banks and auto manufacturers deemed too big to fail.
But all of that paled in response to the literally trillions of dollars pumped into the U.S. economy after it had suffered the sharpest downturn since the Great Depression last year as a result of the Covid-19 pandemic. AllianceBernstein’s former chief economist, Joseph Carson, alerted this column’s readers to the danger posed by the pandemic, ahead of his then-compatriots on Wall Street.
As a cure, policy makers are serving up more of the “hair of the dog” with each new crisis, Pomboy said in a telephone interview. “They’re rolling out trillion-dollar stimulus bills that you know the Fed will monetize,” by buying Treasury paper with money conjured from nothing. The U.S. central bank can do that in large part because the dollars it creates are used globally as a store of value and a medium of exchange.
This confers on America an “exorbitant privilege,” in the words of a former French finance minister. The dollar has been the linchpin of the global monetary system even after the demise of the Bretton Woods system, which had pegged other currencies to the dollar and the greenback to gold at $35 an ounce, and that effectively unraveled 50 years ago this coming August.
Pomboy now sees cracks in the dollar’s primacy, with China allowing the appreciation of its remnimbi or yuan. While Donald Trump railed against supposed Chinese manipulation of its currency to cheapen it to gain an export advantage, the facts have argued otherwise. Indeed, the greater threat to the U.S. would be a strong and stable yuan that could compete with the greenback. That would threaten America’s exorbitant privilege, which lets it consume more than it produces and save less than it invests.
Beijing’s new tolerance of a strong yuan might represent a tectonic shift in the monetary regime that has prevailed for the past half-century, Pomboy observes. It’s not news that foreign central banks have been diversifying their reserves away from the dollar, she adds, a sign of reduced U.S. primacy.
Domestically, the fiscal stimulus from Washington isn’t spurring the economy beyond a one-time proverbial shot in the arm, she continues. Meanwhile, it’s boosting prices from the gas pump to the grocery aisle to the home-improvement store. And while not a fan of cryptocurrencies, Pomboy says their rise triggers her “spidey sense” that a shift from dollars is under way. At the same time, the surge in cryptocurrencies also marks a flight from greenbacks, in a speculative frenzy that has fueled crypto’s surge. It’s just one of an array of speculative excesses, all underwritten by the ultra-easy policies of the Fed and other major central banks.
Barron’s 100 years encompasses what has been called the American Century, during which the United Kingdom was supplanted as the world’s great power. Two world wars dissipated the U.K.’s wealth, and its empire faded with the end of colonialism.
Does America face similar prospects, challenged by China, economically and geopolitically? The West won the Cold War against the Soviet Union, which was a military superpower. However, Russia and other former Soviet states—along with additional third-world economies—remain mostly dependent on the export of raw materials. China, in contrast, is a fast-growing economic and military superpower.
Around the time I started in financial journalism, the U.S. began to lurch through a series of financial crises. It has coped by printing more money and taking on more debt, made possible because our liabilities are the world’s best assets. And that’s the case because of American economic and geopolitical strength, two signal aspects of the past century. History suggests that those may be subject to change.
The stock market approachesBarron’s 100th anniversary with the Dow, appropriately enough, at a record, along with the S&P 500 index, while the Nasdaq Composite is less than 3% from its peak, despite three straight losing weeks.
And in what has been a recurring theme over the past half-century, bad (or at least not as good as expected) news on the economy is good news for the financial markets. Friday morning’s report that just 266,000 workers were added to nonfarm payrolls in April fell massively short of some economists’ guess of one million or more.
The good news for the markets was that the punk jobs report essentially vindicated Fed chief Jerome Powell’s insistence that the central bank isn’t even thinking about thinking about slowing its $120 billion-per-month securities purchases. Such a taper in bond buying would precede any eventual liftoff in its interest-rate target from its current ground-hugging 0%-to-0.25% range, which the central bank’s solons figure might not happen until 2023.
Suggestions about reduced Fed accommodation also came from a curious source, Powell’s predecessor, Janet Yellen, now the Treasury Secretary. She opined earlier in the week that rates might have to rise should the economy overheat, but she later walked back those comments by strongly backing the Fed’s independence.
Yellen and her boss, President Joe Biden, on Friday pushed back at the suggestion that a factor in the payrolls shortfall was their policies, especially the extra $300 in unemployment payments under the American Rescue Plan passed in early March. But the Bank of America research cited here last week estimated that it would take a job paying at least $32,000 to be better off than collecting this benefit. That jibes with the slew of stories recently about employers’ problems filling job vacancies. Other factors, such as a lack of child care, fear of Covid-19, and increased retirements, also play a role, however.
The latest government payments don’t appear to have been funneled into the stock market, as much of the previous ones were, according to J.P. Morgan’s global markets strategy group. After peaking in December, retail traders’ share of stock activity remained strong in January and February, but fell sharply in March. Preliminary data show continued weakness in buying of individual shares and call options in April.
As the previously roaring price action in the favorite stocks of individual traders subsided starting around March, their trading also slowed. Will it pick up again, in a reprise of the fabled frenzy of the Roaring ’20s of Barron’s early years? The Robinhood crowd probably will be back once the action in the meme stocks resumes.
Write to Randall W. Forsyth at firstname.lastname@example.org