June Market Review

We continue with the same line of the past months in equities, with rises in the main indices, and with some exceptions such as the European market. Stocks linked to technology and specifically to the semiconductor sector experienced rises of between 10% and 30%, as is the case of the software company Broadcom.

• S&P 500: 3.47%.

• Nasdaq: 6.18%.

• Stoxx Europe: -1.30%.

In the case of fixed income, investors’ expectations of lower interest rates in the future have led to price rises, especially those with longer maturities of 5 years or more.

I recently read an article called “Individualism and loneliness in contemporary Japan” by the historian Juan Carlos Encinas, in which he describes the drama that Japanese society is suffering today, with the increase in voluntary isolation (hikikomori), the lonely deaths of the elderly (kodokushi) and the number of suicides.

You may rightly ask, what has all this got to do with investment or the economy? Well, from my point of view, it may not be the main factor, but I think it may have helped to bring about this situation.

As I have said on several occasions, the market rises when interest rates are expected to fall. In general, if interest rates go down, credit is cheaper, we can consume more and it would seem that we would not have economic problems. So why don’t we lower interest rates to 0% and live happily ever after like in Disney? Tomorrow I will run for president of the European Central Bank or the FED and make that decision, how easy!

The Anglo-Saxons always have a phrase for every situation (anyway, I think the Spanish language is much richer, to be honest) and in this case it is “No Free Lunch”, every action has its consequences. The 19th century French economist, writer and legislator Frederic Bastiat described this in an essay called “What is seen and what is not seen”. On the one hand, the consequences that are seen and are immediate, and normally the reason why the decision is taken; on the other hand, the rest of the consequences, which are produced over time and are not immediately seen. The problem is that sometimes these consequences can be negative. Bastiat said that the difference between a bad economist and a good economist is that the bad economist only sees the immediate consequences and the good economist also takes into account the non-immediate ones, as well as the collateral effects of these in the future. I would add another type of economist who, knowing the negative consequences of a decision in the future, supports it because the positive immediate consequence is more “popular”.

Central banks lower interest rates to help in times of crisis, but that is the immediate consequence. So, do I mean to say that one of the unseen consequences is what is described in the article I mentioned above? Let’s look at it.

Zero or near-zero interest rates encourage immediate consumption, why?

1) It costs very little to borrow and therefore more likelihood of exaggerated consumerism. I am not one to say how much to consume, but if we get used to being able to consume whenever we want without the slightest effort, we are likely to spend on unnecessary goods or services. It has happened to me. We are not perfect, what can we do, a consequence of a fallen nature.

This graph shows how consumer spending (red line) increases in relation to the fall in interest rates since the 1980 peak (blue line).

Illustration 1. Federal Reserve Economic Data

2) It discourages saving. If interest rates fall to zero, the sense of saving loses momentum. In addition, low interest rates lead to higher consumption, pushing prices upwards, so we can perceive that money will be worth less in the future and, therefore, we are more likely to consume than to save. Saving is extremely important because it is the source of future wealth creation. The saver invests his money, sacrifices his immediate consumption, in projects that, if successful, can be the key to curing diseases, improving food productivity, etc., in short, improving health and lifting thousands of people out of poverty.

Since ancient times, one had to work to cover one’s consumption, it was unthinkable to finance consumption with loans. In developed countries we have become accustomed to borrowing to consume and it is true that, in part, this has helped the economic development of many countries. This was true when consumption was financed by savings. However, with the printing of banknotes and/or low interest rates for a long time, immediate consumption is stimulated and the virtues derived from saving, such as sacrifice, effort and patience in thinking about the future, are lost. A culture of instant gratification is created.

Is the point getting through? Perhaps I am wrong, but reading this brings to mind this passage from the Gospel where Jesus said: “Enter by the narrow gate; for wide is the gate and broad is the way that leads to destruction, and there are many who enter by it; for the gate is narrow and the way is hard that leads to life, and there are few who find it” (Matthew 7: 13-14). (Matthew 7: 13-14.) We value more what involves an effort, but to achieve it we have to “suffer” that way (narrow gate and narrow the way) until we get it. 

Is this what is happening in Japanese society?                      

After the crisis of the 1990s in Japan, the Bank of Japan lowered interest rates to zero or almost zero until today (see graph) and not only did this not prevent the consequences of the crisis, but it may also have had unseen consequences, as Bastiat said, on the culture of society, especially among the young. 

Illustration 2. Tradingeconomics.com

Culture of the immediate, i.e., if we do not achieve things immediately, frustration, anxiety and even depression can set in. These may be some of the causes of the drama in Japanese society. You may disagree, of course, but it makes perfect sense to me.

Could it be happening in Europe? Hopefully not, but there are already many voices clamouring for the central bank to lower rates. I don’t know, I don’t know. Beware of solving immediate problems without thinking about the future.

Let us hope that we continue to struggle to achieve our goals and to give meaning to our actions because, as Benedict XVI said, “every economic decision has moral consequences” … sooner or later.