Synopsis: Many accept as doctrine that the entire rebound in stock prices since 2009 has been driven solely by artificially low interest rates. The observations of a 15th Century sage should be enough to tame that dogma.
The two ecclesiastical scholars looked warily at each other across the table. Outside, street carts noisily rumbled past on their way to a sunny, bright market day. Inside the Cathedral in Frauenberg, it was silent, cool and dark. The men drank ale and ate hard cheese, enjoying a companionable silence punctuated by occasional drabs of conversation.
“You know Bishop, I’ve been making astronomical observations for quite a while. In fact, I remember the exact day I began, March 9th in the year 1497. And I’ve learned a few things, come to a few conclusions.” Announced the Canon of Frauenberg wistfully.
“Ah, such as?” Asked the Bishop.
“Well, I think we’ve been mistaken about the sun revolving around the earth. I believe it is the other way around,” announced the Canon.
A silence ensued. Old boards groaned and somewhere a shutter hinge squeaked. The men eyed each other across what seemed to be a widening distance. Then, the Bishop slapped the wooden table as if he intended to split it in half. He bellowed and snorted, then nearly giggled with joy. Tears streamed from his eyes. “Nic, that’s funny. Really funny.” His face sobered, the mirth draining like a tankard of good beer. “But don’t let anyone else hear you joke about that stuff. I don’t want to see you burned as a heretic.”
Now it was the Canon, Nicolaus Copernicus, whose face drained; of color. He quickly shifted topics as his boss sipped and nibbled. “Right then, how about we discuss that issue with the currency?” Lucky for him, Copernicus could converse about multiple topics. He was multi-talented, working simultaneously on determining the motions of heavenly bodies and managing the monetary matters of Prussian Poland. And you thought talking on the phone while perusing Facebook was serious multi-tasking?
Five hundred years later, we recently completed the eighth revolution around the sun since the bull market began back in March of 2009. Has it all been a Fed induced, easy money binge? Will future orbits be more sobering? Are there alternate theories that won’t get us burned at the stake? The two topics Copernicus knew best help us reach a revolutionary conclusion:
1. Monetary theory: Cracking the questions of the cosmos is nice and all, but Copernicus also dabbled in man’s greatest ambition: money management. (I may be biased.) As the Canon, one of his responsibilities was maintaining the local currency. An original monetarist, he opined that inflation was a matter of too much money chasing too few goods and that excess amounts of currency or loose monetary policies should be avoided. Prices rise when there is money to buy and excess liquidity leads to increased inflation. And talk of bubbles dawns when easy money chases things like stocks, artificially driving up values.
2. Heliocentricity: Copernicus’s idea that the sun was the center of the solar system broke with the classical theories of Greek philosophers like Aristotle and Ptolemy. Yet, for all that time since classical antiquity no one could accurately say why some bodies seemed to move across our sky and then move backwards, or retrograde, before continuing on the primary path. Through his calculations he sought “…a more reasonable arrangement of circles, from which every apparent regularity would be derived while everything in itself would move uniformly, as is required by the rule of perfect motion.” It would take decades before anyone would widely accept that they weren’t at the center of the universe.
In places like the Federal Reserve, they still find it hard to believe the cosmos doesn’t revolve around them. Yet their efforts to make money more available through low interest rates have been only partially successful. Such funds have been more stationary than inflationary, parked on corporate balance sheets and held as excess reserves at financial institutions. Creating it isn’t enough; the money must circulate to create price pressures in the form of inflation or bubbles.
Today, the most reasonable arrangement of data for stock investors should have less to do with the Fed and more to do with earnings. That is, valuations don’t seem to be artificial at all. Since markets stopped moving in retrograde back in 2009, solid earnings have made stocks more and more attractive. And the first quarter of 2017 is no exception with the S&P 500 projected to have the highest year-over-year earnings growth since 2011.
Revolution #9 should see us grabbing a beer and putting the fun back in fundamentals, paying less attention to Federal Reserve press conferences (yawn) and more to corporate earnings calls (okay, also yawn). For those who believe this period since the Great Recession is a Fed induced bubble, most of this will seem like heresy. But, much like that whole heliocentricity thing, being heretical doesn’t make it wrong.
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Links to Sources:
2. https://www.astronomyclub.xyz/uniform-circular/copernicus-and-planetary-motions.html 3.https://insight.factset.com/hubfs/Resources/Research%20Desk/Earnings%20Insight/EarningsInsight_032417.pdf
5. Federal Reserve Bank of St. Louis, Excess Reserves of Depository Institutions [EXCSRESNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EXCSRESNS, March 29, 2017.