Humility's Role in Football, Monetary Policy, & Investing
By Jeff Bernier, CFP®, ChFC, CFS
In case you missed it, my alma mater, The University of Georgia, won the College Football National Championship. I was a senior in high school the last time we won the National Championship. We have come close several times in the last 20 years but always seem to come up short. Hopefully, we will not have to wait another 41 years! Go Dawgs.
While I am celebrating the National Championship, I am not a fan of the college playoff system. Every fall, a committee gets together once a week and ranks the college football teams. The top four teams in the final rankings get to play in a four-team tournament for the College Football National Championship. In no other sport that I am aware of, does a group of people get together to choose who the best teams are. In every other sport, the winner on the field determines who makes the playoffs and who the ultimate champion is. When I coached my son’s 5th grade football team, we played for championships on the field. It was not based on the opinion of the “experts.”
I am reminded of this now as there is much conversation about the decisions of another committee. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.
Since the financial crisis of 2007 – 2009, the Federal Reserve has developed new tools to influence interest rates and economic activity. Some of these new tools (Quantitative Easing) had never been used before in the United States before 2008. It is easy to be a “Monday morning quarterback” and judge decisions made by the Federal Reserve (led by Ben Bernanke) during the crisis. The U.S. and global economies were close to the abyss at that time, and we should be thankful we got through it. The members of the Fed have an extremely difficult job with a dual mandate of price stability and full employment.
While the Federal Reserve began a process to normalize rates in 2016, by historical measures, monetary policy has been “accommodative” for some time. Again, many argue, it has been too “easy” keeping rates artificially low. While this has certainly hurt savers, it has likely benefited the overall economy and the financial markets. Unfortunately, studies show that this type of policy may contribute to wider dispersions in outcomes for those with more wealth (market participants) and those at the lower end of the economic spectrum with low wages and little exposure to financial markets. Unprecedented monetary support has also been provided since the early stages of the Coronavirus pandemic.
Faced with rapid economic growth off the short “pandemic recession,” and inflation as measured by the 12-month change in the Consumer Price Index of 7[i] percent, the Federal Reserve has indicated that it is now time to raise rates and become less accommodative. In all communications they continue to hedge their forecast of future changes with a statement that all decisions are “data dependent” and can therefore change.
They are projecting that we are entering a season of tightening. As we have been in a period of unprecedented monetary support, fiscal support, economic recovery, negative real interest rates, and inflationary pressures, this is probably good policy. I personally welcome the prospect of getting back to a more “normal,” balanced environment.
There appears to be a lot of “gnashing of teeth and rending of garments”[ii] in the financial markets. I guess if you are a “trader” and your time horizon is about as long as the life expectancy of a mayfly [iii] , this may be justified. However, an “investor” can relax in the belief that markets adjust quickly to new information and prices reflect this information. Trying to guess what asset class will win based on the direction of unknowable variables is a “loser’s game”.
Investors frequently predict outcomes based on what happened in the past. A sample size of one! We are just not particularly good at statistical analysis, probabilities, and recognizing unintended, unforeseen consequences. We also tend to decide if a decision was good or bad based on the outcome, when it could have been luck or some other variable. This is what Annie Duke calls “resulting” in her book Thinking in Bets.
My most important point in this blog is that we (and policymakers) must be humble in our ability to predict and control outcomes. It seems many policymakers, politicians, market strategists and investors become overly confident in their ability to forecast what is going to happen. They pronounce with confidence the correct course of action, but few ever go back and check the track record of past pronouncements.
In a properly diversified, global portfolio, you should have exposure to asset classes with various sources of return (and risks). Some of these asset classes will perform better in a high growth, rising rate environment and some will likely perform better in the event of slow growth, economic contractions. A diversified portfolio is an expression of the freedom from having to “know” the future. Of course, you are not at a disadvantage, no one else knows either!
I recently watched a video where author Malcom Gladwell talked about the lessons of the Great Financial Crisis of 2008. He used the American Civil War Battle of Chancellorsville to illustrate that both failures were largely the result of hubris[iv]. He states:
In times of crisis, we think what we want from our leaders is the benefit of their expertise, and that’s not true, what we want from our leaders is the benefit of their humility. It’s not about how smart you are, it’s about your values. Can this leader keep it from going to their head or not?
Sure, the transition to a more normal interest rate and monetary policy can be messy and cause volatility in asset prices. Maybe we can look forward to the day when we don’t look to the PhDs at the Fed – the wizards behind the curtain – to “manage” the economy with untested, experimental tools…or the College Football Playoff Committee for picking winners!
If you have any questions or would like to discuss how your strategies are positioned to fund your long-term plans, our team would love to be a resource.
Please do not hesitate to reach out to one of our advisors below:
Jeff Bernier, CFP®, ChFC, CFS
Wealth Advisor
770-641-6360, ext. 1
Mona Fahmy, MBA, CFS, AIF®
Wealth Advisor
770-641-6360, ext. 2
