I haven’t read anything by this philosopher and thinker since I was in college but recently I read an interesting article by someone who quoted this. There is some serious truth to this quote in the world of politics, but it also connects to economics and investing.
When my dog gets sick and starts vomiting my first inclination is to have her Vet stop it. Interestingly, the Vet generally advises just to let her vomit. “She’s getting rid of the bad stuff. Let it out.” Message: the vomiting is the cure, not the problem.
The analogy here is that recessions and bear markets already are the cure. When you fight them, things get worse. Think about zero percent interest rates. This is a policy that was used to soften the recession of 2008. But think of the unintended collateral damage. Example: retirees working past 65 because they can’t retire on fixed incomes; pension funds failing to find a reliable 7% return; companies overproducing goods because money seems so cheap. And whose cause has it actually advanced (other than distorting the stock market)? Now that the Federal Reserve is looking to raise rates, one observes that the stock market is giving back much of those gains.
The zero interest rates were intended to induce corporate America to borrow to expand their businesses. But over $1 trillion was instead used by American corporations to buy back their own stock. If you can borrow money at 1% and buy back stock that yields 7% (internal rate of return) that looks more appealing than embarking on a business expansion. …an unintended consequence. However, just today (2/9/16) there is an AP story that these companies (including 229 from the S&P 500) have lost over $126 billion on these buybacks. They wound up overpaying. It’s easy to overpay when the price is being bid up so aggressively.
Let’s keep things simple. The economy and the markets are going to cycle down periodically. (If there were no cycles, it would mean everything just goes straight up). So be on guard for “conventional wisdom”, a healthy amount of group psychology, government policy, fear and greed all mixed together.