Surprise, Surprise - NOT

"Humor is a spontaneous, wonderful bit of outburst that just comes.   It's unbridled, it's unplanned, it's full of surprises." - Erma Bombeck

"How ridiculous and how strange to be surprised at anything that happens in life." - Marcus Aurelius

This week the Federal Reserve left interest rates at their previous record low levels.  During their press release they once again sat firmly on the fence of caution and optimism leaving the markets guessing as to their next step.  Consensus still expects an interest rate increase later in the year, possibly as early as September.  The market reacted as if the decision to leave interest rates alone was surprising but readers of this blog should not have thought it strange at all.  In fact I found it strange that the market actually responded positively to the news as clearly the Federal Reserve still considers the economy too weak to handle even a 1/4 point move higher.  Furthermore it is clear that the market is still firmly drinking from the fire hose that is low interest rates and that any move higher will stick a knife right through its heart.

It almost seems like the record is stuck as once again the growth projections were ratcheted down from a range of 2.3% to 2.7% to a range of 1.8% to 2.0%.  I would not be surprised if this range is lowered further later in the year.  Certainly there has not been much if any of an economic uptick in the data through the end of May.  Consumption dropped in March and April, both months with no cold weather impacts, and industrial production has now fallen for five months straight.  For these reasons some economists argue that the United States is in a "secular stagnation".  Secular stagnation refers to the economic theory where savers do not invest their proceeds into the economy and so the economy stagnates.

Looking at America it seems hard to push the economy malfunctions into the secular stagnation box although as has previously been written in this blog the inequality of earnings is now at its highest level since 1928.  High earners are more likely to save rather than invest so this may point to some of the problem but companies are borrowing money at greater rates than at any time in the past and margin debt is also at a record high.

To me the problem is the access to capital.  Large corporations have access to as much capital as they can or are willing to acquire while small growth companies are unable to access capital regardless of their outlook.  These large companies compete on the world stage which is really struggling and does not create much demand at home.  Now of course this is a very broad brush but in the main it holds true.  In addition while the unemployment rate has dropped the middle class continues to be squeezed and this uneasiness closes wallets.  In my sphere it is rare to hear of a small business owner who is truly optimistic about the future.  They are still on edge and have been since 2008.  To them nothing has really changed.  Sure the economy has not imploded again but it certainly does not feel like it has come even close to recovering.

With this outlook it is no wonder that the economy continues to splutter.  If more were done to free up capital and level the playing field to assist the small business owner I firmly believe that this economy would be flying.  Instead the world sits watching the Federal Reserve play games with interest rates and soon we will be barraged with a bunch of horse manure from the potential presidential candidates as to how they are going to grow the economy by magically finding jobs and cutting taxes.  Until they wake up to the fact that the economy needs a complete revision to the rules of the game we will continue to splutter along and will probably waste another decade.  During this time it should be no surprise to my readers if the Federal Reserve keeps interests rates low far longer than anyone can imagine as they really have no metric to hang their higher interest rate hats on.  They will continue to blow hot air around their stuffy conference room but unfortunately this will not result in a humorous outburst - surprise, surprise; NOT.