Three Things I Think I Think – In the Dark Edition

Here are some things I think I am thinking about:

1 – Young People Don’t Like Hillary.  The craziest thing about last night’s Iowa Caucus was the disparity on the Democratic side.  Hillary Clinton is getting very little support from young voters.  Even young females are voting for Bernie Sanders.  Here’s the breakdown by age:

This is very different from the Democratic party that Barack Obama won under where young voters rallied around him.  It has to make you wonder if Hillary can rally the support from young voters to beat a Republican candidate.

More interesting here is the shifting landscape of future politics.  We live in a world where the youth think that a Democratic Socialist is the ideal candidate.  By a wide margin.  Is the USA embracing a socialist perspective more or is this nothing more than a poll given to people who haven’t written Uncle Sam a few sizable tax checks yet?   You know the old saying, a Democrat is a Republican who hasn’t been mugged (by Uncle Sam) yet, and all that….I don’t know the answer, but my guess is that the inequality movement is something that’s here to stay and it’s having a big impact on how young people view the world.

2 – Negative Rates and Hot Potatoes.  The BOJ cut rates into negative territory in a surprise move a few days ago.  This caused quite a stir about how negative rates filter through the economy.  The Monetarist view has dominated many of the discussions and is based primarily around the “hot potato” idea.  That is, if the Central Bank makes it undesirable to hold deposits then investors will shift their portfolios.

This portfolio rebalancing effect should theoretically boost asset prices, increase the wealth effect, boost investment, etc.  You know, the same theory that made QE sound rational to some people.  Except we know that this transmission mechanism is, at best, extremely weak.  Instead, as I’ve described previously, a negative rate acts as a tax on the private sector just as QE does.  It reduces aggregate incomes by reducing the amount of interest earned by the banking system and the banks subsequently tax their customers by charging them higher fees to make up for their own lost income.  The wealth effect might be stimulative in the short-run, but the income tax is deflationary in the long-run.

What world do we live in where a predominantly Conservative school of economics (Monetarism) has convinced itself that a tax on the private sector is good for the economy?  Talk about the triumph of theory over reality!

3 – Bond Are Confusing.  According to the Wall Street Journal 40% of investors don’t know that bond prices fall when interest rates rise.  This is one of the first things you learn in a basic investment course.  It’s also one of the most damaging as it’s a belief so pervasive that retail investors have convinced themselves for years that bonds are a one way bet to the poor house.  Which, of course, has been totally wrong.  The problem is that bonds are lot more confusing than stocks and they get a lot less attention in the mainstream media than stocks do.  So we have to start boning up on our bond knowledge.

In the next few months I’ll try to make a more concerted effort to provide some educational tools on bonds, but for now, here’s a few good resources to get you started:

• Understanding the Bond Market, Stifel
• The Basics of Bond Investing, LearnBonds
• 5 Myths About Bond Investing, Jason Zweig