“Muscles aching to work, minds aching to create—this is man.”
-John Steinbeck, The Grapes of Wrath
“It’s pitiful,” I mutter. Dad and I survey the pond beside his barn on the farm where my family lives; it is down three feet from full pond. A mere puddle. Clouds of dust from the gravel road drift across the pasture and settle on the grass and the trees, turning their leaves from green to a chalky gray. It is a depressing sight. Dad looks at me a long time and says, “Droughts happen, Phillips. Don’t make it worse by fretting about it.” Sigh. Still being taught. He then gives me a useful lesson on weather patterns, average rainfall and the frequency of droughts in Mecklenburg County. He concludes by pointing out that with both the weather and anything else in life, lacking a historical perspective can make everything seem like a crisis.
According to the September advisory issued by the NC Drought Management Advisory Council (NC DMAC), northern Mecklenburg County is experiencing a drought (notably, Charlotte is not). NC DMAC designates the level of drought as “Moderate,” which is defined as having received little to no rain in the last 40 days. We stand at drought level 2 out of 5 with 5 being “Exceptional.” The average annual rainfall for Mecklenburg County is 43 inches and due to a wet spring it appears that we are on track to exceed that for the full year, but the last two months have been exceedingly dry. The last “Exceptional” drought we had was twelve years ago; you’ll recall it was so dry we felt guilty wetting our toothbrushes before brushing our teeth! That drought was on the eve of the financial crisis. Let’s hope that was coincidence and not causation. Like past droughts, this one will end at some point.
Speaking of a lack of liquidity, did you hear about the mini-crisis in the repo market on September 17th? An overnight shortage of cash needed by traders and lenders forced the Federal Reserve Bank to “make it rain” with an emergency infusion of funds. The last time the Fed had to take such action was during the financial crisis in 2008. One role of central banks around the world is to manage the cost and availability of credit by setting short-term interest rates and by intervening in the money markets with purchases or sales of government bonds to keep financial markets running smoothly. While the crisis of last month was short-lived, it was concerning to investors because it was not anticipated by the Fed and it revealed potential structural weaknesses in the financial system. Central bank activity, liquidity, ultra-low interest rates, and even negative interest rates (in the EU and Japan) have been at the top of the list of investors’ concerns this year.
Paralleling these near-term concerns are longer-term worries about whether we are prepared for the structural changes in store for our economy and labor force as a result of technological innovation. We are hearing that artificial intelligence, automation and robots will affect labor dislocation on scale with the industrial revolution. Will there be enough work and economic activity to ward off recession or even depression if we successfully replace the human at the wheel and at the desk? I asked Alexa, but she was rather evasive. Smart people come down on both sides of this issue. On one side are those who predict a world with limited employment opportunities and the need for a government-guaranteed minimum income for every American. On the other are those who agree that many jobs will be destroyed by technology but that, as in the past, new jobs will be created to absorb the displaced workers. Based on historical perspective, and the fact that the unemployment rate is currently near a 50-year low, we come down on the side of the latter while acknowledging that the accelerating pace of change will create friction as we struggle to re-educate our workforce for the jobs of tomorrow.
This isn’t the first time we’ve dealt with disruption in our capital markets or turmoil and dislocation in our labor force. These are as certain as droughts. Coincidentally, I just re-read John Steinbeck’s classic, The Grapes of Wrath, which depicts a depression-era farming family displaced by drought and by structural changes in our country’s economy. The tractor replaces the mule team and banks foreclose on dried-out farms, marking the end of a way of life for thousands of tenant farmers. In Steinbeck’s Pulitzer Prize-winning novel, the Joad family joins tens of thousands of other “Okies” leaving Oklahoma to find a new life in California only to be exploited by a market that is indifferent to human suffering. Steinbeck’s opinions on unchecked market forces and the role of government are easily discernible and remind the reader that there’s nothing new under the sun in certain debates—only the backdrops change.
The backdrop for the coming year is the 2020 presidential campaign. The same debates profiled by Steinbeck about unfettered market forces and the role of government promise to reach a fever pitch in the coming months. With the 24/7 news cycle, absorbing the day’s news will feel like speed-reading The Grapes of Wrath before breakfast each day. You are familiar with today’s issues—as always some are economic, some geopolitical, some social, some simply personal. History demonstrates that we have had bull markets and favorable economic conditions under both Democratic and Republican control of the White House. Yet prior to every presidential election, we all seem to agree that never has the outcome of the race been more consequential than the current one. Here we are again. The argument for this year’s race being the most consequential is that the divide between the two parties has never been greater and that the issues on the table will determine the fate of our great nation. One could reasonably find some truth in this argument but if we don’t keep our wits about us, the shrill voices, vitriolic accusations, twisted mischaracterizations, half-truths and fake news we’ll hear, see and read in the months ahead will have the potential to make this feel like a crisis. Once you decide it is a crisis, you’re apt to make bad decisions, including bad investment decisions. We suggest you heed Frank Bragg’s advice about maintaining a historical perspective. Steinbeck’s story about the Okies doesn’t end well but remind yourself that the nation we call America made it through the Great Depression. We’ll make it through this election.
I’m not sure that Tom Joad and his family would have been helped by an understanding of monetary policy, liquidity injections into the repo market, artificial intelligence, big data or foreign election interference. The fact is, like the Joads, we humans of today can only digest and react to so much information. Recognizing this, we at Bragg will continue to maintain a disciplined process as we manage portfolios and provide financial guidance. We appreciate your trusting us with studying, investing and advising.
Now, if we could just get a little rain.
Note: Phillips wrote his article on Thursday, October 3rd. Two days later at 1am on Saturday morning, Frank Bragg was awakened by the sound of raindrops on the metal roof of his house. He eased out of bed and sat on his screen porch until 3am watching 1.9 inches of rain fall on his pasture.