Sizing up the global economy

Size does matter, you know. There are basketball players, NFL linemen, and the more popular but unmentionable allusion to the bedroom that makes my point, although the older one gets, the more irrelevant playing basketball and football become, if you get my drift.

More interesting to me than any of the above, however, is the application of size and its relevance to the animal kingdom. Randy Newman raised eyebrows and a goodly number of hackles three decades ago with his “Short People” ditty – “Short people got no reason, short people got no reason to live” he crooned, and the vertically disadvantaged got mad and the tall people laughed and the world went about its business of favoring size – in this case – when measured from head to toe. Mr. Newman’s parody was so radical that I suspect he was asking us to think, as opposed to expressing an opinion, and if so, he was and may still be more of a Buddhist than a bigot. But I speak not about the size of people here – but to animals of the more ordinary kind.

I am not what you might think of as an animal lover. I’ve had some great dogs and a rather well publicized cat by the name of “Bob”, but on the whole I’ve become more of a life respecter than an inveterate petter of felines or canines. But there’s something about the size of a living thing that increases or diminishes my sense of caring and I’m not sure why that should be. Let’s start at the top of the size chart and see if you share this same bias: Elephants, giraffes, whales. Good vibes? Of course. Who couldn’t love them? They’re either smart, elegant with those long necks, or symbolic of benign power and strength. Would you ever want to kill one? Almost unanimously you’d answer in the negative assuming your name isn’t Captain Ahab or you don’t run a safari company under the name “The Great White Hunter.”

But now let’s go small: ants, snails, worms. Feelin’ good now? Not so much I suppose, since almost all of us have eliminated a bunch of these guys with nary an afterthought. Yeah, I know they get into our kitchens and slime across our lawns and driveways, which is something whales don’t do. But a living thing is a living thing no matter what its size. See what I mean? Isn’t this somewhat of an intellectual twister of sorts? Size does matter, but maybe it shouldn’t so much when it comes to living organisms. Small things, as Newman might have agreed, really have as much a reason to live as big things. Don’t get me wrong; I’m not on a stump here calling for the abolition of the Orkin man. I just find it interesting how the bigger they are, the more we seem to love them, but when they get small, we give hardly a damn.

So size does seem to matter in some aspects of life, and it certainly does in the financial markets. Super-size August movements in global stocks are but one sign that something may be amiss in the global economy itself – China notwithstanding. There’s the timing and the eventual “size” of the Fed’s “tightening” cycle that I have long advocated but which now seems to be destined to be labeled “too little, too late.” The “too late” refers to the fact that they may have missed their window of opportunity in early 2015, and the “too little” speaks to my concept of a new neutral policy rate which should be closer to 2% nominal, but now cannot be approached without spooking markets further and creating self-inflicted “financial instability.“ The Federal Reserve, however, seems intent on raising FF if only to prove that they can begin the journey to “normalization.”

They should, but their September meeting language must be so careful, that “one and done” represents an increasing possibility – at least for the next six months. The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long term productivity – the decline of which we have seen not just in the U.S. but worldwide.

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