The ‘Hunt for Yield’: Another Evidence-Free Equity Narrative

The Fed projects its influence over the U.S. economy through banks that are increasingly irrelevant to that same economy. This is particularly true from a growth perspective.

Precisely because banks must lend to those capable of paying the funds borrowed back, banks don’t have much of an impact on the innovative/growth aspects of the economy, and for obvious reasons: innovation is born of relentless failure that most often doesn’t result in income sufficient to pay monies borrowed back. Since banks are compensated via interest rate spreads, their loans must perform. Which means loans to growth ideas aren’t part of their business models.

It’s a simple reminder that while Silicon Valley Bank had quite the presence in Silicon Valley, it was a servant to the innovators in the Valley in terms of their wealth and cash management, not a source of loan finance for the actual start-ups that have such a high rate of failure. See above.

Despite this, a narrative persists about the Fed and the “low rates” that it allegedly decreed. Which requires a pause. Governments and those associated with government cannot decree “low” or cheap anything. This is important when it’s remembered that to borrow money is to borrow access to real things, which means artificially “easy” credit would if anything result in scarcity of same. To then pretend that the Fed, for being the Fed, was or is able to decree near
near
costless credit was for the promoters of the narrative to not just
just
ignore ironclad laws of economics, but to trample on them.

Notable here is that many conservative sources of opinion aren’t just trampling on the laws of economics with their blithe assertions, they continue to extrapolate from the impossible that the Fed’s policies authored an investment boom that, among other things, goosed U.S. equity markets. Stop and think about such a view. And in thinking about it, ask yourself which companies largely drove the equity rally of modern times: think Apple
AAPL
, Google
GOOG
, Amazon, Facebook, Tesla, etc.

Oh well, Tesla nearly died too many times to count due to a lack of capital access during the years that conservatives claimed credit near “costless.” The Fed wasn’t at zero when Apple nearly went bankrupt in the late 1990s, but rates were surely falling. The problem was that lending finance was a non-starter for the dying company, only for the world’s richest man (Bill Gates) to save it. Amazon
AMZN
was for the longest time Amazon.org, desperate to stay afloat. Peter Thiel was able to buy 10% of Facebook in 2004 around when the Fed funds rate was 1%. Sequoia Capital and Kleiner Perkins got 40% of Google in 1998 for $25 million.

It’s a long or short way of saying that what the Fed does has nothing to do with the cost of capital in Silicon Valley, the growth and innovation capital of the world. See the present valuations of the companies mentioned above if you doubt this truth. Yet, conservative sources of opinion seemingly eager to placate conservatives who think the Fed exponentially more powerful than it actually is, continue to promote the impossible.

From there, it’s useful to think about what normally sober members of the right contend: even though a nominally “easy” Fed had nothing to do with the financing of the companies that largely drove the U.S. stock market in recent years, we’re supposed to believe the “easy” money found them once they were public. Except that no such thing happened.

For just about every year of Amazon’s public existence, owners of its shares have endured at least one 20%+ plunge. For much of Tesla’s existence, its shares quite simply went nowhere. If you doubt this, pull up a chart of its shares on Google from the time it floated them in 2010 until the present. Flatline doesn’t do what took place justice. A chart of Google’s shares reveals something reasonably similar despite the Fed being at near zero for much of its early public existence.

Please think about this with the “hunt for yield” viewpoint that dominates conservative thought. Supposedly because the Fed kept credit “costless,” those with cash had plowed into stocks amid – yes – a “hunt for yield.” Of course, for someone with fistfuls of cash to buy stocks, someone must be selling them. There’s also the problem of Europe and Japan: the ECB and BOJ largely mimicked the Fed’s actions (in the BOJ’s case it’s been zero for seemingly 30 years!), but with no subsequent rallies.

Yes, it turns out equity prices are a reflection of reality, not price controls. Stocks in the U.S. soared because investors think a great deal of the leading public companies. With good reason…see the names behind the latest U.S. rally. Why conservatives known to celebrate achievement are so averse to acknowledging this truth is odd to say the least.