Tuesday , October 22 2019
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Three Things I Think I Think – Impeachable Ideas

Summary:
This website is, to a large degree, about impeachment and impeaching bad ideas out of the worlds of finance and economics. So, here are some impeachable ideas I’ve been thinking about lately: 1) Market Cap Weighted Index Funds are “immoral”. WHAT? Here’s an article on MarketWatch where someone who runs a “socially responsible investment” firm says that owning a simple index fund is “immoral”. The basic argument is that owning things like gun makers or cigarette makers in an index fund makes you an immoral person. Look, this is nonsense and I explained it in detail in my ESG article. When you buy stocks on a secondary market you aren’t funding the company. You aren’t making that company any more capable of achieving success. You are literally just buying an existing share of stock from

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This website is, to a large degree, about impeachment and impeaching bad ideas out of the worlds of finance and economics. So, here are some impeachable ideas I’ve been thinking about lately:

1) Market Cap Weighted Index Funds are “immoral”. WHAT? Here’s an article on MarketWatch where someone who runs a “socially responsible investment” firm says that owning a simple index fund is “immoral”. The basic argument is that owning things like gun makers or cigarette makers in an index fund makes you an immoral person. Look, this is nonsense and I explained it in detail in my ESG article. When you buy stocks on a secondary market you aren’t funding the company. You aren’t making that company any more capable of achieving success. You are literally just buying an existing share of stock from someone else. The firm already raised capital. They don’t care who owns the stock and that stock is going to trade at a value that reflects its fundamentals, not your personal feelings. So, choosing not to own certain stocks on a secondary market is just another form of higher fee stock picking. And in fact, by choosing to pick stocks and pay higher fees you will end up underperforming a similar plain vanilla low cost index fund which will hurt your ability to fund the causes you want. In other words, you’re being immoral by choosing to earn a lower return than you otherwise would because you have less money to fund righteous causes.

Look, I am 100% in favor of moral investing. But it’s important to understand that what’s moral to you is not moral to someone else. And so it’s silly to use the secondary markets as a place to try to boycott a firm because it will have virtually no impact on their actual operations and will hurt your ability to operate morally. If you want to boycott a company then do it on the primary market where these firms actually obtain funding and sell goods/services. But don’t fall for the high fee stock picking sales pitch about what it means to invest “morally”.

2) “Fractional Reserve Banking” is Still a Thing. Joe Weisenthal had a nice post up on the Bloomberg site about how silly it is to think of things like QE as “money printing”. This evolved on Twitter into a big discussion about “Fractional Reserve Banking” where a group of well known economists kept referring to this concept of how banks operate by leveraging a fraction of their reserves. This is an impeachable idea. Here’s why.

In the most famous macroecon textbooks the money multiplier is taught to everyone. It follows a simple causal path – the Fed lends $100 and banks can then multiply that by 10X or whatever. The implication is that the Fed has a rather tight control over the money supply and the way that banks make loans. This idea came under fire during the financial crisis when the Fed expanded its balance sheet with very little lending following. There were lots of bad excuses for why banks weren’t lending, but the reality is that we finally learned that this textbook treatment of the money multiplier is wrong at worst and misleading at best. And so it showed that the series of asset swaps the Fed was engaged in had a far less powerful impact over the economy than many presumed they would.

The point is, the whole concept of “fractional reserve banking” is broken. Yes, banks hold reserves as a fraction of their assets. But we shouldn’t be misled to think that this implies some sort of causal relationship between the price/quantity of reserves and the way banks expand their balance sheets.

Anyhow, I am either very bad at teaching this concept or it is immensely hard to understand because I can’t seem to impeach this idea from the world even though I’ve been harping on it for 10+  years.

3) Wait, actual impeachment? Here’s an article I wrote in 2018 about the possibility of Trump being impeached. Some people throw a hissy fit when I talk about this. Look, I am not being political. Trump operates like a maverick. He doesn’t follow the rules and that sometimes gets him in hot water. So I’ve always viewed impeachment as a very real possibility because he’s always toeing a rather unconventional line. But it’s important not to mix our politics with our investing. The economy is much bigger than any one person and that’s the key point of my 2018 piece. We often allude to this idea that the stock market did this or that under President so and so, but the reality is that the stock market and the economy do things mostly despite what politicians do, not because they did certain things. So let’s not go falling for scary media narratives about the economy and the markets just because President Trump may or may not get impeached.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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