On a clear July night at Target Field in Minneapolis, 39-year-old New York Yankee Alex Rodriguez swung at a fastball over the plate, driving the ball over the center field fence. With the swing of a bat, A-Rod had hit his third home run of the night, tying the game in the ninth inning and kicking off the team's 8-to-5 comeback win. Just days later, he celebrated his 40th birthday by launching his 24th home run of the year.
For Mr. Rodriguez, better known as A-Rod, powerful swings of the bat have proven as mighty as the pen. After a year-long suspension for drug use, A-Rod has begun to rewrite a sad story many thought would forever live in the annals of baseball and the minds of fans. Even Yankees fans — who are among the most unforgiving — have allowed their joy at winning to justify a
change in attitude toward the infamous player.
Our most basic human emotions, particularly hope and joy, have fed the A-Rod comeback narrative. In the more casual components of our lives, like sports fandom, it's easy to think of this as a possibility. Fans seem hungry to watch dejected athletes attempt a resurgence whatever their level of wrongdoing or misfortune in the past.
It's a bit harder to think of emotion having such dramatic effect on some of our most important cultural constructs. But we see that effect every day. In politics, our leaders must establish laws that define our daily life. Yet emotions like fear, anger and greed lead to inaction as policymakers kick various cans down various roads. That same phenomenon —
emotion over logic — similarly plays out in all other important facets of our lives, including our global economy.
THE FED'S REWRITE
Since the Great Recession, the Federal Reserve has used emotion to rewrite a story of economic growth and stability. Now, investors focus less on those dark days of the downturn and even less on its deep-rooted causes. Loosening lending standards and mounting corporate and household debt harken back to a more carefree, pre-2008 era. Amid the highest of stakes, the Fed has restored markets the same way that A-Rod repairs his likability with ninth-inning home runs. Investors and fans alike are willing to accept new narratives for the sake of winning, no matter the gloom and lessons of years past.
The Fed has met any investor skittishness with various forms of quantitative easing and economic rhetoric. The market manipulation and psychological herding have forced investors to detach from long-term investment plans, a frightening proposition for many Americans heading toward retirement and in need of income. Such control tactics have gone global, showing up in various economies like those in Asia. And when markets falter, central bankers swoop in to ease the pain, as in China's recent trading halts and introduction of numerous trading rules.
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Surely, Fed officials still spend time crunching numbers and debating macroeconomic theory, but markets have become addicted to announcements rather than economic fundamentals. These days, the officials must spend just as much time on wording, timing and tone.
Valuing stocks solely on economic and corporate data has given way to emotional, group-think noise trading as investors react to Fed news in flocks. As a result, markets have become hypersensitive to the Fed's touch. With those well-timed and artfully written statements, the members of the Fed's policy-setting committee have gently informed markets of even the most minuscule change in hopes of avoiding the next burst in valuations. Meanwhile, A-Rod must maintain his stats and well-worded post-game interviews, lest he risk reigniting ridicule from the fans.
In hopes of upholding markets, the Fed has pigeonholed itself and is now locked in its own story line, with the ending still unwritten. The central bank has created diehard fans in investors, who now expect greatness from the team's star players. Surely the Fed will shield fans from those dark days of losses. So Fed Chairwoman Janet Yellen stands on stages to affirm our steady growth and the consistency of the rate hike plan. She steps to the plate and everyone cheers, bolstering the bull market.
BUT SOMETHING IS AMISS
Unfortunately, the delicate nature of the Fed's plan for modest rate increases — and its hesitancy to execute the plan — might reveal the true fragility of our economic growth. Instead of true transparency, the committee tiptoes in the dark, whispers in those backrooms and hopes to stop accidentally leaking information.
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However, economists seem to know that something is amiss. Indeed, wage growth is nonexistent, labor force participation is the lowest it's been since 1976, and the IMF has implored Ms. Yellen not to move forward with the plan for rate increases. In addition, the Fed's massive bond buying program amplified the massive debt burden (now more than $18 trillion) riding on the shoulders of the economy and bondholders.
To be clear, this doesn't mean investors should anticipate a collapse in the near term. If markets start to slip when the rate hikes finally arrive (or for any other reason), the Fed will be ready to ease the pain. It remains to be seen how the Fed will write the ending to this story, or how it will ease investors off their addiction to its safety net. Meanwhile, the bull market naysayers — the ones actually concerned about economic fundamentals and repeating past mistakes — squirm on the sidelines as the herd pushes onward.
Recently the Yankees have hit a bit of a slump. Now, each time A-Rod heads to the plate and postures to launch his next season-saving homer, Yankees fans creep a bit closer to the edge of their seat. After all that doping, cheating and lying, might it finally be OK to join in the fun and root for A-Rod? As long he gets us to the playoffs.
Michael Conway is CEO of Conway Wealth Group at Summit Financial Resources Inc.
