Accounting for market volatility
TEXT OF INTERVIEW
Kai Ryssdal: If ever there was a day not to peek at the Dow Industrials at the opening bell, why this was it. Wall Street followed the global lead this morning. Traders opened the day down 3 percent across the board and spent the next 7.5 hours trying to get back to even. They did get there, or close enough. But in the past couple of weeks the three major indices have lost 10 percent or more. More than 1,000 points on the Dow Industrials. That is a lot of money not in stocks. Chris Low is the chief economist at FTN Financial. Chris, it’s good to talk to you again.
Chris Low: Good to be here.
Ryssdal: Where is all that money that’s going out of stocks going? It’s got to be going some place?
Low: You know, it is. And one of the few places we’re seeing money flowing in is bank accounts.
Ryssdal: So people are taking their money out of stocks and sticking it into a bank account that gets, I don’t know, like 1 or 2 percent interest?
Low: Yeah. No, that’s exactly right. And we’ve talked to quite a few community bankers here. Their number one problem is that they’re trying to find places to invest that money safely. And because of that many of them aren’t paying any interest at all.
Ryssdal: Key word there being “safely.” One of the big safe havens is U.S. Treasury bonds and bills. That’s been getting all kinds of big infloats, yes?
Low: Yeah. No, that’s right. And what happens is the more money that comes in, it bids up the price, which means the yield goes down. A month ago, a 10-year Treasury note paid 4 percent. Now it’s paying just a little bit more than 3. So the return has gone way down because of the investor interest.
Ryssdal: Play that out for me, then, Chris. What does that falling rate on, say, the 10-year mean in a broader context?
Low: Well, hopefully it eventually will mean lower borrowing rates for U.S. businesses and even mortgages. It’s not happening yet, but at some point hopefully the higher yields are going to lure people out and it will lower borrowing costs. It’s interesting that we had a global financial crisis in 1998. What ended up happening was because of that drop in yields, in borrowing costs, our economy actually accelerated to about 4.5 percent and we had a really strong, good year economically.
Ryssdal: Other than regular people taking their money out though, Chris, a lot of this motion in the markets is being driven by big institutional traders, right?
Low: Absolutely it is. And that’s one of the reasons we’re seeing this volatility, the hedge funds. And a new type of trader called the high-frequency trader. These are people who claim they never hold a stock for more than about 12 seconds — taking advantage of the bid offer and volatility in the markets and so on. It does lend an air of chaos, especially on big days in the market.
Ryssdal: Let me change gears on you here for a second and ask about commodities. Oil prices have been falling with the threat of some kind of economic slow down, but other commodities are up. I mean metals, and those kinds of things?
Low: Well metals especially, and gold is making a push today. We’re awfully close to $1,200 an ounce again. And so the alternative — if you can’t be in stocks and you can’t be in bonds because it’s not safe — is to go into gold.
Ryssdal: Characterize this whole thing for me — what we’re seeing in the markets, that is — is it a regular ebb and flow of things or is there something more significant?
Low: No, it’s clearly something more significant. And Bill Dudley, who’s the president of the New York Fed, talked about this in a speech recently, where he said we’ve just come out of a period that economists call the great moderation — where regulators behaved in predictable ways and policy makers behaved in predictable ways. And we thought we knew how markets worked. All of those regular, predictable behaviors are gone and because of that he said we’re probably going to enter into a period of years with higher volatility and I think that makes a great deal of sense. This kind of volatility is probably here to stay for a while.
Ryssdal: Chris Low, chief economist at FTN Financial. Chris, thanks a lot.
Low: You’re welcome, Kai. I hope it helps and it doesn’t jsut confuse people even more.
Ryssdal: I think we’re getting there. Thanks a bunch.
Low: OK.
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