Money, Banking, and Markets – Connecting the Dots

Max Wertheimer

Most of us spent moments of our childhood, crayon in hand, connecting numbered dots that gradually revealed a picture that we couldn’t deduce simply by looking at the separate dots. With experience, we got better at looking at those isolated dots and mentally connecting them into a coherent “gestalt.”

The problem is that when we were kids looking at dots, we knew they were supposed to be connected, so we understood that there was a complete picture behind them. As investors, unfortunately, we forget. We see the Federal Reserve pursuing a deranged monetary policy to one side, an emerging banking crisis to the other, a potential recession on the horizon, massive Federal debt over yonder mountain, market valuations still piercing the clouds, an ocean of market cap that we count as a pool of “wealth,” record corporate profits paving the street of gold behind us, and rising labor costs underfoot, yet we may look at each of these as separate pieces, not realizing that they’re all connected parts of a single, coherent picture.

Worse, without an understanding of how each dot is connected, we may fall prey to tortured theories and verbal arguments that transform the actual picture into a distorted and incoherent mess, where fuzzy logic and superstition connect the dots, rather than clear lines of thought and evidence.

For example, investors are often told that the trillions of dollars of quantitative easing “supported” the economy by encouraging bank lending. They might be surprised to learn that despite the most aggressive monetary policy in U.S. history, commercial bank lending since 2008 has grown at just 3.4% annually, easily the slowest rate in data since 1947.