Legally, willful blindness describes a situation where someone tries to avoid civil or criminal liability by keeping themselves unaware of the facts that would make them liable or implicate them. They don’t just ignore those facts—they willfully avoid learning them.
Nowadays, however, the term is also being used for situations where people deliberately ignore facts that would cause them to be liable for their actions, even when they know the facts.
We often see this phenomenon among investors. They dismiss the facts that don’t agree with their opinion. So, when markets are rising, they take extreme risks although they know full well that their actions will, at some point, have negative consequences. When that happens, they blame whomever they can for their losses—Wall Street, the media, the Fed…
The markets today are steeped in willful blindness. Investors are fully aware of the increasing risks, but they ignore them because of the predominant narrative that “fundamentals don’t matter—the Fed has your back.”
The assumption is not only erroneous but also dangerous because the Fed is not mandated to keep stock prices afloat.
Congress sets the goals for the Fed: stable prices and maximum sustainable unemployment. In January, inflation registered at 1.8%, which is slightly below the Fed’s target, and unemployment came in at 3.8% in March, well below the targeted 4.3% that the Fed estimates is sustainable. Wage pressures are increasing, which means the Fed’s interest rate decisions will be under increasing pressure.
Nevertheless, the prevalent opinion among investors is that the Fed will not raise interest rates and that it will begin another round of quantitative easing if the markets show signs of weakening. That belief appears to be misplaced. According to Cleveland Fed President Loretta Mester, the Fed may have to increase rates if the economy develops as she anticipates. And Patrick Harker, Fed president in Philadelphia, agrees, saying they may need to raise rates once this year and once next year.
In other words, the Fed doesn’t appear to be interested in cutting rates and injecting more dollars into the economy. On the contrary: The Fed believes the economy is dong great, with low unemployment and low inflation. There will be no change in the Fed’s interest rate decisions until we’re in another deep recession. A point that investors and many analysts seem to be missing.
The willful blindness of investors is substantial. Here are all the facts they are ignoring:
- The Fed won’t touch interest rates—they will neither raise nor lower them.
- The Fed isn’t going to reduce their balance sheet any further after September. They won’t increase it either.
- Economic growth outside of China remains weak.
- Employment growth is slowing.
- The government has no incentive, such as a major disaster, to increase their spending. And the Washington gridlock prevents any other significant spending, such as on infrastructure.
- No stimulus package, such as tax cuts, is in the works to boost corporate earnings.
- Additional deficit spending in 2019 will be minimal—the deficit is already pushing $1 trillion a year.
- It’s just a matter of time before the next recession sets in.