What Buffalos Can Say about Interest Rates

When I was 3 years old, my parents would take me to the American Museum of Natural History. We lived in New Jersey at the time, and our apartment was just on the other side of the George Washington bridge.


If you had to guess what was my favorite part about the museum was (after the gift shop, of course), you’d think of the popular exhibits. The behemoth dinosaur skeletons in the Hall of Dinosaurs, the Hall of North American Mammals, the Easter Island head? They’re all good fun, but didn’t compare to the hall of dioramas. I was fascinated by the dioramas, and had my eye on one in particular.


There is a large diorama that depicts a scene of a herd of buffalos jumping off cliffs. Upon first look, it appears to be utter chaos as the herd charges wildly in a confused mass, towards their impending doom. A second look shows that they are all heading in the same direction, and their trajectory is quite uniform. A third pans a fuller picture, and shows that there are small people waiting at the bottom of the cliff. If you look even more closely, you’ll notice that there is a formation of others above, behind the herd.


But how do the Native Americans move the largest mammals of North America? They knew that a few men alone taking on a few buffalo would lead to others coming to the rescue, and least one hunter getting mauled. But, if all of the hunters move together at once and surround the herd from the back, it could work to drive the herd forward.


Or could it? Moving together as one makes it appear as though the humans are big, but a herd of buffalos is still much bigger. A pack of humans will just resemble a pack of coyotes, and it doesn’t take much imagination of how that would end against a multi-ton mass armed with horns and a knack for trampling. On top of that, buffalos are smart enough to know where the ground ends, and would be reluctant, if they moved, to move towards a cliff.


But the Blackfoot Tribe of the Plains were very clever, as are the most astute museum-goers. At the edge of the cliff, and at a safe enough distance from the herd, there is a human disguised as a buffalo. What would happen is that the ablest of the hunters would disguise himself in a robe of buffalo skin with the head and horns fastened as a cap. He would then place himself at a convenient distance between the herd and the cliff, and unseen to most of the buffalo, but seen to a few, he would begin running as the hunters moved forward in formation.


It worked just that startling a few of the buffalo would send the whole herd stampeding in the same direction with the runner (or the smaller buffalo, so they thought). They ran without question, seeming to have forgotten that it was a long way down on the other side.


It may be easy to scoff at the buffalos’ foolishness, thinking that they may as well be asking for their own death, but being the disguised runner was also a very dangerous role. It wasn’t uncommon that the runner could get trampled by the herd, or even pushed off the cliff with the herd, and facing the same fate as the buffalos.


By now, my readers are seeing the bigger picture on how this pertains to macroeconomics (although the title gave it away before, it’s more fun this way).


Of course, this isn’t a perfect analogy for a number of reasons. The “running” seller isn’t in cahoots with the “rising interest rate” or the central bank. Neither are those waiting below as the buffalos fall (the value investors, contrarians, doom sayers). What this describes is the formation of humans when the eventual rising real interest rate is realized, and the runner as a frightened group of sellers in the stock market, and the herd as the rest of participants in the stock market. The lesson is that it takes just a handful of buffalos to get the herd to run off the cliff. Stresses compound, and in a stressful scenario, as this one, there’s a greater probability for irrational thinking. But the common factor for stampeding, is the homogeneous interest rate.


With ZIRP extended until 2022, massive Fed intervention into the markets in March and beyond, the deployments of helicopter money, and lengthened stay-at-home orders, the compounding effect on coordination is tremendous. Investors are herding themselves into the tech basket, flocking in herds to open Robinhood accounts, because they’re feeling boxed in by lack of fruitful opportunities that yield meaningful returns (i.e. traditional savings), and simply stressed out by lack of recreation activities. The only question is, how many feet away are they from the cliff?

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