He made me do it
He made me do it
But we only have
He made me do it
He made me do it
But we only have
Investors could easily sing these bastardized lyrics from Chicago's "Cell Block Tango." The "he" is Federal Reserve's Ben Bernanke (a.k.a. Uncle Ben) and the "it" is, well, investment allocation and spending decisions which, probably, in retrospect, we will "only have ourselves to blame." Poor Ben. He was dealt an impossible hand, an economy teetering on the brink of depression, investment bankers gone wild in a regulatory free-for-all, and a calcified Federal government. In the absence of long-term prudent fiscal policy, monetary policy became a surrogate. While the inexorable march towards zero interest rates seemed to be the right Keynesian tonic to drag the economy back from the brink, it has gone on long, too long perhaps, and it is leading to investment consequences of unknown dimensions.
Just a glance at the blogosphere and financial publications demonstrates completely divergent opinions, ranging from new highs, and not merely marginal ones, for the S&P 500, to apocalyptic prognostications. The problem is the ' rear view mirror' is less useful than in the past. Into uncharted waters we have sailed, not knowing whether this economic world is really round.
John Hussman, who has been coined a "perma-bear" is nonetheless an astute economist. He has accused Bernanke of creating an investment bubble of historic proportions, making people feel wealthier and thus more willing to spend, spend, spend, on "stuff" and on more speculative investments. Whether that was Bernanke's objective, or whether it is merely a side-effect of righting the sinking ship is anyone's guess.
Hussman's most recent column, A Reluctant Bear's Guide to the Universe provides a lengthy, well reasoned, and highly statistically supported view, concluding with his own prediction:
...market conditions remained characterized by an overvalued, overbought, overbullish, rising-yields condition, the extremes of which have been observed only 6 other times in history: 1929, 1972, 1987, 2000, 2007, and 2011 (the last being reasonably forgettable, but still followed by a near-20% market decline). I doubt that the present instance will end any better, but that resolution may not be immediate, and I am quite aware how quickly each marginal new high in the market can erode both patience and prudence.
But, if that doesn't grab one's attention, there is Bill Gross' latest missive Credit Supernova!
As Gross is known as the "Bond King" managing more debt securities than anyone on the planet (other than Uncle Ben perhaps), one has to sit up and take notice when he forebodes possible economic disaster. He cites the work of the economist Hyman Minsky on what he called "Ponzi finance:"
First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.
Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since....While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion....Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.
So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.
Gross' recommendations: (1) Position for eventual inflation.....(2) Get used to slower real growth....(3) Invest in global equities with stable cash flows...(4) Transition from financial to real assets if possible at the margin: buy something you can sink your teeth into – gold, other commodities, anything that can’t be reproduced as fast as credit....(5) Be cognizant of property rights and confiscatory policies in all governments....(6) Appreciate the supernova characterization of our current credit system. At some point it will transition to something else.
Wow, this is a bond guy arguing for hard assets and even intimating government confiscation.
One only has to look at the stock market, real estate, and even collectibles to see the results of a prolonged zero interest rate environment. How far and how long is the question. Meanwhile, investors and savers are left with a conundrum, a sense of cognitive dissonance in a world in which an inflationary or disinflationary outcome can be argued simultaneously. No doubt though, the longer the asset bubble lasts, the more comfortable people become with it as a representation of reality and they spend and invest accordingly, until we reach either the implosion of the supernova Gross mentions, or, in the best of worlds, a governmental devised glide path, over time, to reduce the deficit, setting down the economy in the halcyon fields of a balanced budget. If the latter can be engineered, then, perhaps, the market is discounting the same. Otherwise, watch out below!
As a retiree I have chosen to self manage my investment portfolio. These last couple of years have been exasperating; old asset allocation rules seem to no longer apply, with many categories now highly correlated. Bonds mature and reinvesting in the same at today's interest rates seems insane. This is exactly what the Fed wants, so either one goes out further on the risk curve, (in fact, much further) or sits with cash earning no return, or spend it (the other option the Fed would like one to do).
I've resisted the latter until now. We went to the Art Palm Beach Exhibit at the West Palm Convention Center as we did last year. Talk about collectibles and at astronomical prices. But if we have the inflationary engine that some predict, these might be bargains.
One such painting I liked was Pham Luan's Boats at Sam Son Beach at $9,200, but I've always been a sucker for boat and sea scenes.
Or the whimsical Vextrola by Jerry Meyer (note some of the "hits" such as those by the band I'm Through with Love entitled "Carl's Got the Clap" and on the flip side "Herpes Forever" and the more appropriate -- for us -- the band Senescence Singers' top hits, "Did I Take My Pills?" and "I Forgot What I Forgot"). Alas, no price was listed, but that was one I'd be interested in.
For a mere $595k one could buy the star of the show, Marc Chagall's Le Paysan à la Hache, and who knows, that might be a steal if central banks induce an inflationary binge. Our check book was short a few bucks.
If I had money to invest in art at the show, no doubt I would have just stopped at the exhibit of Lino Tagliapietra's beautiful glass work. Lovely to see, and he was honored as the recipient of the Visionary Award.
I also liked a piece that seemed to capture the essence of today's merriment on Wall Street, the one of the three dancing sheep. Unfortunately, I failed to note the artist's name, so apologies to him/her.
Returning from the exhibit, we decided to buy another kind of "work of art" -- this one is guaranteed to depreciate, no matter what the economy does. Nice to have some certainty for a change! Returning to the beginning theme, a reprise if you will, "he made me do it!" As the Federal Reserve is encouraging either risky investments or just plain old vanilla consumer spending, we chose the latter and bought a new boat, not just any boat, but one we think is beautiful and one that will indubitably be the last boat of my life. It is a small boat, and although Grady-White gives it the moniker of the "209 Fisherman," I am outfitting it for cruising, not long range of course, but something Ann and I can take out on a lovely day, perhaps to Peanut or Munyon Island, or down to West Palm Beach, or even an occasional overnight to Ft. Lauderdale or Stuart, staying at a marina/hotel. It even has a head so that makes a full day on the boat practical.
We are naming it 'Reprise' and with the magic of Photoshop we've been able to get an idea of how the name will look on the hull, using Grady's stock photograph (the younger version of me and my two sons do not go with the boat). The name of course comes from our love of music, and Wikipedia describes it best: "In musical theatre, reprises are any repetition of an earlier song or theme, usually with changed lyrics to reflect the development of the story." And at our stage in life, the developmental section is definitely a thing of the past, and this represents a true "reprise" as we started with a 20' boat more than thirty years ago. And, so, our boating life will ultimately conclude with the same size boat, one that is being made to our specifications. Most would consider it a folly, but to us it will lovely to look at sitting on our boat lift and a joy to run with its quiet four-stroke Yamaha while listening to some of our favorite jazz pieces on its stereo. Thanks for the suggestion, Uncle Ben!