How “Terribly Strange” To Be 70

The always erudite investment manager, Bill Gross, has turned the Big Seven Zero.  As he now observes in his recent missive, A Sense of an Ending, “a 70-year-old reads the obituaries with a self-awareness as opposed to an item of interest.”  He conflates his own end of life angst with the end of a market propped up by unsustainable central bank machinations.  He also cites Julian Barnes’ novel, The Sense of an Ending, which similarly caught my attention, perhaps because Bill and I are about the same age, although I reached the magic 70 mark a couple of years ago, sharing the occasion with my family on a cruise.

Barnes should be the spokesperson for our generation with his non-fiction work Nothing to be Frightened Of required reading.  I’ve already quoted one of the brilliant passages from that book in a previous entry, but it bears repeating: “It is not just pit-gazing that is hard work, but life-grazing.  It is difficult for us to contemplate, fixedly, the possibility, let alone the certainty, that life is a matter of cosmic hazard, its fundamental purpose mere self-perpetuation, that it unfolds in emptiness, that our planet will one day drift in frozen silence, and that the human species, as it has developed in all its frenzied and over-engineered complexity will completely disappear and not be missed, because there is nobody and nothing out there to miss us.  This is what growing up means.  And it is a frightening prospect for a race which has for so long relied upon its own invented gods for explanation and consolation.”

I’ve now had a couple of years to “look back” at the consequences of turning 70.  While philosophically I agree with Barnes, it is the avoidance of despair during the remaining years which is the challenge.  It’s probably why us herd of the retired “keep busy.”  But as much as we try not to think about it, for many of us turning 70 is like throwing on a light switch (or maybe, more aptly, turning it off).  Suddenly, the body rebels at being kept going beyond its normal shelf expiration date.  More parts wear out and medical technology is more than happy to figure out a way to keep us going.  As a friend of ours puts it, “I have body parts on order.”

Unquestionably the worst part of the whole process is watching friends battle unspeakable illnesses or going through invasive surgery to keep the body going, with the attendant weeks or even months of rehabilitation.  As we all joke, it’s better than the alternative. Hey, we're on the right side of the grass!  But with increasing frequency we hear about another friend, a relative, or a high school / college alumnus who has succumbed to the inevitable.

As readers of this blog know, one of the activities I’ve steeped myself in since retiring (and therefore, “keeping busy”) is playing the piano, mostly The Great American Songbook pieces.  I recently came across -- buried in my sheet music – some of the music of Paul Simon written in the 1960s.  During those days, that was the type of music I played, but have long abandoned.  So I found myself playing some again, particularly Old Friends which opens with two beautiful Major 7^th chords, A-major-7 (“Old”) and then E-Major-7 (“friends”).

I’m a "serial piano player" and once I attach myself to a song, I play it over and over again, trying different adaptations.  My mind wanders sometimes and, in the case of this song, remembering my thoughts of the lyrics when I used to play it nearly 50 years ago. Today they have a significance quite different than when I was younger, particularly the phrase from the B section of the song, “Can you imagine us/Years from today/Sharing a park bench quietly?/How terribly strange/To be seventy/Old Friends “

The true meaning of lyrics when I played the song back in the 1960s seemed foreign, unthinkable.  My being 70 at the time seemed to be in a one-to-one relationship with eternity.  Eternity has arrived.

So, Bill, welcome to the club!

Fifty Years in a Flash

Reprise

He made me do it

He made me do it

But we only have

Ourselves

To blame

Reprise...

He made me do it

He made me do it

But we only have

Ourselves

To blame

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!

Getting Back to Reality

The extraordinary increase (as a percentage move) in the 10 Year T Note yield shows the artificiality and the fragility of market values, everything being propped up by the Federal Reserve in the absence of any sound fiscal policy.  The recent Fed minutes merely hinted at the possibility of reducing asset purchases before the end of this year, and bond investors were left without their bungee cord:

Bill Gross, the "bond king," persuasively writes about the problem in his January letter, a long discourse on why "helicopter money" rained down by the Fed to save the financial system has to end badly in some way.

The artificiality of it all hasn't escaped the notice of corporations, many of which have loaded up their balance sheets with cheap debt, while holding mounds of cash, even to the point of paying massive dividends to their shareholders with borrowed funds.  The poster child for this is Costco which paid its shareholders $3 billion and borrowing the funds to do it.  Of course that was before the laughable fiscal cliff deal, which raised taxes on dividends to 20% from its present 15% but only for high income taxpayers.  They were talking about taxing dividends as regular income which must have freaked out the five largest shareholders who are corporate officers or directors, their take on the special dividend with borrowed funds being almost $12 million.  What a country! Borrow the money to pay your top people a huge bonus that is taxed at only 15%.  It truly is the microcosm for the contrived and completely unpredictable financial landscape of today.

A few days ago Barry Ritholz suggested a positive way of using today's manipulated market -- that is to upgrade and repair our aging infrastructure. Many of our roads are atrociously maintained and bridges are crumbling, not to mention aging water systems, power plants, and a railroad transportation system which is truly 3rd world quality.  As Ritholz says: At some point in the future, your kids are going to ask — “Wait, you could have upgraded _______ and it only would have cost you 2.5% in borrowing costs?!?”

 
Isn't that where we should be putting borrowed money to work, creating jobs?

Cheery Tidings from the Social Security Administration

For the second year in a row, this happy news from the SSA, received in the mail yesterday: "Your Social Security benefits are protected against inflation. By law, they increase when there is a rise in the cost of living. The government measure changes in the cost of living through the Department of Labor's Consumer Price Index (CPI). The CPI has not risen since the last cost-of-living adjustment was determined in 2008. As a result, your benefits will not increase in 2011."

What a country, retirees are protected from the ravages of inflation, and, better news, yet, there is no inflation! Hooray! There is certainly no inflation in interest rates from CDs, that's well documented. Thank you, The Federal Reserve!

Of course the SSA's Cola adjustments are made through the most bizarre calculation. Sounds like a lot of sleight of hand, but here is an explanation.

It is interesting to review how the CPI gets measured and how such measurements might distort what inflation seniors really face. According to Bureau of Labor Statistics Consumer Price Index the prices of certain items have actually declined over the last year, specifically Window Drapes (8.00%), Peanut Butter (5.10%), Bedroom Furniture (5.00%), Dishes (4.40%), and Sports Equipment (4.00%). But, with the notable exception of Peanut Butter which many seniors may have resorted to consuming, these items are probably not frequently among their purchases. On the other hand, let's look at some of the offsetting increases: Funerals +2.20%, Dental Services +2.80%, Nursing Homes +3.50%, Physicians Services +3.50%, Prescription Drugs +3.90% and Hospital Services +9.30%

No inflation for seniors? Ha. Also, for a quick peek into the future, let's review the past: According to the Bureau of Labor Statistics, the purchasing power of a 1984 dollar is now $.458 while a 1967 dollar is only $ .153.

No doubt entitlement programs need to be looked at along with taxes to get our fiscal house under control, but inflating away the dollar and playing shell games with Social Security is what happens when Congress cannot agree on anything and political posturing is all our representatives seem to be able to do. We've become a sound bite democracy.

Meanwhile, on another, but related topic, the essay du jour is Bill Gross' latest, with his conclusion saying it all: "The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line. We’re living here in Allentown."

.

Telling It the Way It Is

You have to admire Bill Gross, the eponymous bond king who runs PIMCO's portfolio. His latest monthly Investment Outlook in part takes on the silly season of the midterm elections and its outrageous campaign tactics. The election nearly neatly coincides with Halloween and the ghoulish nightmare of the endless direct mailings and automated phone calls insult the intelligence of the American voter. The negativity is overwhelming. Being on the National Do Not Call list is irrelevant as apparently the people who make the laws can easily bend them for their own benefit so night after night negative recorded messages besiege our land line. If you do not answer, the recording ends up on your answering machine -- some of them can last minutes. When we're home, call recognition winnows most so we can easily answer and hang up almost simultaneously.

The mailbox is stuffed with dire warnings, black and white photos of the opponent which makes he/she look like a ghost and then a nice colorful photo of whomever the mailing supports. Fill in any politician's name you want "[Blank] Is Sucking the Life Out of the Economy." Or another one we received today: "[Blank] Has a Secret She Doesn't Want You to Know." Some are sent by a major party while others are sponsored by "organizations" that sound mighty impressive but are totally unknown such as "Citizens for Lower Taxes and a Stronger Economy, Inc." Hey, I want a stronger economy and lower taxes -- I should be for what they're for!

But I say elect Spiderman!

Just imagine a political system with campaigning that relies totally on televised public debates and published position papers (on the Web, in newspapers) but NO PAID ADVERTISEMENTS or CALLS. Imagine saving all those wasted resources and putting them to better use, especially in these dire economic times.

I'm sick of it and so is Bill Gross. As I said, you have to admire his stance, a risk he takes as he is not a politician, but represents a major financial institution. He's also a damn good writer. Good riddance to the midterm elections. When will we ever learn? The link to Gross' article is above, but I conclude by quoting part of his statement on the subject. It's just too good to be buried in the link.

Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.

And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales. Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.

Bill Gross Redux

As I’ve noted in some prior blog entries, Bill Gross, the world’s preeminent bond manager from PIMCO, also happens to be an excellent writer. I read his monthly comments as much for their style and wit, as I do for their content. His piece this month Don't Care, although primarily about the sovereign debt crisis, seques into the topic using the experience we’ve all had, the vapidity of cocktail conversation, the inherent disinterest of people in other people, coming to the conclusion that “the careful discrimination between sovereign credits is becoming more than casual cocktail conversation. A deficiency of global aggregate demand and the potential impotency of policymakers to close the gap are evolving into a life or death outcome for the weakest sovereigns, with consequences for credit and asset markets worldwide.”

But I am not going to discuss sovereign debt here (perhaps the most serious one ultimately being our own) but, instead, the experience he so eloquently and hilariously describes as the blather of the social gathering. He even incorporates a graph entitled the “Cocktail Party Empathy Chart,” the X-axis being “Seconds Into The Conversation” and the Y-axis being “How Much I Really Care About What You Are Saying.” As one might imagine, there is a diagonally dropping line from ten to zero in about ninety seconds.

Although Gross covers the five topics such conversations normally wander off to, I’ll use his general observation as my own seque into a very recent experience relating to my last entry , in which I said I was happy to see the preview performance of American Buffalo as it gave me an opportunity to form my own opinion of the production. Since then, three professionally written reviews have appeared, one in the Palm Beach Post which was positive but, I thought, could have been more enthusiastic and two unconditionally excellent reviews, one in The New Times, Broward/Palm Beach and the other from Skip Sheffield’s blog.

We were at a social gathering recently and someone asked whether anyone had seen this new production of American Buffalo so I began to glowingly describe the production and was interrupted by the comment that the Palm Beach Post didn’t seem to be overly enthusiastic. Exactly my point I began to say, and before I could expand upon that it was pretty clear to me this person was more interested in talking about something else relating to one of those five “unbearable minute-and-a-half” topics, not really wanting a thoughtful reply. On Bill Gross’ X/Y graph, I hardly lasted the 90 seconds!

But why should this be a surprise? We don’t even listen to each other on the bigger issues. Look at the recent hyped meeting on healthcare between the President and leaders of Congress, each party pushing its own agenda, preening for their constituents in the all-day televised meeting. Hey, it makes no difference whether we will bankrupt the nation, as long as I look good! Who cares what the other has to say?

But I digress. Thanks, Bill Gross, for reminding us that we need to listen to each other, although I guess he might agree it all seems pretty hopeless.

Awash in Liquidity

Again (see last post) I defer to another insightful analysis about the economy and why we might be at an investment inflection point, this time turning to the world’s leading bond manager, Bill Gross at PIMCO. His monthly investment outlook, Midnight Candles, details why the investment “bubble” is a long standing one, that as a nation which once relied on the production of real things, we became focused on “paper asset” appreciation by the 1980’s. Governments have artificially influenced those prices since then. Gross distills this in an interesting observation: “How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down.”

That sets the macro economic scene, which has been compound with the crisis of the last couple years. More recently investors have flocked to riskier assets as the Fed has flooded the markets with liquidity and driven interest rates to nothing. Unless the real economy grows substantially, this has to end badly when the Fed reverses course. For this reason, Gross believes asset prices might be peaking.

Gross is certainly one of the more literate, philosophical money managers around, and his prefatory remarks set the stage in that venue. As one who is about Gross’ age, I identify with his feelings about being “Everyman.” I suspect he has read Philip Roth’s novel of the same title, but that’s another matter.

On a lighter side from my photo archives….

.