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.
...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!
