The Great Correction: 4 Years...and Counting...Still No Recovery in Sight
I’m glad to be the last speaker. Nobody can come after me and tell you why I’m wrong about everything. Instead, I get to tell you why the other speakers were numbskulls. Besides, we all have a tendency to be most influenced by the last person we talk to. Or at least I do.
Wherever we go we tend to pick up the accents…and attitudes… of the people who are around us. We all know, because we’re all good contrarians, and this is something we can all agree on, that whenever everybody thinks the same thing, nobody is thinking. But that’s just what happens. We all come to share the ideas of the people around us…even without realizing it.
Right now, a 10-year US note yielding less than 3% is an illustration of this phenomenon. That gives that note a current yield that is actually – in real terms – negative. Consumer prices, as measured by the feds themselves – are going up at about a 5% rate, giving that Treasury note a current yield of MINUS 2% before taxes. After taxes, it’s nearly MINUS 4%. What kind of group-think causes that?
Of course, I don’t know if bonds will go up or down. I just know that when we see so many people are doing such an amazingly bizarre thing, it’s worth looking at it more closely.
My wife and I were driving up to New York from Washington a few months ago. That’s when I realized how easily we are influenced by whomever we’re listening to at the time. My wife is always trying to improve the family. So, she got a tape recording of Virgil’s Aenead for us to listen to on the drive. It’s the story of the founding of Rome by refugees from Troy, read by a BBC actor in a grave and booming voice.
By the time we got to the end of the New Jersey Turnpike we had been listening to the story for a couple hours. I was thinking in Virgilian terms. So, when Elizabeth suggested that I ask the tollbooth operator for directions, I just blurted out.
“We have long travailed over hardened black earth…
“And now we seek the northern tribes…those of the reddened sox…
“Who – with the gods’ help – crossed o’er storm-tossed seas to build great cities on the desolate coast among the savage Yankees.”
Without a pause…the woman at the toll booth fired back:
“Yeah…well you’re goin’ to Brooklyn.
“Ah…destiny has brought us hither!”
“Yeah…and if you don’t get movin’ I’m gonna call the cops.”
“Thank you oh sweet maiden, daughter of Venus and Minerva.”
The story of Rome is a great story. And Virgil’s account of its founding is very different from, say, press reports on the debt-ceiling hike or the coming of QE3.
The big difference is that Virgil thinks things happen for different reasons. There is more at work than just choices made by mortal man. Sometimes the humans in his story makes good choices. Sometimes they make bad choices. But that is not all there is to the story. There are the gods too…who are either jealous and treacherous, or generous and helpful. And there is something else – destiny itself. Fate. Or as the old Anglo-Saxons used to call it the “Weird.’ “Your weird is set,” they would say…meaning you’re your goose is cooked and there is nothing you can do about it.
I only introduce this idea as a thought…provocation. Not even a hypothesis. Just an analogy. What if the US were…well…like Rome?
No one knows what will happen. “It is not given to man to know his own fate,” as the saying goes. But it could be that there is more going on here than just a bunch of people trying to make the best decisions in a bad situation. Maybe destiny is involved too…and maybe that is why people all come to think the same thing at the same time.
If everyone thinks the US T-note is such a safe item that they’re willing to take a negative yield just to hold it…maybe it’s not safe at all.
And if destiny…or some huge historical force is involved…maybe the fight is hopeless. So why bother? Why get all bloody and dirty?
I know you all have to make investment decisions. So, I will try to bring this down to the practically level. The only place where I’m directly involved in giving investment advice or in taking it is in the Bonner Family Office. In a nutshell, I’m trying to figure out how to leave money to the next generation in a way that helps them…rather than destroys them. I’ve invited a few other families to help pay for it. We’re not taking any new members right now…but Will will be happy to tell you more about what we do later on.
The trouble with fighting is that you don’t notice a lot of things. You have to keep your head down. You have to stay focused on the fight at hand. And you have to believe in it…even when the facts don’t necessarily support you. That’s why zealots and believers are generally poor investors. They want to be proven right. They want their side to win…and they’re willing to back it with their money. They put their money where their mouths are, in other words. Sometimes both get whacked.
It’s all right to be a fighter when it’s only your own money at stake. You can do with it as you please. But if you are custodian for future generations, it’s probably better to lift your head and look around. You want to put your money on the fighter who is most likely to win…not the one you’d like to win.
In our family office, we are neither fighters nor flee-ers. We try to be careful observers. We’d rather get a good seat ringside, where we can see where the blows are landing…but not too far from the exit. Right now, we hold a lot of our wealth in cash. Not that we are tempted by a lot of the investment advice I’ve heard hear this week. But cash is like a seat by the exits. You don’t want to sit there all the time. Too drafty. But it comes in handy if there’s ever a fire…at least we won’t get trampled trying to get out.
Most of the speakers you’ve heard from at this conference are fighters. They think they can either turn the country around…like Addison…or that the US will turn itself around, like John Mauldin…or that new technology will make us all rich and help us to live as long as Methusela, so we won’t care.
But suppose the US really is like Rome? These guys can fight all they want. The Empire has its own destination in mind. And it will get there in its own sweet time.
More to come…next week.