Wisdom is one recompense we get for having to face a changing reality. At least with wisdom, we can benefit from the instances where things don’t change; we can learn from the patterns that bridge the past with the present and the future. And so today’s investors, with a few centuries of economic and financial history and the many patterns of human behavior to guide them, should exhibit some wisdom in light of the most recent trap laid for them.
History demonstrates (and Harry Dent suggests in his book The Next Great Bubble Boom) that major bubbles are separated by three generations or about 80 years. The Crash of ’29 and the Crash of ’01 seem to fit this pattern. The separation in time allows for those with the experience to be more or less “out of the game.”
This latest round of stimulus features negative real interest rates --very simply a powerful and fast-acting device to boost asset prices and generate Wealth Effect economic growth. The negative real interest rate environment is a form of extortion; it puts undue pressure on investors to buy riskier assets in order to get their savings to compound. It is much related to what others have dubbed “the yield trap.”
The very nature of this policy is to get people to take extra risk in order to boost short-term economic growth. But because the entire policy process is founded on artificial stimulus and relies upon the perceptions of well-being (as opposed to actual well-being), it is unsustainable. As a result we are collectively led down the garden path, and those who comply or capitulate are certain to lose. Yet with a number of recent “bubble” experiences to learn from, you would expect today’s investor to follow the wisdom of Ulysses and insist upon being “tied to the mast” for this arrangement of the siren’s song (Does Bernanke know he’s a composer?).
I remember very well the terrible urge to join with the winning stock-market investors as I recommended cash or fixed income investments in 2007. The inexorable rise of stocks, commodities, housing and leveraged buyouts seemed a tide that might never ebb—that is until the perceptions began to change and the entire process began to work just as powerfully in reverse.
So unless one is determined to be the nimble trader, alert for the first signs of weakness, investors are the dupe in this. It’s some powerful voodoo, however; for anyone in need of a diversion, I suggest falling in Love. I have soared high on that tide, too, and while that process works in reverse as well, at least that bridge, Thornton Wilder’s bridge, is one of the human patterns that we can hope will never change.
The fool makes the same mistake more than once. If you’re going to be a fool, at least be a fool for something worthwhile.
