Friday, March 26, 2010
Is there anybody under the age of, say, 55, who remembers the last bear market in bonds?
OK, I'm under 55 and indeed remember the last bear market in bonds, but I was a capital markets nerd in high school, long before it became fashionable. Do any of you remember?
I remember it well. I'm a 47 year old futures trader, with a stock broker dad, and I remember my parents trying to refinance the house to help pay for my Middlebury College education in 1981.
Needless to say, that refi didn't fly.
It was the best of times, it was the worst of times. All a bank investment officer had to do was pickup $100 million in long treasuries at 12 - 14%, sit back in his chair, and sleep the next 30 years, awakening only to receive murmurs about his genius.
In fact, I know a guy who put his inheritance into 15% treasuries back then and has enjoyed a fat retirement from 30 to 60. Now he's in distress, wondering where to put the money.
In the Fall of 1980, I sold a house in the Bay Area of California and put an $80K down payment into a 6-month CD paying 18%. Never since, have I seen a guaranteed investment paying this rate. By the way, the interest rate I was paying on that house (purchased in 1975) was 12%.
It was a bear market only in the odd sense that the Fed forced rates up by choking off liquidity, with a purpose in mind of course.
I know someone who had the option of putting $50,000 in savings into Treasuries (at about 15%) but bought a partnership interest in Palm Trees.
No joke. Well, it's pretty funny. But he doesn't think it's a joke now. I'm sure he'd be retired now, with roughly $1.5 million or so, after tax, if he saved the interest.
Buffet says, "Most people are afraid to wait for the big, fat pitch, and then swing for the fences...."
There's a good argument that one should beg, borrow and budget to buy equities now; certainly a year ago.
"There's a good argument that one should beg, borrow and budget to buy equities now"
Equities are up because of a relative flight to safety, ironically. There's no good place to put money right now. Low single-digit rates hardly compensate for the potential inflation risk of holding Treasuries. Same for corporate debt. Stocks don't look cheap on fundamentals, but those companies with solid cash flows should hold value. That doesn't mean that they're bargains, except in a relative sense. Am I wrong?
Even though the 1970s sucked in many ways, we had better music and much better movies. It also gave us some swing for-the-fences investment opportunities.
I heard an apocryphal story of someone on Wall Street in the 1970s bemoaning that he knew equities had to be a long-term bargain with the Dow at 5x collective earnings, but his kids needed braces. Buffet made his fortune because he had balls and lots of long-term funding.
Folks like Boone Pickens figured out that many oil companies were trading at a fraction of the value of their proven reserves. They drilled for oil on Wall Street with hostile takeovers.
Lots of entrepreneurial activity was going on in the 1970s that would flower in the 1980s and beyond. There was a comparatively small but quite effective venture capital sector. Not so today. Instead, Kleiner Perkins "New New Thing" is to use Al Gore to lock in government-mandated products and then ship the manufacturing to China. Just look at their website.
That doesn't mean that some people won't make lots of money. But it'll be through short-term trading not long-term commitment.
We're on course to have quite high top marginal rates. Like Britain in the 1970s this will kill all sorts of creative activity -- but at least England let Mick and Keith keep their royalties on "Exile" so long as they stayed out of the country.
If you're not rich, Obama says "Don't worry, be happy ... I'm doing this for you." But you won't have a job.