It has been my position that all things economic (Booms, Busts, Recessions, Depressions and Collapses a la 2008) are normal and run in repeating but unpredictable cycles. Knowing and being at peace with this can be very comforting in crisis times. It is simple. We have seen all of this before, despite the differing facts surrounding each event, and it has never been the end of the world. For some reason (maybe unintentional — no, I’m sure it is intentional) the media can never seem to get its arms around this concept. As such, any flare up economically, politically or geopolitically takes them to DEFCON 1.
Both the media’s propensity to go ballistic on every crisis, big or small, and the fact that many more crisis are likely in our lifetimes has been a constant theme in the four-year history of kortsessions.com. I can guarantee that there will be another episode like the financial crisis of 2008/2009. Maybe not a “Housing Bubble,” but something stupid going on in the banking system will be the trigger. I know this because experience has taught me that bankers, left to their own devices, will always find new, creative ways to screw up what should be a very simple business — taking deposits and making loans to creditworthy borrowers at a profitable spread.
The seeds of the next disaster are being sewn right now!
Right now I’m not sure what credibility Mr. Greenspan has on banking regulation as it was his Fed that was asleep at the switch in the run-up to the housing bubble/financial crisis. This, like the calls for the repeal for Glass-Steagall (The Banking Act of 1933) in the late 1990s, represents efforts to ease banking regulations designed to protect the public and to keep bankers from their own worst instincts. I propose that even if we did nothing to change Dodd-Frank, bankers would still find new ways to create financial mayhem. If “what’s past is prologue,” another nasty financial event may be percolating under the surface. It may take years to mature but, guaranteed, it is out there.
I do not mean to say that Dodd-Frank is perfect. There are elements that may need to be tweaked but full range repeal makes no sense and would probably hasten the next blow-up. I’m not sure we should obsess about this eventuality at current writing.
Should you worry? I don’t think so. This is all very much out of our control. And, in my case, I have seen plenty of these episodes in my 57 years as an investor and 42 years as an investment professional. They have all been very disconcerting but none represented the end of civilization as we knew it.
When I think about all the disasters that have befallen the United States (a civil war, two World Wars, epidemics, 9/11/2001, a Great Depression and numerous other financial crisis) in the first two centuries of its existence, juxtaposed against a history of returns from common stock investing, it is hard to come to but one conclusion — you have to participate in this asset class.
According to Jeremy Siegel and his Book, “Stocks For The Long Run”:
“The superiority of stocks to fixed-income investments over the long run is indisputable. Over the past 200 years the compound annual real return on stocks is nearly seven percent in the U.S., and has displayed a remarkable constancy over time. Furthermore, real stock returns in other major countries have matched those in the U.S.” (see “Bashing the media for fun and profit” for a 210 year history of real equity returns vs. bonds, t-bills, gold and the mattress)
Siegel also observed that “Fear has a far greater grasp on human actions than the impressive weight of historical evidence.”
This brings me back to my title: “Setting the table for the next disaster.” If it got your attention, maybe Siegel has something on the grasp of fear on our actions. Obviously, the media has figured this out. They are profit-making enterprises and they know that FEAR SELLS. Ergo, they are not your friends when making investment decisions.
For the media there’s never much positive in the news except when things are booming in the market (i.e. when things are really over-valued) and people are tuning in to see how much money they are making in stocks. When everything is coming up roses the media leads the euphoria. Now, even though the market has had a spectacular rise they continue to hang crepe — worry about the French election, continuing Fed action to undo QE and raise interest rates, North Korea, a really green administration in the White House, pundits and money management elites coming out of the woodwork to say the market’s overvalued. This is despite a world of evidence economically, both here and abroad, that conditions are improving. It is also despite the fact that valuations in a 2.24% 10-year Treasury environment are not excessive and certainly not excessive when compared to any past high water marks (I don’t include Shiller PE as one of those benchmarks). Who knows? They might be right this time but I doubt it.
What are your thoughts?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.