James Grant of Grant's Interest Rate Observer has long been a highly respected financial commentator particularly noted for his keen eye on the risk side of the investing equation more than the reward side.
I happened to see him address an advisor-oriented conference some years ago. Amidst a skillful, even lugubrious, presentation highlighting U.S. economic trends generally and Fed policy specifically, he happened to let out a single sort of stock tip, as it were; I, and probably many others in that large conference hall, noted the idea. The investment idea did extremely poorly for many years thereafter (but has had a great 2016). And, of course, a raging bull market these past years has mocked his broader thesis about all of today's economic monkey business.
None of this is to disparage Mr. Grant in the least. Was it not the legendary Baron Rothschild who claimed to have made his fortune by always selling too soon? To the contrary, Grant is sophisticated and persuasive; his fault may be that, like Rothschild, he's a few years ahead of his time.
I bring this up because CFA Institute Contributors wrote up his latest conference appearance. It included the usual specimens of Grant's rhetorical gems, e.g., "If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC?"
I think the key idea that struck me is one that has come up in our discussions several times before, which concerns the value of macro-economic analysis. Many are those who dismiss these concerns, preferring to rely on market history. A market history approach would say that since the market is up most of the time and down a small percentage of the time, one has to take a long view, invest in stocks and hold tight. Makes sense.
But doesn't the following suggestion from Grant, acknowledged for his erudition, also make sense?
Investors have fallen into the trap of thinking that the future will be like the past, Grant says. The period of falling yields and rising bond prices that began in 1981 is entering its 35th year. He noted that a 35-year bear market preceded this. Yet the yield curve for Swiss bonds is sub-zero for the next 30 years, thereby implying that investors expect negative rates to persist for a long time."
Not every market pessimist is a gun-toting, beans-storing survivalist. To put some flesh on the skin and bone of yield curve-type discussion, read Kevin Wilson's depressing but well researched discussion of how Chicago and Singapore stack up these days. Here's a snippet:
All in all, it would appear that Chicago has a weaker economy, 250 times as much violent crime, triple the unemployment rate, far higher taxes, tremendous pension liabilities, much higher debt per capita, a pervasive corruption problem, and a falling population. Worst of all for investors, it is losing jobs, corporate tax base, and talent rapidly."
A professional acquaintance of mine, a PhD involved in very high value-add financial analysis and a long-time Chicago resident, admitted to me a couple of years ago that she was thinking of taking up residence in some other state. The reason had nothing to do with greater opportunity on Wall Street or some other destination. No, it was personal. She observed that the radius within which she felt comfortable biking in the city was continually shrinking.
It's not just the hub of the financial wheel at the Federal Reserve, but the hub of your own bike wheel on which big historic shifts may hinge. So what say you? Do we focus only on 200 years of U.S. market data, or do we concern ourselves as investors, a la James Grant, with broader changes in the political economy?
Here are today's advisor-related links:
- Dirk Cotton says that formerly frowned-upon reverse mortgages are now worth a look as a means of boosting retirement cash flow.
- Don't Quit Your Day Job reveals that corporate profits peaked back in 2014.
- Eric Parnell, CFA: Q2 earnings reports almost over - profits slide but stocks surge.
- Ian Bezek: Is VC mayonnaise fraud sign of a top?
- John Lohr: How to choose a financial advisor - Part III
- Jack Waymire: In an anonymous digital world, advisors can't sell themselves to investors but must attract them.
- Gerstein Fisher looks at how to benefit from sell-side analysts' bias.