Dogs and Cats Living Together

Jared Dillian
Editor, The 10th Man


Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.

Mayor: What do you mean, “biblical”?

Dr. Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath-of-God-type stuff.

Dr. Peter Venkman: Exactly.

Dr. Ray Stantz: Fire and brimstone coming down from the skies. Rivers and seas boiling.

Dr. Egon Spengler: Forty years of darkness. Earthquakes, volcanoes…

Winston Zeddemore: The dead rising from the grave.

Dr. Peter Venkman: Human sacrifice, dogs and cats living together—mass hysteria.

These are strange times.

Let’s make a list of the top 13 strange things out there right now.

1. Numero uno. The gold medal. Interest rates are negative all over the world.

2. Many Republicans want to reinstate Glass-Steagall, along with the Democrats.

3. There are housing bubbles all over the world, big ones. And they keep on going.

4. Japan might do the helicopter drop (as discussed last week) and cancel its outstanding debt.

5. US debt is over 100% of GDP, and nobody is campaigning on deficit reduction (except for the Libertarians).

6. The normally wild-eyed Libertarians are running as sane centrists.

7. Russia might actually be interfering with US elections.

8. Terrorism is rampant across the globe, and nobody seems to care.

9. Great Britain voted to leave the EU.

10. Scotland may again try and secede from Great Britain.

11. Stocks are at all-time highs.

12. Gold is up 30% in a few months, and people are still massively underinvested.

13. The Federal Reserve is the most hawkish central bank in the world.

Actually, I could have gone and listed another 13. It’s crazytown out there.

I think a lot about history. Thomas Carlyle, the Scottish philosopher, said, “The happiest hours of mankind are recorded on the blank pages of history.” It’s true.

Remember studying US history in high school? You learned all about Woodrow Wilson and World War I and then you learned about FDR and World War II, but you skipped over Harding/Coolidge/Hoover in between.

What happened in the 1920s, anyway? Only the biggest economic boom in the history of the United States, coupled with massive technological progress and improvements in longevity and people’s standard of living. The best time ever. You might think people would want to study the conditions that led to that prosperity, so it can be repeated.

So what was it? Why were things so good?

Faced with a huge postwar recession in 1920-1921, really a depression, the Harding administration’s response was to do… nothing! Literally nothing.

And so—it was the fastest and sharpest recovery in modern history. I forget the exact statistics, but unemployment dropped from 11-something percent to 2-something percent in a matter of a few years. And yet Wilson and FDR are considered to be the “great” presidents.

The happiest hours of mankind are recorded on the blank pages of history.

The pages of history are not very blank right now. We live in interesting times.

Keep a Cool Head

I think the first step is to acknowledge that these are not normal financial conditions. Far from it.

Normal financial conditions are when interest rates are at 6%, you can reasonably save for the future in a bank account, stocks are neither rich nor cheap, bonds aren’t trading at 160 or 180 or 200 cents on the dollar, and dozens if not hundreds of startup companies aren’t valued at more than a billion dollars.

None of this is normal.

The reason it isn’t normal is because this—all of this—is the result of the accumulation of every government intervention in the last 30 years. That is the reason why we are here today.

Professional investors complain about this all the time, about the distortions, that they can’t do their job of finding undervalued assets and waiting for them to return to fair value. Nothing is at fair value.

What few of these professional investors have realized is that you have to adapt or lose assets and shut down your fund. If everything is distorted, you have to front-run the distortions.

Unpleasant, but that is the reality of the situation.

Business has been good for me. I will admit it: I have no particular edge when it comes to security valuation. But I am excellent at trading ahead of government stupidity. Policymakers are easier to predict than corporate earnings, at least for me. If we went back to the ‘50s or the ‘80s or the early ‘90s, when things made sense, I would have a very tough time of it.

Sad, but true: you can’t have an opinion on stock X or bond Y without having an opinion on what the government is going to do that is going to affect stock X or bond Y.

Nobody was surprised by what happened to the coal industry—Obama said what he was going to do, then did it—but it’s probably the best example of how, in certain instances, the government has 100% control over the outcome. It didn’t matter how compelling the valuation case was, how cheap the assets got. It was a zero.

Election 2016

Every year around this time, the sell-side firms’ research departments will go and make a list of what stocks will win and what stocks will lose depending on who gets elected.

Speaking of coal, if Trump gets elected, for sure, coal will rip. I’d say that the Democrats would be bad for financials, but financials are going to get hammered no matter who gets elected (note: it might already be priced in).

I don’t pay too much attention to these election plays—a bit too much like roulette. But the bigger idea here is that both major candidates represent bigger government, more intervention, and even bigger distortions. In other words, more opportunities for you and me. I wish that weren’t true, but that is the world that we live in.

The whole notion of the CFA makes me laugh. Forget security analysis, all you need is a newspaper, or its electronic equivalent.

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