GUALFIN, ARGENTINA – What a week!
Cohen, Kim, Powell, Xi, Putin – We could barely keep up with the excitement.
But, strangely, investors were blasé… It didn’t matter to them that the president’s own lawyer accused him of impeachable offenses while in the White House… or that the Russian leader threatened nuclear war… or that Mr. Powell, the Fed chief… well, that’s a more complicated story.
And heck, we’re not going to get worked up about it either. But herewith a summary: Mr. Powell told Congress that he has his eye on the ball… and yes, the Fed is looking out for investors too.
With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.
In other words, it’s the same old, same old… but it’s becoming more obvious every day that this is a whole new ball game. At least, from a financial point of view. Just how new it is has yet to be discovered… but that will be our destination today.
Great American Business Bonanza
Warren Buffett made the point in the last week that you didn’t have to worry about any of this. You could have ignored the news – all of it, from 1942 to 2019… WWII, Korea, Vietnam, Cold War, Berlin Airlift, Cuban Missile Crisis, Fall of the Soviet Union, the internet, the Rise of China, dot-coms, housing collapse. All you had to do was buy the S&P 500… and thus, participate in the great American business bonanza.
If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1.
He is right, of course. In 1942, Buffett was 11 years old and made his first stock market investment. If you had just bought the S&P, if there had been an S&P in 1942… and if you had been alive then… and if you had used a no-fee index fund, which didn’t exist in 1942…
…and never read a newspaper… or watched TV…
…you could have done pretty well.
But you would have missed so much!
Richard Nixon’s remarkable address to the nation on August 15, 1971, for example, in which he announced that henceforth the U.S. would use fake money.
And you would have missed Paul Volcker’s masterful save – in which he almost single-handedly prevented inflation from getting out of control by kicking the federal funds rate to a peak of 20% in June 1981.
And then, 17 years later, you would have missed Alan Greenspan’s disgraceful announcement that the Fed would be there to make sure investors didn’t lose money.
Of course, you could have spared yourself all the gobbledygook and blah blah from Bernanke and Yellen, neither of which had any idea of what they were doing… and all the mindless bumpf coming from Washington, from Republicans and Democrats alike, not one of who had any more idea of why stocks were rising than Buffett himself.
At least Buffett has a sense of mischief; he shows how ignorance pays off. If you had been able to look into the future in 1942 and seen all the absurd and destructive things coming down the pike (Buffett focuses on the federal debt, which was set to explode 40,000% over the next 77 years)… you might not have wanted to invest at all.
That is, you might have taken Buffett’s own advice to heart… and realized that it didn’t make sense to risk what you had and what you needed, in order to get what you didn’t have and didn’t need… especially when you could see so many freight trains headed your way.
Had an investor been able to foresee all the crazy things coming our way after 1942… would it really have made sense to go all in… to bet his whole wad on the S&P?
Buffett thinks he had the “American Tailwind” moving him ahead, through crisis and bumbles… absurdity and calamity.
As we opined previously, it was more likely that he had the Fed behind him. And some very peculiar and unrepeatable circumstance of the 1942-2019 period.
First and foremost, the U.S. won WWII! If it hadn’t won, the whole thing might have turned out very differently.
And it won the Cold War too… And Richard Nixon introduced a new, cheap money system… and Paul Volcker tamed inflation… and interest rates headed down for 36 years… and Alan Greenspan gave out the “Greenspan put” to investors… and the Fed added $4 trillion to the nation’s base money since 2000.
In 1942, the U.S. was on its way to fabulous successes… breakthroughs in technology… great achievements in every sector.
After the war, the U.S. had the strongest economy in history… the biggest trade surplus ever… a declining national debt… a balanced federal budget…
…interest rates set by the free market… money that was backed by gold (as solid as a real dollar!)… the freest, most-open society and most competitive businesses… and a stock market that reflected the actual value of the businesses traded on it. The U.S. was No. 1 in almost every category.
In the intervening years, all those things have degraded, degenerated… turned around and slipped away. The tailwind has turned into a headwind.
Today, the U.S. is again No. 1… but in the wrong categories. It owes more money to more people than any country ever did. And it spends more money on its military than all its plausible enemies – if there were any – put together.
Its interest rates are abnormally low and its assets are artificially high. Its government is controlled by a smallish group of insiders, the Deep State, and both political parties are dominated by self-serving hustlers.
Its most important price signal – the cost of money – is no longer determined by the free market, but by a group of 12 hacks. And if interest rates go up – which they surely will – many of its households and businesses, as well as its government, will all go broke.
Our advice to 11-year-olds: The U.S. markets may repeat the experience of the last 77 years; but we wouldn’t bet on it. It really is a new ball game.