And so castles made of sand, fall in the sea, eventually.
Hi all,
After two weeks of building castles in the sand, I'm back. Anything happen while I was out?
As you can see, the girls and I have been spending some quality time making sand sculptures (a grand total of nine different sculptures over 14 days), while trying to let the stress of 50 weeks wash out of my system. We've been going to Kiawah Island in South Carolina for the last 25 years, and it still doesn't get old. Best beach on the East coast and only 40 minutes to some of the best food on the East coast (much shorter if you count the outstanding fresh shrimp cooked up by Ms. Debbie). And for you golfers the PGA Championship will be played here next year. It really is a special place.
OK, I know some shit happened while I was gone (I was at the beach in South Carolina after all, not in the rain-forest canopy of the Amazon). But really, what happened? There was a rather heated battle over whether or not we should raise the debt ceiling. Surprise, it was raised! And surprise again, the raise came with very little in the way of long term debt reduction attached. And surprise, surprise, Standard and Poor's lowered the credit rating of the United States of America to AA+ from AAA. And surprise of all surprises, stocks sold off a very unappetizing 10% ( the only performance that was worse was the record setting Bucco's home stand debacle). Nothing really surprising here, our average portfolio did substantially better during the decline (the SEC frowns on showing exact performance numbers so call me if you want to know how we did). Overall, the sun came up in the East and set in the West. Sounds like bull you'd hear from someone that's had a tad too much sun.
Not everything happened as expected though, there were at least a few surprises. One of the most significant was my alma mater's, Bank of New York Mellon's, announcement that they will be charging large customers a fee for depositing money instead of paying them interest. It seems that many of Mellon's corporate clients don't exactly like the returns they are getting on sovereign debt (both US and Euro) relative to the risk they are taking, and want to park the money in cash. This is what is known as a "liquidity trap". Investors are willing to pay for liquidity. It has happened only two times in recent history, during the Great Depression of the 1930's, and during the Japanese collapse of the 1990's. Liquidity traps are very rare, but they speak to the fact that investors are so suspect of economic growth that they would rather pay someone to hold their money (i.e.. negative returns) than invest it in the economy.
The other thing that surprises me is how many people keep referring to our economic troubles as "The Great Recession". The word recession creates the impression that the economy is meandering down some familiar path that it has taken numerous times in the past. This is simply not true. As the following graphic shows, this is NOT normal:
What we have today is a "Great Contraction" not a "Great Recession". This is a debt contraction of monumental proportions. The global economy has been living on leverage for the last few decades, and there is no easy way out. We have built our economic growth on sand, no different than my castles being swept out to sea. Our friends in office are trying to find a way to transfer wealth from creditors (savers) to debtors (the government). They will do so via defaults, financial repression, or inflation, or a combination of all three. Growth will stagnate, that is why stocks have sold off. Investors around the world are coming to grips with the fact that economic growth in the major Western economies is at best stalling near 0% - 2%.
This isn't the end of the world. One of the great things about building castles in the sand, only to watch them swept out to sea, is that tomorrow is a brand new day. We can build a new castle, something better than what was built yesterday, "a golden winged ship is passing my way".
When I got into this business many moons ago I loved the prospect of a "zero sum game". For every winner there is a loser, and vice versa. Money is being made somewhere in the world, my job is to be on that winning side more often than not.
