The biggest investment stories of the year were not merely sets of interesting data but tapped into reservoirs of anxiety and doubt about the world we live in. These stories have not resolved those issues, but they have fueled useful thought about them.
The “New Normal” Debate
Generating the most traffic on AdvisorOne was money manager Ken Fisher’s disparagement of Pimco bond manager Bill Gross’ famous, or infamous, “new normal” concept.
“We are chimpanzees with no memory,” Fisher said in response to Gross’ view that we are living in times of reduced economic expectations. “The next 10 years are going to be just as good as the 1990s. The problems in this current environment we think are so different, and so new and so unique. It’s the same stupid old normal we’ve always had. We’ve got a great future.”
If Fisher hadn’t made those remarks back in September, someone would have to have done so. After all, the U.S market has had a pretty good year and lots of companies are more profitable than ever.
Not so long ago, in the midst of the market’s downward thrusts in 2008 and 2009, classic “buy and hold” investing was repeatedly pronounced dead. Yet those who maintained fealty to that much maligned strategy have experienced gratifying recoveries, and have not had to struggle with the question of when to get back into a rebounding market.
Lesson: The return of “the same stupid old normal we’ve always had” — and the struggle panicked investors have had determining whether to get back in the market — should teach us all a little humility. No one has ever been able to consistently time the market. We should simply steel ourselves for a ride that will be bumpy but worth the journey.
Death of the Bull Market in Bonds
A second story generating inordinate web traffic also involved Pimco manager Bill Gross — namely, the world’s biggest bond manager’s declaration that the great 30-year bull market in bonds was over.
The story was linked to the Fed’s announcement of a second round of “quantitative easing” — specifically, a plan to purchase $600 billion in Treasury bonds. The Fed’s plan was aimed at keeping interest rates low, thus propping up a shaky real estate market and unleashing the animal spirits of equity investors, which would create a wealth effect.
The Fed’s bond buying, said Gross, “raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near zero percent returns and a picking of the creditor’s pocket via inflation and negative real interest rates.”
Gross’ declaration of defeat — and the bond market’s selloff confirms his view — is a fresh reminder of all the strikes against bond investing.
Inflation is always crouching in the corner ready to take away whatever meager yields are being offered, and government fiscal and monetary policies are the key determinants of how your investment will perform. In other words, credit quality matters — and the bond market has judged Uncle Sam to be tinkering abusively with its national balance sheet.
Whether you agree with Ken Fisher or Bill Gross, it’s pretty clear why — from Gross’ perspective — we’re living in a “new normal.” There is no good news out there — or prospect of any — for bond investors.
Lesson: Investors in Treasuries, who have always had to worry about inflation risk, duration risk and taxes, could always rely on the absence of political risk; the full faith and credit of the United States Treasury was something the whole world banked on.
As bond vigilantes, gold bugs and the Chinese now constantly remind us, America and credit quality are no longer synonymous. Where once our word was our bond, our bonds are no longer expected to be worth tomorrow what they are today.
The Flash Crash
The “flash crash” of May 6 had every financial advisor’s attention. The story drew wide attention to what are normally technical issues about capital markets functionality with a gripping drama of the Dow plunging about 700 points within just 20 minutes.
A single, $4.1 billion computer-initiated trade seems to have triggered the precipitous decline, and there has been much gnashing of teeth about high-frequency computerized trading and even the role played by the proliferation of ETFs in less liquid areas of the market.
Should investors fear financial Armageddon — or buy like crazy — if another apparent flash crash occurs? Probably both reactions, in good measure and at different times, are called for.
Sometimes bad things occur rather unexpectedly and their consequences also surprise. The Great Chicago Fire was one of the biggest U.S. disasters of the 19th century, yet it is credited with spurring the rapid development of Chicago as one of America’s and the world’s great economic centers.