Did you read the latest Bill Gross piece? Talk about a complete killjoy. I consider myself pretty skeptical about the financial markets’ prospects for the coming years, but even I just wanted to slip into a warm bath with a razor blade after reading Bill’s morbid “the end is near” commentary. Have a look at the first couple of lines from his post, fittingly titled “A Sense of an Ending”:
Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so.
And it doesn’t pick up from there…
Call me old fashioned, but I adhere to a strict “traders don’t talk about their feelings” code. Like Michael Lewis taught us in his great book Liar’s Poker:
“When you arrive at six-thirty A.M., having had no sleep the night before, and having lost your best friend in a car accident, and some Big Swinging Dick walks over to your desk, slaps you on the back, and says, ‘How the hell are you?’ you don’t say, I’m really tired and really upset.’ You say, I’m great, how the hell are you?’ ”
Bill is completely breaking the code with his depressing piece about the end of the great bull market in financial assets.
Maybe I should cut Bill some slack. He is getting up there in age, and he is going through some life changes as he contemplates the end of his investing career. And it’s not like I disagree with his prognostication for financial markets. We are completely screwed.
Bill has been lucky enough to ride the great bull market of the past 35 years, but he is correct that this ride is coming to an end. The fact that it coincides with the tail end of his career has made him a little more reflective than usual (and judging from the tone of his post maybe a little depressed as well).
I would like to offer a little bit of a more optimistic counter view. Well, maybe not optimistic, but something to drag you out of the Gross induced coma. We will get a monster wealth redistribution in the coming years. It will not be fun. The baby boomer generation has blown this massive financial asset bubble, and they are disillusioned about the true level of their wealth. They have not saved enough. They have heaped massive future obligations on the next generation. They have consistently layered more and more debt on every problem they have ever encountered. They have mistaken this debt for wealth. The baby boomers believe this debt is money good, but it is anything but.
Bill Gross is correct to be pessimistic about the long term sustainability of this financial asset bubble his generation is responsible for. But we will get a reset. And although most pundits think this reset will look like a 2008 style credit crisis, I think that outcome is the least likely.
Everyone always hedges for the last disaster. Do you think that after the Titanic sank, ship travel became more or less safe? We all know the answer, yet I am sure that ticket sales plummeted in the months following the disaster.
Today as the financial excesses are bubbling up, the hedgies are all busy putting on the exact same trades that worked in 2008. Well, the simple fact everyone is doing this will ensure it never happens.
The surprise will be something no one is expecting. And I can’t think about any outcome that is less expected than inflation. No one is hedging for a return of persistent inflation. In fact, until a month ago, everyone was more worried about the exact opposite. I said it then, and I will repeat it now – years from now we will look back and laugh at the idea we were ever worried about deflation.
Inflation also has the added benefit that it will accomplish everything needed to reset the system. It will inflate away the “wealth” of the baby boomers, while at the same time reducing nominal debt levels to new lower levels so that the next great credit cycle can begin again.
It will be painful. I am not disputing that one bit. But the money is already gone, and this will be the easiest way out – so you know that is the route we will take. Bill Gross sees the handwriting on the wall. Just as he is busy contemplating his death, he is just as aware of the coming great bear market in real returns for his inflated financial assets. His generation should be worried.
I don’t have any answers. I don’t even know what I would do if I were given the power to rearrange the financial system any way I see fit. Yet any discussion about what should be done is irrelevant. All that matters is what will be done.
And in that matter, I am more confident. The system will be reset when inflation engulfs our economy. Now I am not some doomdayer – busy packing guns, ammo and freeze dried food in my basement. I don’t think we are about to descend into some anarchistic collapse of the financial system and society.
But I do think we are going to inflate our way out of this terrible mess. Ask yourself how many currencies have collapsed because of deflation? And then ask your same question about inflation. I think the road we will eventually follow is quite clear.
The reset will be horrible for the 0.01%’s that control most of the financial assets. There is also no doubt that it won’t be pleasant for the average Joe’s who will struggle with rising food, energy and other costs. But who are the most indebted in our economy? It’s not the Warren Buffets and Ken Griffins of the world. It’s the average middle class family who have basically no net worth with a big mortgage or left over student debt. The coming inflation will reduce that burden.
As we enter this new period in the coming years, the market turbulence will cause a lot of the financial elite to warn about the “dangers of inflation.” They will be correct – inflation will be dangerous. Especially to them. The prices of financial assets will get destroyed. But the prices were never real in the first place.
My message to all the generations below Mr. Gross’ is to not get fooled by their calls to keep the status quo. The status quo of ever bigger financial bubbles while they hog all the riches, with the growing inequality causing more and more social stress is unsustainable. The system needs to be reset. Get ready for it. But don’t get despondent when it comes. It will be ok. The storm will be fierce, but we will emerge on the other side much better for it.
In the mean time, don’t let Gross’ morose ponderings get you down. The great financial bubble is almost over, and with it, the last generation of great investors like Gross will ride into the sunset. But there will be a new generation that figures out how to navigate through the coming changes. Keep reading Gross because there is a lot of wisdom in his decades of market experience, but seek out the next great investor – he isn’t some 70 year old writing about his coming death…
Wall Street Week is back
The great Louis Rukeyser show Wall Street week is back! Obviously Louis isn’t hosting it, but we finally get a show that isn’t TV personalities hitting the BUY! BUY! BUY! button while screaming at the top of their lungs. Last week my not-so favourite activist Carl Icahn was the guest. I won’t bother examining all the ironic contradictions he made, but I will leave you with one quote about his bullishness for Apple.
I want to record that quote for posterity, and include a chart with the price of Apple.
Don’t worry if Apple dips, good ’ole Uncle Carl will be there to show you a bid. And he never goes back on his word… (don’t believe me – just watch this)