Sunday, October 9, 2016

October 9, 2016 Revolution

Risk/Reward Vol. 324

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

What follows is a window into how my brain functions.

Having just spent eight days in Paris, I continue to marvel at how well ordered and uniform it is. Broad boulevards stretch for miles, all lined with beautiful five story limestone façade buildings capped with mansard roofs. But it was not always this way. Indeed until the 1850's, Paris was a medieval city, a patchwork of narrow, winding streets. After the Revolution of 1848, Louis Napoleon a/k/a Napoleon III (who was swept into power as a result of that revolution) ordered the destruction and reconstruction of much of the city. Why? Well, in large part to prevent another revolution. Broad boulevards are much more difficult to block than narrow passageways thus enabling those in power to deploy troops more quickly to quell nascent civil unrest.

France was just one of 50 countries that experienced revolution in 1848. A few years of bad economic conditions (e.g. the potato blight in Ireland, disappointing harvests on the Continent and rising unemployment attendant to the budding industrial revolution) caused ad hoc coalitions of reformers, farmers and workers in scores of countries to rise up against the entrenched and feckless empowered class. These upheavals resulted in large migrations (my great grandfather and great grandmother emigrated from Switzerland and Germany at this time) which in turn spawned anti-immigrant, nativist movements such as the Know Nothing Party in the United States.

Does this sound familiar? Are we not revisiting this same phenomenon? Clearly, the hangover from the Great Recession remains. Moreover, the entrenched, empowered class has proven feckless. As a result, ad hoc and disruptive coalitions have arisen. How else can one explain Brexit or Feel the Bern or Trump or Marine LePen or Colombia's no vote on the FARC plebiscite or the rise of trade protectionism or the emergence of nativist political parties throughout the world? Doesn't it seem that everyone is thinking if not shouting Howard Beale's line: "We're mad as hell, and we're not going to take this anymore."

So what does this have to do with investing? A lot, frankly, especially when it comes to being frustrated by and with the empowered class. In this regard, I recommend that you read Bill Gross' (the erstwhile Bond King) most recent Investment Outlook which can be found at http://www.janus.com/. Therein, he accuses the world's central bankers of employing a Martingale strategy; that is, doubling down continually on losing bets until one of them hits Such a strategy can succeed only if one has unlimited resources and as Gross notes, not even central banks have those. In the end, they must answer to the body politic which, as discussed above, is growing ever more restless with ineffective monetary parlor games such as negative interest rates. He concludes that at some point, investors, weary of choosing between receiving near zero returns on their money or taking outsized risks may abandon the standard financial complex altogether. The Bond King has already. Gross advocates selling stocks and bonds and buying gold and raw land. Now that's revolutionary.

My two areas of interest continue to move. The yield on the US Ten Year Bond rose steadily this week in advance of what most believe will be a rate increase in December. I will wait for this movement to slow before buying interest rate sensitive securities. And domestic oil hit $50/bbl for the first time since June. The latter is enticing but is based mostly on an a still-uncertain OPEC production freeze come the end of November. For now, I remain on the sidelines awaiting a more certain path to profitability.

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