Secular Bull Market In Bonds – The Wall by John Mauldin, Mauldin Economics
I generally send out two letters a week. The letter that arrives in your inbox over the weekend is Thoughts from the Frontline and is written by me. The second letter, which is called Outside the Box, generally comes in the middle of the week and is an article or essay written by someone else that I think merits your time. Quite often I disagree with the sentiment or analysis being expressed, but I find the writer makes me think about alternatives to my personally favored presuppositions. It is always good to listen to the other side of the story, especially when we are talking economics and finance and our investment portfolios!
Over the last month, most of my selections for Outside the Box have leaned to the bearish side of things. Jawad Mian, who writes a global macro letter called Stray Reflections for Mauldin Economics, has been gently chiding me about those bearish sentiments from his perch in Dubai. So today in Outside the Box I’m going to let Jawad offer his views, which are of a decidedly more bullish nature. (I should note that here at Mauldin Economics we pay attention to Jawad’s out-of-consensus forecasts, even when we don’t agree. Some of the team are circulating a PowerPoint presentation that he did almost eight months ago to a CFA group in Michigan. He was spot on with every one of his main points.)
Jawad has shown me how macro thinking and money management can be gracefully and profitably intertwined. He likes to approach the world of global macro investing like a poet contemplating an epic in progress – conjuring up battles in his imagination, inventing and discarding subplots, balancing reason and rhyme. His guiding principle is to help investors understand and navigate through all the complexities of an unstable, inflation-prone world.
Today his bullish macroeconomic forecasts launch from a surprising source: Pink Floyd’s epic album The Wall. He finds similarities between the torturous journey of the album’s protagonist and today’s battle-scarred (or maybe I should say bear market-scarred) investor. Taking license with some of the lyrics, he even weaves Dick Fuld and Lehman Brothers into Pink Floyd’s writings.
In this analogy, the more an investor blocks out the world and retreats into his own ideological biases, the worse off he becomes.
And on that point both Jawad and I agree. Anytime we let our emotions and biases become the driving force behind our investment selections, we are setting ourselves up for true problems. Logic, reason, and an open mind are much better drivers of the investment process. I think you will find Jawad’s work both challenging and thought-provoking.
I find myself between meetings here in New York as I write this note. The team at Mauldin Economics went down to the Jersey Shore yesterday to meet with Charlie Stroller and his team at the Financial Advisor family of publications. They are a well-run operation, and I look forward to our respective firms being more involved with one another in the future. I went down an evening early to spend a day by the ocean, but someone turned the thermostat down and dialed up the wind; so we stayed inside, looking out wistfully at the beach.
On a personal note, I’ve been doing a lot of research but am really deeply behind on my emails. There are some 500 in my inbox that I need to deal with in one form or another, and I’m just going to have to stop the world and handle them over the next two days before moving on to the next project. If there is something you’ve been expecting for me, I will hopefully get around to it sooner rather than later.
Have a great week and enjoy Jawad’s insights.
Your running hard just to stay in place analyst,
John Mauldin, Editor
Outside the Box
By Jawad Mian
Pink Floyd’s The Wall is a musical milestone unlike any other. The album’s highly acclaimed release in 1979 was followed by an imaginative tour in 1980-81 and a visually intriguing movie in 1982 of the same name.
The songs trace the tortured life of Pink, a fictional protagonist modeled on band members Syd Barrett and Roger Waters. The storyline begins with his fatherless childhood, domineering mother, and abusive school teachers. Events lead him to become a rock star, only to feel jaded by the superficiality of stardom.
To live free from life’s emotional pain, Pink begins to build a mental wall between himself and the world. Every personal wound is another brick in his wall of exile. As his wall nears completion, spurred by the revelation of his wife’s infidelity, he convinces himself that his self-imposed isolation is a desirable thing.
At first, the gathering of bricks seemed fairly innocent. Now, all that’s left is a giant wall that encloses him from all sides. Pink, unable to arrest his frenzied mind, spirals into insanity.
Is there anybody out there?
Never thought that I would end up all alone,
Everyday I’m feeling further away from home,
I can’t catch my breath,
But I’m holding on.
In the wake of emotional destruction, the gravity of his life’s choices sets in.
Source: Pink Floyd
This has been a tremendous bull market in stocks.
Yet, people still remember what happened during the early 2000s and 2008. Having lived through that period, most of us fear a repeat and will do everything possible to avoid it. In this “avoidance process,” we built a wall of mental detachment to cope with bear market-inflicted wounds.
While the wall helped temper our emotions to the market’s gyrations, it further severed our understanding of the rapidly changing investment environment. In the last six years, the common investor (let’s also call him “Pink”) has missed a lot of opportunities as a result.
With the self-deluding rationale that this time is different, the metaphor of “the wall” makes its first appearance after the spectacular tech crash in 2000. The wall is a defense mechanism that renders Pink comfortably numb to his own mistakes. With bitter satisfaction, he continues his hopeful journey.
It was just before dawn,
One miserable morning in black September ‘08.
Dick Fuld was told to sit tight,
When he asked that his bank be bailed out.
The Fed gave thanks, as the other banks,
Held back the enemy tanks for a while.
And Lehman Brothers was held for the price,
Of a few thousand ordinary lives.
It was dark all around,
There was frost in the ground,
When the tigers broke free,
And no one survived.
The 2008 meltdown etches an indelible mark on Pink. He resigns from the cruel investment world, watching with skepticism and disdain as the market is rescued by the central bankers’ dirty tricks. You can hear him yell out from a lonely bend, “Hey! Central Banker! Leave the markets alone!”
All in all, it just leads to another brick in the wall.
The US housing bust, European sovereign debt crisis, Japan’s deflation demon, China’s hard landing, the commodity crash, and currency wars are all bricks in his ever-growing wall. Every financial wound leads him to drift farther from reality. The more he blocks out the world and retreats into