Chris Leithner Letter Nos. 184-187
26 March 2015 – 26 June 2015
My job, as I see it, is to learn from other people’s mistakes and from my own. … As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” … From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance. But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.
My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.
There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.
WSJ.com MoneyBeat (28 June 2013)
What Happens When Rates of Interest Rise?
“The Reserve Bank [of Australia] has lost faith in the economy staging a recovery,” The Australian stated on 5 February 2015 (RBA’s Growth Warning as Rates Cut to New Low). During the past three years it has halved its Overnight Cash Rate to the present 2.25%. Lower rates clearly haven’t caused a recovery; will record low rates do so? It doesn’t seem to matter: futures markets presently indicate that by mid-2015 the RBA will cut the OCR to 1.75%. During the past year, ever more people have extrapolated these unprecedentedly low rates far into the future. On 11 June 2014, for example, in What if Interest Rates Stay Low for the Next 70 Years? The Daily Reckoning Australia stated:
Rates have been going lower for years. In some [Western] nations, [counterparts of the OCR have] now reached [0.5% in Britain and 0.25% in the U.S.], a situation that would have been hailed as impossible just a few years ago. What if interest rates were to stay low for the rest of the century? This is definitely a possibility.
Money Morning Australia (What if Interest Rates Never Go Up? 24 May 2014) went the whole hog: “is there a chance that interest rates will never go up? Is the world – including Australia – in a new era of permanently low interest rates? It’s possible. In fact, it’s probable.” On 9 October 2014, Simon Read, personal finance editor at The Independent, reported some results from a survey of British mortgagees. One-fifth believes that their rate will never rise. (Another finding from the survey casts doubt upon this expectation: slightly more than half of mortgagees know neither the rate they’re paying nor whether it’s fixed or variable).1 Finally, Alan Kohler, the avuncular face of the business and finance report on the Red Channel’s 7pm nightly news, advised (“New Era of Deflation Is upon Us,” Business Spectator, 10 December 2014):
I think it’s possible that not only will Australian interest rates be cut [in 2015] and U.S. rates not rise, interest rates could stay at this low level for the rest of the decade. … It’s likely to be a period of rising asset prices and rising volatility … (see also Frank Shostak, The ECB Fears Deflation, But You Should Not, Mises Daily, 4 February 2015).
When the crowd backs one horse, it’s prudent to ponder alternatives. “In financial markets,” James Grant, the editor of Grant’s Interest Rate Observer has repeatedly written and uttered during interviews, “everything has its season.” This wisdom derives ultimately from the Book of Ecclesiastes (3:1-2): “There is an appointed time for everything. And there is a time for every event under heaven. A time to give birth and a time to die; a time to plant and a time to uproot what is planted. …” From this principle it follows that there’s a time for economic booms and financial bull markets, for busts and bear markets – and for high as well as low rates of interest. A caveat, which today’s main-stream implicitly but nonetheless strenuously rejects, is that the anointed elite cannot perpetuate the boom. It can delay the bust (at the cost of eventually intensifying it), but it cannot abolish it. Monetary central planners cannot, in other words, permanently suppress rates of interest to artificially low levels; their repeatedly vain attempts to do so, however, always unleash unanticipated (that is, adverse) consequences.
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