Most recently Ken Rogoff and Carmen Reinhart produced prodigious volumes of data in their 2009 work with the tongue-in-cheek title This Time Is Different: Eight Centuries of Financial Folly. Two years earlier the duo had hit upon another human proclivity, this time of political entities. Their December 2007 paper “Banking Crises: An Equal Opportunity Menace” confirmed what the worldly wise already knew: Governments around the world—including our own—are no more inclined to reveal their true financial condition today than in the past.
Such collective amnesia by the governed and lack of transparency by those who govern contribute to the human suffering that ensues in crisis after crisis. That is precisely why today’s fiscal and monetary damage control may be nearly as ineffective at stemming the tide as the various and sundry, and often experimental, interventions during the Great Depression. That statement is not made lightly. Early-stage fiscal policy initiatives, which produced far-less-than-advertised economic multiplier effects, have been hamstrung by political gridlock ever since. On the monetary side, Ben Bernanke, unlike many in positions of high political authority or the body politic itself, knows Depression history. The more pertinent question: Is he able to apply history’s lessons to today’s subtly similar yet significantly different set of challenges? Thus far, the results are not reassuring.
The pragmatic solution to economic unpleasantness throughout the last decade has been to repeatedly inject the economy with the adrenaline of cheap and easy money. The philosopher shudders in disbelief. The ongoing attempt to put off the consequences of years of cumulative excesses by jacking up the prices of assets to levels above their intrinsic worth is itself not without potentially dire consequences. The Fed’s current action of pushing interest rates down to near zero is having the effect of driving people out of the safer assets into the riskier ones, of sacrificing the prudent to save the foolish. Societies have crumbled for lesser transgressions.
That the extraordinary excesses built up in recent decades can be contained with so little proportional consequence boggles the mind. Whatever their motives, Oz-like governments are playing Russian roulette behind the curtain, which should be ample cause for us to match such recklessness with an equal measure of skepticism.
I believe that the spectacular market rise currently being celebrated has underpinnings similar to the cheap-money “fools’ rally” from 2003 to 2007—and that we are in both a secular bear market and an economic contraction that may not have seen its darkest days. Thinking into the future as we are inclined to do, the only development that would leave us scratching our heads would be further dramatic moves to the upside. We cannot forecast if, when, or how far the pendulum might swing, but our record suggests that sometimes we seem to be slightly ahead of the crowd in sniffing out trouble.
Just as a rising tide lifts all ships, the opposite is also true. If, as this essay suggests, today’s high tide follows the rhythms of nature—this time downward—then finding attractively priced businesses will become that much easier. They are most plentiful when the market is dominated by distressed sellers, many of whom are parting with heirlooms not because they want to but because they must raise cash.
On a personal note, it would be a mistake for readers to typecast the writer as a perennial pessimist, particularly for those who aren’t familiar with my investment posture in the 1980s. During the first decade and more of the greatest bull market in modern history, I was rationally exuberant, finding more opportunities than I had money. If one carefully studies Shiller’s “Graham” P/E chart, one will discover that my optimism had a solid foundation in value. Because of my conviction that interest rates were unsustainably high, almost everything appeared cheap in those stocked-pond investment days. Contrast that with the situation from the mid-1990s to the present. Most investors have been unaware of, indifferent toward, or become accustomed to chronically overvalued markets as the new norm. They suffered the consequences of ignorance or apathy in 2000–02 and 2007–09—and, just perhaps, history may repeat itself in the months or years ahead.
As a rational optimist at the core, I expect there will come a day when I will once again be miscast—likely in the midst of pervasive despair—as an irrational optimist. I will take that characterization no more seriously than I take today’s. All along the journey, I’ve taken solace, as well as found courage for my convictions, in knowing that the road I’m taking has never been, nor ever will be, crowded.