Brent’s Newsletter

DEAR CLIENTS:

The old timers called this a “cheese grater” market. I think “sawtooth” is a better metaphor. The chart shows the pattern which started in late January, a repeating up and down movement which really just goes sideways.

I recall a few days back that we were down 400 points one day and up 300 the next. Some have trouble making sense of this, but it is really quite ordinary and has happened many times. An extended sawtooth can be a very good thing. It is a “time out” phase, the market stopping to take its breath after a strong uphill run. If it goes on long enough the underlying fundamentals have time to catch up and justify the recent higher share prices. Should that happen, it is the most pleasant kind of market “correction”. I’m not making a prediction, simply explaining the phenomenon. It’s anybody’s guess what the balance of the year holds. But we've been saying that domestic stocks are not cheap. A time out in any form is a welcome break.

OWN OR LOAN

We say “stocks and bonds” lightly in conversation as though they were similar. But they are radically different kinds of investments. With stocks you are an owner...with bonds you are a lender. The inherent risks and rewards are quite different and, at times, the two can diverge wildly or move in lockstep.

Historically bonds have been represented as safer than stocks and a way to stabilize a stock portfolio. To some extent that remains true. But context is everything. With the exception of municipal tax-exempt bonds, we think the present risk/reward profile of bonds looks uninviting. Interest rates have been extremely low. So, investors, overestimating bond market stability and stretching to get barely one or two percent yield above money market rates, have piled billions into bonds without hesitation. I know I’ve written plenty about a possible rout in the bond world exacerbated by indiscriminate buying of Exchange Traded Funds (ETFs). Nothing like that has come even close to happening but the dynamics of a rout are not difficult to demonstrate. It is not that the underlying bonds would fail to pay - rather that liquidity and stability of prices could experience powerful jolts. Again, I’m not making a prediction. I am, however, explaining why we are careful and why we continue to avoid ETFs.

THE POPULATION BOMBED

Not only is truth stranger than fiction, it is more profound and artistic. No one writes better than God. For example, the tragedy of the Titanic embodies greater drama, irony, pathos, romance, subplots, symbolism, and surprises than the most gifted novelist could have ever composed. In fiction we meet characters who remind us of people we have known. In life we meet people who remind us of no one else. I believe that is why we fail most at explaining the world to ourselves, and especially why we fail at extrapolating the future. We are forever telling ourselves stories. And those stories are forever inadequate at capturing reality.

A favorite story of my generation has been the threat of overpopulation, which was conjured up in the mind of science writers who apparently never understood they were writing science fiction. Paul Erhlich's 1968 bestseller The Population Bomb typified the genre. He predicted global starvation, economic and social collapse, rampant violence, hysteria, even cannibalism... all this to happen in the 1970's. Erhlich had the numbers and a consensus of academics to back his claims. The book was a massive bestseller and its message widely believed and heeded. We enlightened souls in the educated classes dutifully arranged to have no more than 1.5 children per household and showed proper disgust for the ignorant and selfish who failed to get the memo. Having children became a sin against science and society. The Chinese government exercised courageous moral leadership by making children unlawful, and motherhood a crime, except when practiced in extreme moderation.

Well, the world’s population has more than doubled since the late 1960's, but not one of Ehrlich's predictions has come true. The world’s quality of life has improved at every level and the percentage of people living in abject poverty is lower than ever in history. The earth can sustain its billions. These days it is despots and corrupt governments that give us starvation and want. These inconvenient facts have not prevented Mr. Ehrlich from enjoying more than a fifty-year run as author, expert and lecturer on population issues. He has only needed to readjust some dates and details in order to keep the game going.