Calm, Bridgewater and Yellen
Note to readers: I am headed to Taiwan. If there are readers there who would like to have a coffee, reach out. For the rest of you, I’ll post again as I can, based on what I learn, along the lines of Letter from Kyiv and Letter from Santiago. AS ALWAYS, THIS IS NOT INVESTMENT ADVICE. DO YOUR OWN RESEARCH. INVESTING IS RISKY AND OFTEN PAINFUL.
“Tell me about a complicated man.
Muse, tell me how he wandered and was lost.”
-Homer, The Odyssey
“I would have given up everything that I had in an instant, including my own life…I think he was 42 and a new father…it was the worst thing of course that ever could have happened to me and my family…like an explosion, in which shrapnel tore into us, my wife, his brothers.”
-Ray Dalio, as interviewed on my podcast on the loss of his adult son. The link is here.
We are wired jittery and need to cultivate calm. At least I do.
There is plenty to alarm us. There are two hot wars producing stacks of bodies, pending elections with candidates that scare or dismay many voters, and unusually volatile financial markets.
During the current earnings season on some days a relatively modest shift in company news has resulted in a stock dropping 30% or more. A rather ingenious decision by the US Treasury Secretary triggered a significant rally in US bonds. It’s easy to get pulled into the drama, to focus short-term rather than long-term. However, short-term thinking is bad for investing and life.
It’s even easier to fall prey to this when the media is incentivized to jangle nerves. “Sky Falling” generates more clicks than “Weather More or Less Normal.” News is a for-profit venture, after all. I’ve always known this, I started my career as a journalist. But the ability of the news to distort was made particularly vivid in a recent spate of stories by The New York Times about my former employer, Bridgewater.
I have some thoughts on the Times reporting that I’ll get to in a moment. First, let me discuss the nerves part. I’ll then conclude with Treasury Secretary Yellen’s move.
I was relatively optimistic early in the year. I thought inflation would come down, the economy grow and we’d get what is called a “soft landing,” meaning interest rate rises slow the economy but don’t crush it. I wrote about that here and paid subscribers could see how that impacted my asset allocation, which was generally long assets. In the summer, however, I began to get nervous as a combination of budget deficits, rising oil prices, and unfavorable pricing made the bond market look vulnerable.
I wrote a piece, here, about the bond market potentially falling apart, which it did shortly thereafter. But it fell apart more quickly and significantly than I expected. As bonds fell and interest rates rose, the stock market slid about 10%. After a few weeks of this, I’d lost a few percent of my net worth. How long would this go on?
I had trouble sleeping. I was checking prices and trading more frequently than I normally do. Both are indications I was rattled even though I knew I wasn’t “supposed” to be rattled and losses are part of the game. In some years, Buffet has lost 1/3 or more of his wealth (48% in 1974 and 31% in 2008).
I’ve never suffered losses like that because I’ve never taken as much risk as he does. There is a simple reason: I am not as optimistic as he is. But I’ve also never enjoyed his upside. Early in his career, he had a couple of years where his returns were more than 100%, which requires taking significant risk.
The only way a person can take that much risk is by believing the worst-case scenarios won’t happen. Fear is a survival mechanism, and it works. Or rather, it worked. For thousands of years, it paid to be jumpy. If you react to every coil of rope as a snake, it just might save you from a lethal bite, which is particularly useful when antidotes had yet to be invented.
But in the modern world, that fear is often (not always) misplaced. We live in a system that’s designed to self-correct and avoid the extreme outcome. Over the last few hundred years, that system has become more complicated and effective, which is why we live longer, know more, and are wealthier.
Yes, there was 9/11, a pandemic, Ukraine, and Hamas attacks, all of which would have seemed like a paranoid Tom Clancy fantasy, except that, tragically, they weren’t. But by and large, bad governments are voted out and in wealthy nations leaders are constrained in their power. Cheap prices during a stock or bond crash attract buyers and recover. Medical problems attract innovation and solutions.
But to benefit fully from this, I (we) must believe that these unseen, countervailing, balancing forces will emerge, a faith that the plane will indeed hold together once it starts going through the chop. How to have an accurate view of reality given the terrible things that do happen?
Planes take us to places in unprecedented safety and comfort yet, sometimes, a suicidal pilot locks themselves into a cabin and drives them into a mountain. Think statistically, is the answer, but our emotional mind doesn’t think like that and an emotional mind that is saturated in alarming information most certainly does not. That’s one of the reasons I value thoughtful analysis.
Over time, I’ve accumulated habits to keep my mind as calm as it can be. It’s now a long list including sleep, exercise, meditation, no alcohol, laughing a lot with my wife and friends, and long walks. In my years remaining, despite the darkness that sometimes envelops us, I want to be more confident, rather than less, on things working out.
In terms of investments, the big thing to bet on is that corporations will continue, over time, to make money, which means putting more of mine in stocks. For me, 50% of my money in stocks is a big number. But as you can see below, corporate profits have soared, despite vicious declines in 2008 and 2020 and, further back, the Great Depression.
By the way, I can see the power of faith in a good outcome in real-time with this Substack. I started this as an experiment, not sure anyone would read it. Yet, it’s attracted thousands of subscribers and I have learned many things from them. I took a risk and you all, by reading, reward me.
I am a fan of a free press. I am also a fan of economic creative destruction and the media is in the eye of that storm right now. That I can write this Substack, get my weather from a phone and Meta and Google dominate advertising tells you the old media world that once controlled the news, weather, and advertising is under attack, its protective moat pierced.
I was initially wary of writing about the demise of the MSM because it’s a topic that cranks love. But watching The New York Times report on several issues I know intimately (adoption, Russia) and, more recently, Bridgewater, is leading me to question everything in the paper, which I know may sound extreme to some.
I worked at Bridgewater for many years and know the research process and clients well. Full disclosure: the author of the new expose on the company, excerpted in the Times, wrote me when I left Bridgewater and asked me for information. I declined.
The Times ran the excerpt under the headline “How does the world’s largest hedge fund really make its money.” The article asked why “the biggest hedge fund didn’t seem to be much of a Wall Street player” and then listed several people who suspected something nefarious afoot. About 15 paragraphs later, the Times declared “Bridgewater was not a Ponzi scheme.”
The innuendo was that Bridgewater doesn’t leave a market footprint because it isn’t taking real market risk and is, therefore, maybe even a fraud. Despite the Times explicitly saying Bridgewater isn’t a Ponzi scheme, the reader comments reveal they got the hint.“Bernie Madoff was a bumbling amateur compared to this guy,” wrote the reader “mcomfort.”
The article is preposterous. Not a single client, the people who invested billions in Bridgewater, are interviewed. No one forces them to invest. They chose to do so and spent hours probing the firm and the investment process, as did regulators.