Issue 7 - If Tomorrow Never Comes

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If Tomorrow Never Comes

' If Tomorrow Never Comes ' was a #1 hit for Garth Brooks in 1989. It was re-released by Ronan Keating in 2002 when it reached #1 again. It is essentially a love song so you may be wondering why it's receiving ' top billing ' in my financial newsletter.

I heard the song on the radio yesterday and for some reason, the title stuck in my brain, on repeat. It struck me that ' If Tomorrow Never Comes ' was a perfect description of the approach taken by our central bankers over the last 3 1/2 decades.

They have managed the economy, based on a presumption that tomorrow would never actually come. A belief that the ' day of reckoning ' would never come and that they could continue ' kicking the can down the road ' without having to deal with any repercussions.

So, how did this economic management approach manifest itself and when did it begin? In the case of the Central Bankers, it started with the arrival of Alan Greenspan in 1987, replacing Paul Volcker as Chairman of the Federal Reserve.

Prior to Greenspan's arrival, G7 central bankers acted in a prudent & responsible manner. They had a real vocation to protect their countries against the evils of high inflation. This was clearly their primary mandate & they took it seriously. They understood that if inflation was properly managed, ' the rest would take care of itself ' in the sense that conditions would be optimal for economic growth & employment. Essentially, they made the mastering of inflation their life's work.

Central bankers of that era also understood the crucial importance of independence. They strongly resisted any pressure from politicians, seeking lower interest rates to enhance their election prospects. The leading figures of this time were Paul Volcker at the Federal Reserve and Dr Hans Tietermeyer at the Deutsche Bundesbank. There were other prominent central bankers, of course, but these two were the ' Leaders of the Pack ', revered and imitated by the others.

These central bankers understood that ' keeping Wall St happy ' was not part of their job description. They also had a strong sense of risk management and the importance of their regulatory role. In terms of their relationship with the banks & their trading rooms, they saw themselves in the role of a referee, whose job it was to make sure that the ' players on the pitch ' respected the rules and operated accordingly. Volcker & Tietmeyer also knew that it was not part of their job to be popular. In fact, if they did their job well, they would often be unpopular. They also recognized that the natural ' ebb & flow ' of the economy meant that recessions would occur every so often and that this was not something to avoid but rather an issue to be managed in a manner that would leave the economy not too heavily damaged.

Lastly, these central bankers believed that monetary policy should essentially be symmetrical ie. that they should add liquidity & ease monetary conditions when the economy was weakening and extract liquidity when the economy was running ' a little too hot ' & inflationary pressures were emerging.

The general impact of these ' prudent & sound ' policies was that, once inflation had been mastered after the inflationary oil shocks of the mid-to-late '70s, the G7 economies did relatively well. There were no asset bubbles & recessions were usually mild and relatively short

This all changed with Greenspan's arrival. Greenspan courted Wall St and pandered to the politicians. He decided that the Fed would be ' The Saviour of the Stock Market '. Any time that the market looked weak, the Fed would cut interest rates or take some other ' easing measure '. This became known as ' The Fed Put '. Once this happened a few times, market traders knew that they could ' buy the dip ' with equanimity, knowing that ' The Fed had their back '.

Greenspan would later describe the rise of the booming stock market as ' irrational exuberance ' but the reality was that it was very rational to keep buying stocks when any market correction would be promptly tackled by the Fed. Greenspan even introduced a ridiculous policy called ' Forward Guidance ' where the Fed would effectively tell Wall St, in advance, what it was going to do, thus allowing the Wall St Traders to front-run all of its trades. And so began the ' Era of the Bubbles '. It started with the stock market rising to ridiculous levels before crashing in 1999 and doing so again, along with the real estate market, before the GFC in 2007 and as we speak, we seem to be reaching the crescendo of the third such bubble, which will likely be the biggest of all. However, the bigger the bubble, the bigger the crash and this is what we are now facing.

People talk about the wealth created but much of this wealth is not real. Wealth based on earnings, cashflow & profits is real. Real money that creates dividend flows & can genuinely enrich stockholders. However, the ' wealth ' emanating from massively overvalued assets is not real. The limited number of people who are smart enough or lucky enough to ' cash out ' do generate wealth but for all of the others, this is merely ' a fragile edifice ' that cannot support itself as it is not backed by sound fundamentals

This is not the only economic damage that can be laid at the feet of the Fed. By creating a ' consequence-free ' market, via the Fed Put, they alerted politicians to the fact that it was no longer essential to be prudent in their taxing & spending policies. They no longer needed to worry about the ' Bond Market Vigilantes ' that had terrorized their predecessors into responsible economic management.

And so began the spending splurge aided & abetted by the tax-cutting spree which created a massive increase in the national debt. The ' symmetry ' of economic management had long been abandoned. It had essentially been asymmetric since 1987, as the Fed responded to every crisis with monetary largesse but never ' took the money back ' when economic conditions recovered. With this kind of approach, the creation of massive bubbles was all but inevitable.

And so here we stand. On the surface, until recently, all seemed ' sweetness & light ' with a roaring stock market, many technological evolutions and an apparently, bright future. But beauty is only skin deep and the fragility that has evolved from reckless policies is becoming more & more apparent. We sit here with the most indebted economy ever, a stock market that looks like it's about to roll over, a completely underfunded pension system, social inequality at an all-time high and a central bank that is pretty much out of bullets.

I started out by referencing the song " If tomorrow never comes " to describe the philosophy operated by the central bankers & the politicians that they enabled and I will finish by moving from Garth Brooks to Bryan Ferry and his 1977 hit " This is Tomorrow Calling "

In spite of Garth Brooks' worries, Tomorrow has come. It's here. It's calling us now. It's the ' Day of Reckoning '. We have been ' stealing from tomorrow ' for decades, spending beyond our means, leaving our children & grandchildren ' up to their neck in debt 'and it looks like ' payback time ' is just around the corner.

BTW - I just ordered this book. If you would like the long detailed version of what I just elaborated and articulated in a far superior manner than I could ever do, buy it too. It's just been published and looks like a very good read. Here's a summary from the WSJ

https://www.wsj.com/articles/the-lords-of-easy-money-review-an-inflated-sense-of-ability-11642028907

Life Lesson # 7 - 1974 - Go with your gut !

I went to secondary school ( or High School, as you call it in the U.S ) in 1971. The school was a modest local public school, run by Christian Brothers. I was bright at school but rather inclined to get myself into trouble, from time to time, due to my fondness for a prank & a joke and spending too much time, making smart remarks, at the back of the class. ( Well, at least I thought they were smart ! ). My good exam results never prevented the teachers from giving my mother & father a hard time at the bi-annual parent-teacher meetings

At the start of my penultimate year, we had a session with the career guidance teacher, to advise us on our choice of subjects for the final 2 years. This was an important decision as it would impact what college degree we could go for or what career direction we could take.

Although neither of my parents had a financial background, I seemed to like financial topics or maybe I just liked money, given that we didn't have much of it. So, when it came to the choice of subjects, the career guidance teacher's standard recommendation was to select geography, a science subject & a business subject. I think it was maybe the start of my contrarian instincts as I dropped geography, physics & biology and chose Accounting, Economics & Business Organisation. Nobody in our school had ever taken THREE business subjects before but I knew what I wanted so I never felt the need to ' hedge my bets,' as the teacher had recommended.

As I happened, I never went to college. At our time, only about 20% of kids went to college and they tended to be the ones with money. Nevertheless, my business subjects served me well. When I joined the Bank of Ireland, after leaving school, my business subjects enabled me to get a number of exemptions for the various bank exams, enabling me to complete them in record time. Similarly, when I then went to study for a CPA Accounting qualification, by night, I had a huge start, over my fellow students ( who had all ' hedged their bets ' ) and passed the CPA exams, a year ahead of schedule.

I was working in the international payments dept of the bank but as I was studying for my CPA, I went to the Head of HR and asked if they could transfer me to the Accounting Dept or the Financial Control Dept. I reckoned that such a move would help me in my studies & it would also be more beneficial for the bank to have future CPA's in that role than people without any specific finance background.

Needless to say, the Head of HR didn't see things my way and declined my request without providing any explanation. That was good enough for me and I immediately began searching for a new job. Three months later, I joined KBC bank ( then called IIB ) as a trainee trader and a whole new career opened up for me.

So what did I learn?

# I learned that backing your own judgment is a good thing. # I learned that' diversification for diversification's sake ' is not necessarily a smart strategy. ( Warren Buffett was later to opine similarly, with respect to investment ). # I learned that doing something different from everybody else, is absolutely fine so long as you are good with it.

All of these concepts served me well, later on in life and especially when it came to some major investment decisions, which would end up transforming my life financially