July 14, 2014

Where Were They Going?

Anyone can see the road that they walk on is paved in gold,

and its always summer they’ll never get cold,

they’ll never get hungry, they’ll never get old and grey.

You can see their shadows wandering off somewhere,

they won’t make it home, they really don’t care.

They wanted the highway, they’re happier there today.

”The Way”, (c) Fastball, Hollywood Records 1998.


In 1995, Tony Scalzo, Miles Zuniga and Joey Shuffield formed Fastball amidst the thriving local music scene in Austin, Texas, quickly creating a regional buzz which led to a recording contract. In 1996, their first album, “Make Your Mama Proud” received a lukewarm response, but their second album “All The Pain Money Can Buy” went platinum and was nominated for a Grammy, powered by their first hit “The Way”.

Scalzo was inspired to write the song after reading the account of an elderly couple (one with Alzheimers, one recovering from brain surgery) who had disappeared en route to a local festival and were discovered dead rather sadly a fortnight later at the bottom of a ravine in Arkansas, hundreds of miles off course. Scalzo, rather fancifully, chose to image that they had begun to reminisce and had decided to become ethereal beings on a permanent romantic road trip, answering the song’s question, “Where were they going without ever knowing the way?” In the context of this song, the fact that they didn’t know where they were going is, of course, irrelevant as it was the journey that was important rather than the destination.

Sadly, in the world of finance and economics, markets and and central banks, the destination is an extremely important concept,
and unfortunately one in which we feel global central banks, led by the Federal Reserve, have conveniently forgotten.

We continue to build on our theme of either deliberate (concerning) or accidental (scary) asset price bubbles caused by the artificially low interest rates maintained by the world’s central banks.. A glance back through our recent newsletters this year titles “Jenga”, “The Smartest Guys In The Room”, “CAPE Fear” and “Mind The Gap” all carry the same message – don’t confuse the Price of an asset (eg equities,, bonds, homes) with it’sValue, in other words don’t take a dizzyingly upward move in the price of an asset as a signal that it has suddenly increased dramatically in value. In fact, exclusively using price as a method to determine value is a key reason why bubbles form – moreover, it is why the upward price “spike” tends to be symmetrical, (an overlay of Dow Jones 1929, tech bubble 2000 etc looks like the same chart), because “price=value” is of course dangerously double sided (ie. when all you look at is price, a falling price promotes panic selling), particularly when you are right up in rarefied air with no underpinning, having left “Fundamentals” behind quite some time ago.

Moreover, the tendency of humans to extrapolate current conditions far out in the future always proves to be fallible. With the VIX (Fear Gauge) at multi-year lows the temptation is to be suckered into thinking that conditions will always be this benign, stocks always go up, businesses will always make money, and the central banks have all the answers.

Ironically, with reference to the lyrics, in fact the road that the central banks walk on is not paved with gold at all, it is paved with fiat (paper) currency – which is being manipulated and debased, causing a multitude of unintended consequences. Don’t let them be your guide – establish asset values from a fundamental perspective.

We’ll leave it to Seth Klarman, who has graced these pages before:

“The government, the ultimate short-term player, cannot withstand much pain in the economy or the financial markets…bailouts and rescues are likely…the government will take enormous risks in such interventions, particularly if the expenses can be conveniently deferred…”

Respect the Cycle

One of the first really valuable lessons I learned in my investment career was to respect the market cycle. One of my seniors at Macquarie Bank always used to say “the cycle lives on!” He was right of course. It was the heady days of 2006/07 when the mood amongst [Read More]

August 14, 2014