Lord, Grant us Chastity and Temperance… Just Not Yet!
Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled with staggering losses. In this context we have noticed the emergence of a new consensus in the form of an invocation we hereby term the Augustine of Hippo Plea.
St. Augustine of Hippo, here seen doing saintly magic in his later years. In his Confessions the Saint admits that as a “wretched young man” he once inserted a phrase into one of his prayers that has become quite famous for the hopeful qualifier attached to it: “Da mihi castitatem et continentiam, sed noli modo.”, read: “Grant me chastity and temperance, but not yet”. At the time the future Saint feared that he might actually get what he wished for. “Timebam enim ne me cito exaudires et cito sanares a morbo concupiscentiae, quem malebam expleri quam extingui”, as he explains (“I was afraid that you might hear me right away and quickly cleanse me of the disease of carnal desire, which I would much rather have explored than expunged”).
A recent example of this consensus we have come across was an interview with Jeffrey Sherman, Deputy Chief Investment Officer at Double Line Capital, Mr. Gundlach’s investment company. It bears the scary click-bait title “It Sure Feels Like 1987”, a comparison numerous people have made over the past year or so, and rightly so (this includes us – in fact, we were probably among the first people pointing out some of the parallels). As an aside, we plan to revisit this particular topic soon in more detail as well.
Mr. Sherman touches upon all the relevant issues in this interview: the rise of quantitative trading strategies and the perception that they may be one of the weak links in the chain, the increase in yields across the curve, the nevertheless soggy performance of the US dollar, the vast expansion in corporate and government debt, the financial strains faced by consumers, the Fed’s tightening bias, the overvaluation of the stock market and the dangers of trend extrapolation, possible investment alternatives to stocks and bonds, you name it. He leaves almost nothing out; as far as we can tell, the only noteworthy omission is the slowdown in money supply growth.
And yet, despite enumerating all these tripwires, one doesn’t come away with a sense of urgency at all. For instance, he mentions a 10 year t-note yield of 4% as potentially posing a problem, while levels close to 3% are still deemed manageable. But how can anyone be sure of this? All we know for certain is that the level of interest rates required to trigger crashes and economic busts has steadily declined over recent decades.
