And Now for Something Completely Different; Some Recommended Reading with Perspective on U.S. Economic and Financial Conditions
In 5,000 years of recorded history, there isn’t another known instance of negative interest rates. Now we’ve got about $13 trillion of securities with negative interest rates around the world. So far, that hasn’t happened in the United States, but don’t assume it won’t when we finally get a recession.
Money is a commodity. It has a price just like oil, gold, wheat or any other commodity. When the market isn’t allowed to set the price, bad things happen- misallocation of capital basically. You know this if you’ve tried to save money and found that the only way to get a return above inflation is to make investments you’d really prefer not to make (How many of you remember 6% CDs?).
You know it if you’re a pension fund or an insurance company trying to earn enough money (without ridiculous risk) to meet your obligations. You know it if you’re a so-called zombie company that’s still in business only because desperate investors are willing to lend you money at really low rates with none of the usual covenants that would in the past have protected them. Here’s a link to what goes on as that happens.
You know it if you’re a company executive borrowing cheap money to buy back stock at an unprecedented rate to keep your share price up. You know it if you’d like to retire but haven’t because you can’t earn enough from your savings (if you have any) to pay the bills.
Do negative interest rates somehow mean that “This Time Is Different” since we’ve never had them before? I strongly suggest again that you read the book of the same name. I don’t think this time is different. The business cycle still exists. The unprecedented, profligate, irrational, continuing use of debt to try and fix a debt caused crisis has postponed and, for all I know can continue to push into the future, the regression to the mean that the business cycle always bring. But it can’t eliminate it.
So just for this article, no analysis of a public company filing. No evaluation of the latest trend in retail. No talk of consolidation in active outdoor or who our customers are. I want to point you at a discussion some really smart people are having about the economy, conditions in the country, and how things might work out. Even though not industry specific, it’s very relevant to your company’s longer-term strategy. It’s also relevant to you and your family.
Ray Dalio founded Bridgewater, a very successful hedge fund. He’s pretty rich. And pretty smart. In the past I’ve pointed you to his 30 minute explanation of cycles called “How the Economic Machine Works.”
In April, he published a couple of essays entitled “Why and How Capitalism Needs to be Reformed.” If you do nothing else, please work your way through Part I where he outlines, in both words and simple charts, the circumstances the United States finds itself in. I imagine most of you have seen at least part of this information. I have. But I’ve never seen it all pulled together so well in so short a space.
Ray goes on to talk about MMT (Modern Monetary Theory- basically a rationalization for why we can spend all the money we want, build up all the debt we want, and keep interest rates at zero and it won’t matter). He recognizes all the problems with it, but believes that when the next recession hits, we’ll get some form of it and, in fact, may have no choice.
Another bright gentleman named John Mauldin, whom I have met but can’t say I know, saw Ray’s posts and began what turned into six short articles on Ray’s ideas. The first one was called, “Ray Dalio Is Kinda, Sorta, Really Wrong.”
Here’s a link on John Mauldin’s web site to the last article in the series. It in turn contains links to Ray’s essays, John’s responses, and then a response Ray published in Forbes.
I think enough of John Mauldin to actually pay for some his organization’s publications. Not many people can say that.
If you read through this exchange, you won’t find “the answer.” You will find a cordial, respectful, dispassionate discussion (we need more of those) that offers different perspectives and great information that’s credible and some of which you haven’t seen but need to.
It is, I’m sure, relevant to your family and your business and worth some of your time.