My brain is racing. I have too much on my mind. Money, money, money. No, not my own money, which I spend so fast it’s like a fast breeder reactor. Except that those reactors somehow make more fuel and I don’t. Well, that metaphor won’t work. Let’s try another. No, not my money, which is my usual shame because my mother would die if she saw how fast I spent it, like a drunken sailor coming off a nuclear submarine. (There is that nuclear analogy.) But the nation’s money. That’s what I am worried about.
The Fed Chair, Dr. Yellen, has advised that she plans to see the short term Fed borrowing rate rise from .25 percent to 2.5 percent within about two years. This would mark the end of a fantastically long period of the Fed keeping interest rates at essentially zero.
My mind goes back to the great economist, Edward F. Denison, of the Committee for Economic Development. Dr. Denison wisely told my Pop that if an interest rate goes from one percent to two percent, that’s not a rise of one percent. That’s a rise of 100%.
So, Mrs. Yellen apparently has in mind a rise of roughly 1,000 percent for the short term rate. That means a mortgage’s payments (assuming an interest-only mortgage just for laughs) would, on a $500,000 chateau mortgage, go from roughly $104 per month to roughly $1,042 per month. That is a big change. The housing bubble that is going on in much of the country would be affected in a serious way. Prices of homes would go down, down, down.
Then we have the issue of the stock market. At this point, bonds pay so little interest that investors chase stocks for modest dividends and for capital gains instead of coupon yield. This has propelled stocks into the heavens.
No problem for me. I love stocks. But when bonds have meaningful coupons, stocks lose much of their luster. Look out below. Stocks are fantastically high as a multiple of yield by almost any measure. So… when Mrs. Yellen throws cold water on stocks and turns the light from green to red for housing, there is going to be some shrieking.
Mind you, it has to happen. Even the Great and Powerful Fed cannot just keep blowing up this asset bubble forever. Interest rates have to rise. That’s inevitable. And as many smart economists note, better that it happen in some managed way than that the whole thing simply explode because of some unexpected event like another major sovereign default. But these immense financial events can never be totally managed. It is like a nuclear reaction. It can get out of control once the rods are pulled out. (Nuclear is on my mind.)
It will all be fine in the long run. But expect some turbulence upon landing. That’s all. Make sure your seat belt is fastened.
And if you missed this asset bubble, don’t feel bad. So did most other Americans, who were simply too scared after 2008 to pile into equities. We all make mistakes. Man is a mistake-making animal, as I often say.
But don’t miss it next time. Get a good financial advisor and get yourself into the market, little by little over many long years.
This reminds me of something: The Wolf of Wall Street. Super great movie. A work of genius. Genuine brilliance. Way too dirty but a work of genius. However, it gives a wildly untrue portrait of Wall Street. The first firm where the villain/hero works, portrayed as a vile snake pit of mistreatment of investors, was L.F. Rothschild. Just by total chance, my old Dad was on the board of directors of L.F. Rothschild. The firm he described to me was squeaky clean and totally above board. I certainly trust him and his recollections.
But come to think of it, I don’t believe I have ever seen a movie about Wall Street that did not show the brokers as anything but crooks. And certainly there has been some truth to that in some cases.
By and large, though, Wall Street treats Mom and Pop investors well. It is through the big wire houses and the big on-line firms that the ordinary American can dip his bread into the gushing gravy river of corporate profits. (That’s a favorite Phil DeMuth analogy.) It is through Wall Street that the ordinary Joe and Jane can amass savings sufficient to get through retirement into eternity. Those brokers that we see in plays and movies and on TV as criminals and swindlers have — in my more than 50 years as an investor — proved careful, trustworthy, and indispensable. I trust them and have rarely been disappointed. I wonder why Hollywood hates them so much. Maybe memories from their great grandparents of con men in the twenties. Maybe swindlers they know in Hollywood. Maybe it’s just the old dramatists’ wish to portray the great and the rich as corrupt. It makes us little people feel morally better than our economic betters.
Well, anyway. Enough of that. Let’s just say that there are going to be some big changes in asset values sooner or later and let’s also say that your broker is not your enemy in almost all cases.
So, today was hot. Alex and I slept very late. Then I went for a walk along the beach with my pals, the very good looking Visser family. Then, off on the Cobalt for lunch at Bottle Bay. Then a short stop at a restaurant on the water next to The Long Bridge. The restaurant is called 41 South. It was charming but hot.
For some reason, I felt as if I were burning up. Then I felt dazed with fatigue. I really cannot spend much time in the sun. Maybe I am a vampire without knowing it.
At lunch I sat between wifey and Megan Visser, the staggeringly beautiful daughter of Mike and Nancy Visser. (Nancy is beautiful, too, and so is Megan’s sister, Payton. The brothers and the fathers are great looking, too.) Megan is going to film school. She is also working on important work in a real estate office, works for her father, Mike, a brilliant videographer, and also does editing classes at her film school. Plus she is vivacious, witty and charming. I wager she will go very far.
I am going to watch a film noir classic called His Kind of Woman with the great Bob Mitchum, the super Jane Russell, and the hilarious Vincent Price actually playing a straight big game hunter. It is set in a resort in Mexico but it sure looks like Palm Springs to me. Makes me miss our home in Rancho Mirage. I’ll go there soon and send pictures. I do not deserve that house. Maybe by then the drought will have killed the golf course. Scary. Then that house will be a freak.
I miss my dog, too. My wife is perfect but I miss my dog. She is more than perfect. Nothing compares with waking in the early morning to see that furry face next to mine. Nothing. I have to go now.
Never mind. No, I don’t. I have to tell you about the trains. This area is crisscrossed with the mighty tracks and trains of the BNSF. The whole town throbs with their power. As we passed under the main railroad bridge over the mouth of the Pendoreille River and I marveled at an immense train pulled by the unstoppable power of Mr. Buffett’s orange and yellow diesels, it hit me.
The train is the metal, kinetic embodiment of America’s economic power, its genius, its limitless potential and actual. The train is a living vein of the mighty body that is American prosperity. That train is as close as anyone will ever get to seeing commerce incarnate. And one man, one stupendously daring and careful man, basically owns that train and he does not put anyone in a gulag or a prison or on a scaffold. He does it — at this point — for money and for joy. Real commerce, real freedom, real power from the mines and the ranches and the factories and farms, and it all comes together as a train of money and joy. Just like America.
I love those trains.