Back in 2009, I attended the annual meeting of Berkshire Hathaway, the conglomerate controlled by famed investor Warren Buffett. That year’s meeting held special attraction, taking place just weeks after the stock market hit its low during the financial crisis. Buffett served that day as investors’ North Star.
Prior to his much anticipated Q&A session, Buffett made a short presentation to a crowd of over 40,000 worried shareholders. His clear mission that morning was to calm and teach.
Buffett, in full professorial mode, highlighted a trade he made at the crisis-induced market low. In the midst of market panic, he had managed to sell a US government bond at a price that produced a negative yield for the buyer. Obviously, stuffing money under their mattress was just not a practical alternative.
Buffett’s lesson was clear. Investors had temporarily gone insane and rational behavior always returns.
Seven years have passed since his lecture and now trillions of dollars of government bonds across the globe trade at negative yields. Perversely, the US 10-year bond is now seen as attractive with its mouth-watering, positive yield of 1.5%.
What was once abnormal has become normal. Justifications abound.
Central banks will hold rates low for much longer. Inflation is dead. Global growth is slow. As long as these conditions hold – and the cascade of consensus thinking says they will – yields will stay low or go lower.
The panicked investor Buffett once mocked is no longer. Interest rates at these absurd levels are now accepted as normal. There is no panic, but rather a cold calm about it all.
As the internet would transform the economy during the tech-stock bubble and the Fed-induced low interest rates justified ever-rising house prices and a credit bubble, what assumptions have we adopted as certain today?
Has Japan’s economic disease – following the bursting of their own credit bubble and marked by economic stagnation, demographic decline, persistent deflation and, yes, aggressive zero interest rate monetary policy – become investors’ new North Star?
The habit of real-time diagnosis is often a fool’s game in investing. Only in the aftermath of a burst bubble does a consensus narrative form.
Today, a new, dangerous consensus may be forming. With the justification and acceptance of insanely low interest rates across the globe – creating massive problems in meeting society’s future needs, such as pension and other retirement obligations – stocks are increasingly seen as the only alternative.
In the midst of a bubble, anchoring yourself to what you know can do wonders. While the chase for investment returns never ends, what I know is the desperate reach for returns never ends well.
