EXECUTIVE INSIGHTS
Michael A. J. Farrel
Chairman, Chief Executive Officer and President
First Quarter 2012: Too Much of a Good Thing
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Most humans are uncomfortable in silence. To avoid it, modern humans subject themselves to constant stimulation, mostly in the form of information. We used to simply read a few newspapers each day or watch TV. Now we are bombarded with emails, texts, blog posts, newsletters, tweets, Internet news outlets and a cable TV channel for every possible purpose.
Markets efficiently decipher all this information – or so it’s believed. Regulators and policy makers are also privy to the same, if not more, data in their quest to provide the guideposts of commerce. When we started as an investment team back in 1991, the internet was still a gleam in Al Gore’s mind and fax machines were still the norm, but we thought we had all of the information we needed to manage our portfolios. I reminisce simply to ask the question: Has all this information made us smarter?
In 2000, the Tech Stock bubble was in full deflation mode, but if you think about the information preceding the burst you will recall that Alan Greenspan’s infamous “irrational exuberance” warning was made in 1996. Over the next three-plus years there were countless news articles questioning the validity of the rise in prices and the quality of the IPOs being underwritten and yet many people still had a look of shock when it inevitably came down to earth.
The housing bubble started to deflate in 2006 and a simple news search shows that it, too, had hundreds of articles written about it in the three years prior, stories that called into question the underlying strength of personal incomes to support a home purchase, mortgage structure and availability as well as outright fraud. It wasn’t just news stories that were out there. We were not the only ones talking about the end of the bubble in our 2006 quarterly commentaries “The Goldfish is Dead, Senator” and “The One-Trick Pony.” I also recall attending the Grant’s Interest Rate Observer spring conference in 2007, which preceded the collapse of Bear Stearns, Lehman Brothers and AIG, and listening to a hedge fund manager present an interesting picture of how Wall Street was packaging chicken parts into securities and the rating agencies were stamping them with approval to be sold as steak. His colorful description of ABS CDOs was a “heads-up” on the impending collapse of the debt bubble in 2008 that kicked off the credit crisis. Again, many were surprised not only when it burst, but that there was also a strong link between debt growth and GDP growth.
As we mentioned on our last call, monetary stewards have spanned the spectrum, from Paul Volcker’s days of unannounced policy actions, to Alan Greenspan’s ubiquitous opaque chatter and predictable incremental 25 basis point moves, to now Ben Bernanke not only speaking clearly and telegraphing his actions but also disclosing the thoughts behind his every action. You could say we have a new bubble in information. The Federal Reserve, in a push for transparency, now publishes more detail on the range, central tendencies and inputs into the economic projections of the Board Members and Bank Presidents. The Chairman does interviews and goes on ‘60 Minutes.’ In the past, FOMC meeting minutes were released with a five year lag, then 90 days, then during Greenspan’s reign it went to three weeks. Now Mr. Bernanke gives a press conference following the FOMC meeting. I don’t think the market is any better at managing with all this information; I would argue the enhanced disclosure has only intensified the bubble that follows.
As with any topic, whether it is macro or otherwise, it is up to each market participant
to glean that which is important from all of the information and idle chatter that is out
there. One thought I would offer to anyone who is thinking about these things is to
find a quiet room without a screen and consider the thought that Milton Friedman
popularized, that there is no such thing as a free lunch. It seems to me that there are free
lunches being served by policymakers all over the world. And the same can be said for
companies and businesses that promise returns without fully acknowledging the risks
and the trade-offs of portfolio decisions. The flood of information is its own free lunch.
While I don’t know exactly how the bill for these free lunches will eventually be paid, it
will be paid at some point.
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