What Goes Up, Can Go Down

Here we go again. Somehow, someway, we forget the maxim that has survived the test of time: What goes up, can go down.

In the first decade of this century, many of us thought, despite overwhelming historical evidence to the contrary, that real estate values could only go up. Millions of foreclosures and bankruptcies later, we discovered we were wrong. We had to relearn the lesson the hard way. But it seems we didn’t learn the lesson at all.

I read in this morning’s newspaper how people are spending more and even dipping into their savings because they feel wealthier due to rising stock and real estate prices. Indeed, the savings rate has fallen of late, just when interest rates are showing the urge to rise. Bad timing.

People are borrowing more money to buy stocks. And they’re taking expensive vacations beyond their means. And going deeper into debt to pay for colleges they can’t afford. And buying more house than they need.

An overwhelming majority of investors think the stock market will be higher in six months. They might be right. But they might be wrong. Are they prepared to be wrong? Many aren’t.

Reason would dictate you’d sock more money away during the good times — for rainy days, college, retirement, or simply to have a safety net. But by now it’s pretty obvious many of us live for today and aren’t all that concerned about tomorrow.

History tells us it’s highly likely, at some point, the stock market will fall quite a bit from its current lofty levels. It could be tomorrow. It could take longer. But it surely will fall.

There is a good chance real estate values, at least in certain areas, will fall, too.

If any of these inflated values are sustainable, it will be in only nominal terms, that is, without taking inflation or currency values into account. People are acting that neither is a significant risk. I fear they’ll be mistaken on one or both counts. Indeed, it’s hard to imagine any scenario that sees a stronger dollar in the long term. And we know inflation and interest rates are already below historical norms, suggesting the risk to the upside is not immaterial.

The timing and sequence of events are impossible to predict. A material decline, in real terms, in the value of equities and real estate is easy to predict.

But either way, it’s only a prediction. And that’s the point: the future is unknown. All we can know for sure is there will be bumps in the road. At some point, what went up will go down.

Warren Buffett, the most successful investor in the world in my lifetime, is famous for saying, “You only find out who is swimming naked when the tide goes out.”

When asset values fall, or inflation rises, or the dollar falls, or interest rates rise, as these things will most surely do at some point, we’ll discover who was swimming naked.

Save yourself the embarrassment, Vera. Act prudently. Never assume the sun will shine forever just because it’s shining today. And don’t forget life’s hard lessons, particularly this one: What goes up, can go down. And try not to be surprised or unprepared when it does.

P.S. 2/12/18 – This cartoon seemed appropriate.

Rethinking Hypocrisy

My earliest recollection of hypocrisy was in church. It was there I sat and listened to the pious prayers of my father. The distinction between the man who spoke those words and the man I knew as my father was striking in the mind of his son. The son never felt loved by this man. The son experienced the coldness, the harshness, the anger. It was not all bad, of course; there were good times. But it was nothing like the love and compassion preached in the church; spoken of in the prayers. I learned what hypocrisy felt like. And I didn’t like it, not one bit.

As I matured, I realized that hypocrisy had found a home among most if not all churchgoers. They claimed to believe one thing and then lived their lives as if they believed something else. There was so much pretending.

Along the way, I realized I, too, was a hypocrite. I always fell short of the values and principles I espoused. Walking the talk was so damn hard.

And so I was hard on myself. And on others. And found I longed for authenticity, both in myself and others. I think I even desired it more than goodness.

At the same time, I recognized that authenticity could be costly. I came to realize the strong incentives for hypocrisy in the world. And came to understand just how much incentives matter. It made me less judgmental, but I still loathed hypocrisy. I saw no redeeming virtue in it. In hindsight, it’s hard to believe how naive I was.

In time, I came to accept that hypocrisy was part of our nature. Ralph Waldo Emerson wrote, “Every man alone is sincere. At the entrance of a second person, hypocrisy begins.” Every man. Perhaps it’s no one’s fault.

Something I read recently, authored by Paul Craig Roberts, caused me to question further whether I had been too hard on hypocrisy — on myself and others. Mr. Roberts wrote:

There is a vast difference between proclaiming moral principles that one might fail to live up to and proclaiming immoral principles that are all too easy to keep.

We live in an era in which the proclamation of immoral principles is commonplace. Indeed, we even elected an immoral man to be our president. I’ve tried to find some redeeming virtue in the man. But I can’t.

But it’s not only him. It’s everywhere around us. In the corporate world, immorality thrives under cover of the principle of shareholder value, which supposedly cleanses all unclean deeds. But you find it in the nonprofit world, too. And among nations. And among religious folk. Especially religious folk.

President Trump makes my dad look really good. Yes, my father was a hypocrite. Probably no worse than me or most others, but a hypocrite nonetheless.

However, he was a man who proclaimed moral principles. And who lived up to most of them, most of the time. He didn’t love me well, but he taught me well. And probably did the best he could do.

I could have done worse. Much worse. I could have been reared by people who proclaimed immoral principles. By people whose sins dwarfed the sin of hypocrisy.

I was fortunate.

I used to think there weren’t many things worse than hypocrisy. I suppose it’s just one of many things I thought I knew that proved to be untrue.

The Newest War

I think yesterday will mark the beginning of our newest war. Yesterday is the day the Trump Administration announced new stiff tariffs on solar cell imports and washing machines. China and South Korea will not be pleased. Nor will American consumers, who will end up paying more for electricity and home appliances. Some people will be pleased though. They include stockholders in Whirlpool, domestic solar cell producers (if there are any), and some people who will end up being hired by Whirlpool, although their numbers likely will be dwarfed by the number who lose their jobs in the solar industry. In short, there will be some winners and some losers in the short term. The long term is a different matter.

We’ve been down this path before so we have some idea what to expect. In fact, a lot of what’s happening these days is reminiscent of the years leading up to, and the early days of, the Great Depression. Then, the nation decided to pull back from its open border policies, both in commerce and immigration. It seemed like a good idea at the time, at least to some people. But as we know, it didn’t turn out so well.

That’s not surprising. For when one nation takes actions that hurt other nations, it’s reasonable and predictable to expect retaliatory measures. And that’s why I suspect yesterday marked the beginning of the newest war: it could well be the day the 21st-century trade wars commenced.

The problem with trade wars isn’t only economic. The larger problem is that they often lead to military wars. And casualties. And that’s exactly where I fear we’re headed. I will be surprised if we don’t find ourselves at war with China in my lifetime. And perhaps Russia, too.

Meanwhile, our stock market is looking a lot like the market in the 1920s. And we know what happened in 1929. I’m not predicting a repeat performance, but it’s safe to say there are risks that are being minimized or ignored. And that’s never a good thing.

Given extraordinarily high asset values and a highly leveraged corporate sector, along with unprecedented peacetime sovereign debt levels, it’s easy to imagine an eventual outcome that entails a lot of financial carnage, especially against the backdrop of economic inequality the likes of which we haven’t seen since the 1920s. Yet we don’t seem to be concerned.

The nation chose to go in a belligerent, self-centered, tribalistic direction in the last election. It was a foolish decision, but it was the decision we made. And now we’re seeing it play out.

The worst is yet to come. Nonetheless, I suspect most of us will come through it just fine. But some of us won’t. And it’s hard to know today who the winners and losers will be. We just have to keep our ears to the ground and be quick to react, I suppose.

We’ll do our best for you, Vera. And for your parents and your uncle Andrew. I suppose it’s my main mission in life now. I consider myself fortunate to have all of you in my life. Fortunate indeed.

Tired of the Games

Naval Ravikant is always worth listening to in my opinion. I recommend checking out his recent Periscope talk on Twitter.

Naval is a techie but also a modern-day philosopher. He said something in this talk that was timely for me. He said he’s “tired of the games.” That’s how I feel.

Consequently, he’s living life one day at a time. For people like me, that isn’t always easy. We’re goal oriented. We respond to challenges. So getting up without goals, and simply living in the presence, can be disconcerting at times. Yet I am so tired of the games and, at this point, have no desire to return to the games. The pursuit of money and achievement is no longer sufficient motivation.

I’m reminded of this when I’m speaking with clients who are consumed by their work: increasing prices, improving efficiency, improving margins — often through rationalizing (a fancy word for laying off people). I hate the way people talk about reducing their workforce. The lack of humanity is so profound. I recoil at what the pursuit of money and status has done to us.

More fundamentally, though, I’m not looking for more things to do. Yet I’m very much stuck in the future. It’s hard for me to live in the presence.

Yet that’s where I want to be. Need to be. It’s where I can find the deepest happiest. But it can be boring at times. Yet the alternative no longer holds appeal.

I’m tired of the games.

Believing in the Impossible

I’m intrigued by people’s ability to believe in the impossible. And I take it as a warning to myself, for if others can believe in the impossible, then there’s every reason to think I can too. Which gives me pause.

In my lifetime, I suppose there have been many examples of this phenomenon playing out in real life. But lately my focus is the investment world. That’s where I spend a considerable amount of time and energy.

In the late 1990s, people who bought stocks believed in the impossible. They drove prices up to astronomical levels — far behind anything that could be supported by reasonable assumptions or objective data. I remember at the time thinking, this is crazy. Yet it continued, far longer than some people thought possible. Until it stopped. And the inevitable bursting of the bubble.

Some stocks still aren’t back to their highs from that era, eighteen years later. And quite a few companies that were highly valued in 2000 aren’t even in existence today. A lot of money was lost. Many household balance sheets and retirements were gutted.

Less than ten years later, we saw it unfold again. It was hard to believe. Hadn’t we learned anything? Apparently not.

Real estate values went through the roof. People were getting mortgages far beyond their ability to repay. Speculators were flipping properties like pancakes. Until it stopped. Until the bubble burst.

Bankruptcies ensued. Evictions spiked. Many homeowners and investors lost a lot of money. Some homeowners are still underwater (i.e., no equity in their homes). Banks had to be rescued.

And now, a decade later, we’re at it again, only this time it’s broader. It’s not only real estate. Or stocks.

We’re already seeing the worm turn in commercial real estate in certain areas and, to a lesser extent, residential real estate in certain markets. I suspect we’ll see much broader reversals before it’s all said and done.

In the stock market, some equities are priced at levels that could never be justified by expected returns. It’s only a matter of time before the correction wipes out massive amounts of paper gains, except, for some, they aren’t merely paper gains.

Many people have borrowed money to buy stocks. They’ll be on the hook for those debts irrespective of what the market does.

Others bought into the market late, paying high prices that they may not see again for a very long time, if ever. Paper losses have a way of becoming real losses.

Meanwhile, the latest fad, crypto currencies, quickly morphed into the mania phase last year. It’s hard to know exactly how this will play out, but it’s easy to see that quite a few people will lose a lot of money — mainly, people who believe in the impossible.

Belief in the impossible isn’t restricted to investment decisions of course. It plays out in every area of life, from health and work to politics and religion.

I suppose it’s sometimes easier to believe in the impossible than to face the reality. At the very least, it can sometimes put off the day of reckoning. It also can interject excitement into otherwise mundane and boring lives.

Some people say it’s good we have the capacity to believe in the impossible. The hope of miracles is beneficial, they say. I’m not so sure. It seems to leave a lot of carnage in its wake.

I like to delve into the reasons for our motivations. What causes us to believe in the impossible? What’s our motivations? What propels us to take risks that, from an objective standpoint, seem ridiculous?

More importantly, how and when am I susceptible to the same motivations? How can I avoid falling prey to the forces that prop up the world of make-believe?

From an investment standpoint, how can I profit from the mistakes of others? There are always two sides to every transaction. How can I ensure I’m on the right side of the trade?

There’s a lot to consider. The answers aren’t always easy to spot. Yet the temptations are always alluring, especially when the masses follow.

It’s in our nature to find security in the herd. Being strong enough to leave the herd when the herd has gone mad isn’t as easy as it sounds.

Yet that’s what we have to do at certain times, Vera. We have to be strong enough, and smart enough, to recognize the madness. To remain grounded in reality and not allow ourselves to be swept up by the false promises of the impossible. To be able to distinguish between hard challenges and the unobtainable. To be able to tell the difference between the impossible and the unknown.

The differences aren’t always apparent. And therein lies the challenge.

I Must Get to Know Him Better

My inclination is to avoid people I don’t like. The reasons should be obvious.

Sometimes I haven’t had a choice, though. Sometimes, the person was a boss. Or a merchant or contractor with whom I had to interact. Sometimes, they were classmates or teachers. Or neighbors. Or clients. In other words, sometimes I was compelled to deal with people I didn’t like, whether I liked it or not.

Usually, I tried to make the best of a bad situation. Sometimes, I didn’t do a very good job of that.

It’s easy to be passive-aggressive in such situations. It’s also usually self-destructive.

Recently I came across a statement of Abraham Lincoln that cast the situation in a new light. Lincoln had this to say about unlikable people:

I don’t like that man. I must get to know him better.

“I must get to know him better.”

I’m thinking that’s probably pretty good advice.

Fanning the Flames of Destruction

The president of the United States thinks some countries are “shitholes.” And, to no one’s surprise, they happen to be populated by people with dark skin.

In yesterday’s post, I debated whether America was burning, much like Rome — whether its best days were ahead of it, or behind it. Today the debate seems silly.

Leaders of great nations don’t talk the way America’s president talks.

It’s unfortunate, but it is what it is. There is more to life than the status or standards (of living and morality) of one’s country of residence. Things like family and friends matter more. Far more.

I suspect America was never as great as some people believe and isn’t nearly as bad today as some people believe. As is often the case, truth is probably hiding somewhere in the middle, out of sight.

We do know that such condescension is not new. “Those places are filled with barbarians.” “Savages.” “Illiterates.” So-called great nations have never had any trouble coming up with pejorative terms to describe people of less powerful and less wealthy places. Just add “shithole” to the list.

The danger inherent in condescension is that it always comes back to bite you in the ass. Ironic, isn’t it?

Even Rome Wasn’t Burnt In a Day

Conservative author and pundit Jonah Goldberg recently reminded us that “even Rome wasn’t burnt in a day.” He was talking about the United States. And what he sees as our country’s decline.

Sven Henrich was even more pointed:

If you ever wanted to understand how the all powerful Roman empire ended up destroying itself, just watch the news in 2017.

More recently, James Traub authored an article in Foreign Policy titled “The United States of America Is Decadent and Depraved,” wherein he observed that:

Decadence is usually understood as an irreversible condition — the last stage before collapse. … But as American decadence is distinctive, perhaps America’s fate may be, too.

At the close of the year, in an interview with Pulitzer Prize winning journalist Chris Hedges, Ralph Nader delivered a stinging critique of the current state of America, in a column titled The Visionless Society.

I don’t know if America is in decline. But I have to admit: it feels like Messrs. Goldberg, Henrich, Traub and Nader could be right.

Mainly, I feel this way because of 11 specific factors.  Continue reading

Just the Facts

When I was a kid, I used to watch a show called Dragnet. It was a police show starring Jack Webb as Sergeant Joe Friday, who coined the phrase “just the facts ma’am” when interrogating female informants. I think Sergeant Friday’s admonition could benefit us today.

We live in an era of spin and propaganda. I think there is so much of it because it works so well. I like to believe, notwithstanding all the evidence to the contrary, that humans are rational beings. Yet despite what I like to believe, I know we’re highly susceptible to manipulation. I know that propaganda can be highly effective. I know we believe certain things not because the facts (the evidence) suggest them to be true, but merely because we want them to be true.

I’m constantly reminded of this reality by our president. I doubt a week goes by — indeed, possibly not even a day — in which he doesn’t say something that isn’t true. Some people and organizations chronicle all his lies. I have no interest in doing so. My concern is broader because it’s clear that the president isn’t the only purveyor of propaganda out there in the world today.

All I’m suggesting is we would be better served by heeding Joe Friday’s admonition and focus ourselves on the facts, if for no other reason than we’d learn more, become better informed and be able to make smarter decisions. And, in the process, avoid a lot of mistakes and bad consequences, not only for ourselves but also for our nation.

Here is just one example of what we’d learn. The president gloats from time to time about the performance of the stock market during his tenure as president. The message is clear: the performance of the stock market has been extraordinary and it’s all because of him. I suspect some people believe it. Not because it’s true, but because they want to believe it.

When one looks at the actual facts versus the propaganda, one learns a couple of things. First, one learns the increase last year wasn’t remarkable. In fact, it was average for a bull market (and, of course, as even the president knows, the bull market began long before he was elected).

Second, we’d learn that the performance of the U.S. stock market last year was pretty mediocre (at best) on relative terms. In fact, the S&P 500 (the standard measure of U.S. stock market performance) came in 33rd. In other words, an American would have made more money by investing in any one of 32 other stock markets last year than if they’d left their money in the U.S. stock market.

You would have made more money by investing in Poland. Argentina. Hong Kong. China. India. Emerging markets generally. (Interestingly, one of the few markets that did worse (Russia and Saudi Arabia) are led by autocrats who apparently have a special place in our president’s heart.)

This is but one example of the false messages that are being peddled day in and day out. And most of them are coming from places other than the White House.

It would be nice to be able to rely on what people in positions of power or authority tell us. But to do so, at least in these times, would be foolish.

Just the facts.

I’ll reach my own conclusions, if you don’t mind. And form my own beliefs. Based on the evidence (facts), not on someone else’s self-serving claims.

The Day the Heart of God Was Revealed

This is what follows Christmas. According to the Gospel story, Herod sought to kill the baby Jesus. He thought Jesus would be a threat to the empire — to the systems of power that underpinned the privilege and wealth of the few. So Herod ordered all newborn male babies to be slain. And the blood of the innocents flowed.

To avoid Herod’s threat, Joseph and Mary fled with the child to Egypt. It was the day Jesus became a refugee. (Interestingly, if they had tried to seek refuge in the U.S. today, they would have been turned away.)

But it’s more than a story about a refugee. Far more. At least to anyone who believes in a god — more specifically, in a god whose nature and purpose were revealed in the being and life of Jesus.

To such people, Jesus the refugee reveals much. He reveals the very heart of God. Continue reading