Eating the Inner Organs of Beasts and Fowls

Mr. Leopold Bloom was clearly given to sensuous pleasures but he wasn’t entirely immune to the pleasures of the mind. Following yesterday’s market action, most of us probably feel the need to scale back a little from our sensuous pleasures, such as eating the “inner organs of beasts and fowls”, and give more weight to reflective or cerebral pursuits.

After closely watching market behavior for more than 25 years I am quite capable of boring you with pages of analysis about Kondratieff winters, Elliott Wave Cycles, and Austrian Business Cycle Theory. I could also decide to keep things simple and just talk about the end of the great credit binge that started in 1980.

I could do all these things, but I won’t, because it’s become crystal clear to virtually everyone except central bankers, that, largely because of their actions, we live in a serial bubble economy, where asset prices are only allowed to fall with the utmost reluctance, it being thought “a bad thing,” whenever houses, equities and gasoline, fall in price, especially precipitously. Consequently, everything that can be done to inflate asset prices is attempted, from money printing to interest rate manipulation. While Chinese authorities recently attempted to bolster equity prices by ordering state-owned enterprises to buy stocks, in the U.S. the plunge protection team resorts to more subtle but, in the long run, just as ineffective methods.

What’s to be done? For the average investor theoretical knowledge has proved to be next to useless because what should happen is often prevented from happening by central banks, in the same way that I can temporarily prevent a friend’s bankruptcy by giving them another credit card. Sure, I delay the day of reckoning, but now I’ve also made the problem worse by increasing their debt burden. How and when central banks will choose to act this time or the next time, can only be divined by close attention to the political tea leaves, a skill decidedly lacking in mere mortals.

For those of us with enough time, who require a positive return over and above taxation and inflation, while lacking the requisite divination skills to know when the Fed will step in with QE4 and/or QE5, there is no choice but to stay the course, waiting for a reversion to the mean. After all, from 1926 to 2015 the S&P 500 returned almost 12 percent/year including reinvestment of dividends. While there is certainly no guarantee that the future will be similar to the past, I for one believe that, as long as people continue to innovate and to improve their lives, stocks will generate a decent return over the long run. Yes,  I know that Keynes said “In the long run we are all dead…”

“Mr Leopold Bloom ate with relish the inner organs of beasts and fowls. … Most of all he liked grilled mutton kidneys which gave to his palate a fine tang of faintly scented urine.”  James Joyce (Ulysses)

Please note that this article is not intended as legal or financial advice.