"Theirs not to reason why
Theirs but to do and die.
Into the Valley of Death
Rode the six hundred."
~ Alfred Lord Tennyson, "The Charge of the Light Brigade"
In a fitting end to what was – at least for those investors who aren't readers of Sure Money – a disastrous 2015, The Wall Street Journal ran two articles on its "Opinion" page on the last day of the year that epitomize everything that is wrong with financial journalism in the "Age of Obama."
The first article, written by Burton G. Malkiel, author of the famous investment book "A Random Walk Down Wall Street," is an example of the type of unimaginative consensus thinking that led investors to lose huge amounts of money last year investing in energy master limited partnerships, big bond funds, and other dangerous areas.
The second, written by former vice chairman of the ever-clueless U.S. Federal Reserve Alan Blinder, praised the recent, disastrous budget deal reached by Congress as an example of bipartisan consensus when it was really a cowardly sell-out to special interests and a spending orgy that hastens the nation's pathway to bankruptcy.
In short, both articles were an insult to independent thinking that demonstrate how far the mighty Wall Street Journal has fallen under the ownership of Rupert Murdoch.
Here's why these Wall Street "experts" are so far off the mark…
Mr. Malkiel's article was entitled "Investing for 2016 in an Expensive Market." After conceding that both the stock market and bond market are expensive, Mr. Malkiel proceeded to advise readers that investing money required for future expenditures like college education can prudently be invested in government-guaranteed certificates of deposit at Internet banks paying a 1.25% return. This advice, which ignores the fact that a 1.25% nominal return is a negative inflation-adjusted return, is nothing less than idiotic on its face. Why would anyone with a functioning cerebellum lock up their money in a long-term certificate of deposit that guaranteed them a negative inflation-adjusted return on their money (and charge them a penalty if they need to withdraw it early)? Simply put, you would have to be an idiot to follow that advice.
Blind conformity invariably leads to disaster.
Mr. Malkiel didn't stop there sharing his bond brilliance for 2016, however. He also suggested that "[t]he sharp price declines recently in higher yielding corporate bonds have made them relatively attractive compared with U.S. government securities." Is he kidding? What he calls "recent sharp price declines" are actually a crash in the high-yield bond market due to severe liquidity problems coupled with catastrophic credit problems in the energy and commodities sectors, serious credit problems in the retail industry, and severe competitive pressures in the media business. Advising investors to allocate money to corporate credit today is like inviting Dr. Kevorkian over to your house for dinner.
Finally, the well-known author advises investors to diversify their equity holdings away from purely U.S. stocks to foreign stocks. While this call for diversification may make sense on its face, he does not mention the single biggest reason why foreign stock markets may be attractive in the year ahead – the fact that central banks in Europe and Japan are actively weakening their currencies, which renders their regions' exports more attractive and helps boost their companies' earnings. Instead, Mr. Malkiel argues that the cyclically adjusted price/earnings ratio (CAPE) for Japan (20x) and Europe (15x) and emerging markets (10x) are lower and therefore more attractive than the higher-priced (26x) U.S. market. This simplistic argument ignores the serious economic challenges facing these regions, particularly the emerging markets, which are being seriously damaged by the strong U.S. dollar and should be approached with great caution.
Mr. Malkiel and his advice have reached their sell-by date.
Not to be outdone, however, Mr. Blinder tries to suck up to our corrupt politicians who just sent to the White House for President Barack Obama's signature a pork-barrel-laden budget bill that should answer any doubts about why Donald Trump's complaints about Washington, D.C., are resonating with voters. Mr. Blinder correctly points out that the budget bill does nothing for deficit reduction and makes a mockery of Republican control of the House of Representatives since a block-headed group of Republican conservatives refused to compromise, forcing House Speaker Paul Ryan to negotiate with Democratic Leader Nancy Pelosi rather than stick to his guns and close down the government. For some reason, Mr. Ryan and his Senate cohort Mitch McConnell have failed to realize that closing down the government would be a boon to the country and their party.
The last time Republicans forced a government shutdown in 2013, it was followed with the expected criticism by the liberal press and a massive Republican landslide in the 2014 midterm election. But rather than heed that lesson, the Republicans fell for the Democratic threats that they would be blamed for a shutdown in 2016, surrendered their principles and taxpayers' money, and let this disastrous spending bill go through.
Yet despite all of this, Professor Blinder – a member of the Princeton economics faculty that has inflicted untold damage on the United States by sending us such luminaries as Ben Bernanke – calls this train wreck "a big win for America."
Such is the state of economic policy discourse and financial journalism in the Age of Obama.
When the next financial crisis hits, as it surely will in the near future, I believe investors will look back to the Dec. 31, 2015, issue of The Wall Street Journal and these two articles. Here they will find the idiocy writ large that led us to the brink of disaster once again.
Into the Valley of Death rode the 600… Or was it the 400?
Who cares? They all ended up dead!
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.