I remember when... Reminiscences of a Baby Boomer.
In 1985 my professional investment career commenced, and the Dow Jones industrial Average was at 1325. Today it stands at 34000, 25 times its level back when I began. This is a compound return of 9.25% (11.3% if dividends were reinvested). In 1985, the U.S. government was borrowing money at 7.5%. Now, after a 13-year period of it borrowing at levels far below 0.60%, and at times close to ZERO, it is now, to the horror of anyone with less than 16 years of investment experience, borrowing at rates that are close to 5%! AGHHH! At any point between 1985 and 2007, 5% would have seen people dancing in the streets! Today, it is viewed as shockingly bad.
A popular refrain in 1985 was that the Government was going to borrow so much money that eventually it would bankrupt the whole system. Really smart people were adamant about this, and it was headline news. Even 38 years ago, bad news sold the best, we just used newspapers to read back then!
Today, people are saying the same thing; Armageddon is coming.
Perspective.
In 1985 the amount of total Government debt compared to the size of the economy was about 40%. It was deemed to be a crisis. It has steadily grown to about 120% and, as it crept higher, the howls of impending doom mostly subsided. Until recently. Last year, when rates were zero and the government was printing as much money as today, it wasn’t a problem. Suddenly, it is. To be fair, most of the screaming today comes from officials threatening to default! My how times have changed.
Today, people are howling about not just the size of the debt, but also that the cost to service that debt is soaring because rates are high. This is true! It costs about 1.8% of all the US economy produces in a year to service the debt. Pretty much what it has averaged the past 83 years. So basically, the government needs to take 1.8% of all the U.S. economic income to pay its bills. To put that into perspective that’s 1.8% of $27 TRILLION (which is growing pretty fast BTW). It’s a big number to be sure, but let’s compare it to the American consumer who is paying about 6% of their disposable income (after tax!) to pay its bills. So, who would you rather lend to? Joe six-pack, who could sell his truck (in a pinch) to pay you, or the government, that, if in a real pinch, just prints the money?
In the end they will do what they always do; print a bit and tax a lot. It's even better when they inflate the economy and tax the higher prices and pay back their depreciated debts with your money. It’s always the same song.
Why so sad?
Now, we don’t like it when the government spends our money - unless we find some value/use for what they do with it. Sometimes, like during the pandemic, they just deposited it to your bank account because it seemed like a good idea. Sometimes they pay it to you as a pension, sometimes they pay you interest on the money they borrow from you, and sometimes they just burn it — blowing stuff up. That’s all true. But it's also true that in the process of wasting it, blowing it up, or giving it away, it goes to someone. It doesn’t just disappear, someone gets all that money!! And, during this process, you spend it or save it. It doesn’t just evaporate, someone gets it! And in fact, the government gets a cut of all that too. It’s the best business in the world and no one does it better than the Americans. So don’t tell me no one will lend the government any money. That’s just silly.
The point is…
For the first time in 16 years investors are being paid fairly to lend money. Our fixed income fund now yields more than 7%. What’s not to like about that? At Davis Rea, we have lived and invested when interest rates were 10%. Both equity returns and fixed income returns were excellent over time when rates were far in excess of where they are today. Don’t get discouraged by the intelligentsia prophesizing doom. They haven’t been right in my 38 years of experience. “Doomers” are mostly not Boomers, they are mostly people with 10 years of experience. Nice people and they have read lots of big books and are good with computers. Most in the investment business these days are Millennials. Just because you haven’t seen something before doesn’t mean its bad. This is a new experience for them. They are likely up to their eyeballs in debt. It’s sad. They will learn over time.
I was born the last years of the Baby Boomer generation. I started my professional career when the first millennials were just being hatched. Today, the investment landscape is mostly millennials who never even thought about money or the cost of it until 2006 when they first started giving it away for free.
Prophets of doom are useless, but things are changing. We are back to the future and having perspective is key. There is always a way. These are exciting times, opportunities are expanding, we are paying attention.
John O'Connell
Chairman & CEO Davis Rea Ltd
