Never such innocence

Any remaining believers in Big Government have some explaining to do. In response to what amounts to a rebranded flu, the Conservative regime – one hesitates to call it a government – of Boris Johnson has, seemingly almost without effort, managed to destroy an economy. This leaves Conservative voters staring at the national economic slaughter in stunned disbelief.

Not that the UK’s Covid hysteria is unique given the global context, though it may be uniquely awful. The West, or perhaps the Anglosphere, is collectively behaving as if it nurtured some kind of economic death wish. Perhaps it does.

Bond markets are being tested to destruction. Monetary and fiscal stimulus à l’outrance are pumping up government bond yields just when sovereign coffers are least able to weather the storm. If you can hear a rumbling noise in the background, it is the sound of a 40-year bull market in interest rates collapsing in on itself. The monetary system, whether planned or unplanned, is being forcibly reset.

As we suggest, the problems are not localised, but systemic. Analyst Doug Noland:

Ten-year Treasury yields were trading at 1.46% Thursday morning ahead of Chairman Powell’s scheduled Q&A session at the Wall Street Journal’s Jobs Summit – up about five bps for the week. Yields surged soon after Powell began speaking, ending the session almost nine bps higher at 1.57%.

Powell could not have been clearer. The Fed Chairman went into significant detail as to what it will take for the Fed to begin tapering QE along with what would be required to commence an increase in short-term rates. It’s all dovish – as expected. At least outwardly, the policy focus is geared specifically for a return to full employment. And the Fed will not be responding to what it views as a transient uptick in inflation.

It was all the normal dovish creed we’ve grown accustomed to – that up until recently was manna to Treasury and risk markets. But it’s just not working – and why it is not is both intriguing and critical for global market bubbles at a heightened risk of deflating.

Why did bond yields surge on Powell’s boilerplate comments? The more obvious – and conventional – view would be his avoidance of any mention of another “operation twist” or, indeed, any measure that might indicate the Fed was considering additional support for the long-end of the Treasury curve. Hopes the Fed would be part of a concerted global central bank yield control effort were dashed.

Listening to the entirety of Powell’s comments, there’s much to concern bond investors. For one, the Fed is lax on inflation in an extraordinary environment that beckons for vigilance. Our central bank is locked into experimental policy doctrine when it should be open-minded and flexible. Moreover, the Fed is trapped by a backdrop of bubble markets and resulting acute fragilities. A Friday headline read, “Investors are having a ‘Crisis of Confidence’ in the Fed.” While somewhat premature, the Powell Federal Reserve is increasingly suffering from a credibility problem.

And not just the Fed. Big Government throughout the West is displaying grotesque signs of overreach, metastasis, and mission creep. And philosophical decrepitude.

We have written in the past about the Austrian economist Leopold Kohr. Whereas the Scottish moral philosopher Adam Smith wrote about the wealth of nations, Kohr’s magnum opus was entitled ‘The breakdown of nations’. Kohr was born in the tiny village of Oberndorf in central Austria. The size of his birthplace would prove to be a constant influence on Kohr’s world outlook. Kohr believed that there were unavoidable limits to the expansion of societies:

Social problems have the unfortunate tendency to grow at a geometric ratio with the growth of an organism of which they are a part, while the ability of man to cope with them, if it can be extended at all, grows only at an arithmetic ratio.”

As far as Leopold Kohr was concerned, only small states could constitute true democracies, because only in small states could the citizen have direct influence over the governing authorities. Probably the best example of such devolved and localised democracy in Europe today is Switzerland – which continues, not incidentally, to be one of the most successful economies in the world, despite – in huge opposition to the conventional ‘wisdom’ on the topic – maintaining a strong currency.

We have ridiculed the many little states,

wrote Kohr, sadly,

Now we are terrorised by their few successors.

Professor Albert Bartlett of the University of Colorado was another thinker wary of gigantism. His 70-minute presentation here remains the most impressive presentation on YouTube we have ever seen. (Apart from this one.)

Professor Bartlett’s thesis is that mankind’s biggest failure is our inability to understand the power of the exponential function. The exponential function describes anything that grows by a fixed percentage over time. He uses the example of bacteria growing in a bottle. At 11 o’clock the bottle is empty, bar one bacterium. By 12 o’clock the bottle is full. The doubling time – the time it takes for the bacteria to double in number – is a minute. He then asks: at what time is the bottle half full?

The answer may surprise you: at just one minute to mid-day.

What applies to bacteria in bottles also applies to the human population on our planet, and to the world’s natural resources. To cut to Bartlett’s chase, he asks:

Can you think of any problem in any area of human endeavour on any scale, from microscopic to global, whose long term solution is in any demonstrable way aided, assisted or advanced by further increases in population locally, nationally or globally?

As he states, equally starkly,

Continued growth past maturity for any entity becomes obesity or cancer.

What holds for bacteria, population and resource use also holds in relation to the continued expansion of global debt. As Herbert Stein puts it, if something cannot go on forever, it will stop. Welcome to the government debt markets of 2021.

So we avoid debt instruments like the plague (a literal plague, in this case, rather than a confected one with a huge PR budget). What we do place our faith in is a combination of fairly priced claims on the real economy and honest entrepreneurial endeavour, i.e. value stocks, together with a mixture of uncorrelated funds (systematic trading funds or CTAs), and real assets, including the monetary metals, not least because we grow ever more concerned about the real world impact of central banks apparently driving cars with accelerators but without any discernible brakes. And we wait, somewhat impatiently, for the political mood music to change.

Philip Larkin, one of Britain’s most popular 20^th Century poets, happened to capture the uncynical mood of the pre-Covid, pre-2020 era perfectly in his 1964 poem ‘MCMXIV’, about the culture in the country at large, and its generalised and perhaps now unrepeatable deference to authority, at the outbreak of what would become known as the ‘Great War’:

Those long uneven lines
Standing as patiently
As if they were stretched outside
The Oval or Villa Park,
The crowns of hats, the sun
On moustached archaic faces
Grinning as if it were all
An August Bank Holiday lark;

And the shut shops, the bleached
Established names on the sunblinds,
The farthings and sovereigns,
And dark-clothed children at play
Called after kings and queens,
The tin advertisements
For cocoa and twist, and the pubs
Wide open all day;

And the countryside not caring:
The place-names all hazed over
With flowering grasses, and fields
Shadowing Domesday lines
Under wheat’s restless silence;
The differently-dressed servants
With tiny rooms in huge houses,
The dust behind limousines;

Never such innocence,
Never before or since,
As changed itself to past
Without a word – the men
Leaving the gardens tidy,
The thousands of marriages,
Lasting a little while longer:
Never such innocence again.

Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.