Gentlemen prefer blondes

“Gentlemen prefer bonds,” Secretary of Treasury Andrew Mellon told a reporter when asked whether one should invest in stocks or bonds in the 1920’s.  As many lost their fortunes in the stock crash of 1929-32, Mellon’s words looked very wise.  The market lost 87% ($8 became $1) but bonds came out ahead.

At the age of 13, my grandfather died unexpectedly and my dad sent me to live with grandma on the other ranch.  My mission was twofold—do the chores and keep grandma company.  I remember her getting out the picture albums and reminiscing about the 20’s and 30’s.  Her take on the 30’s wasn’t the kind of gloom you hear so often.  It was an age of rediscovery, she said.  Men rediscovered faith and family and women rediscovered their curves and the joy of home.  In other words, hard times made people return to reality and values.  I was especially amused at her take on women.  They forsook gin and jazz and fast car driving and got married, she was saying.  And from 1928-1935 there were significant practical improvements in fashions—short sleeves, bras, hair barrettes and zippers.  Hence the remark about the rediscovery of the curves.  And with this refocusing on things other than money and fast times, comedian Henny Youngman seized on the spirit of the times and twisted Mellon’s words. “Gentlemen prefer blondes.” Everybody laughed.

I was talking to my trusted financial advisor last night and he noted that all the old guys my age who are in his company are worried spitless over the coming inflation. The young guys are all going, “what’s inflation?” The bond market is roaring and is 5 times as large as the stock market these days.  Every day he interviews clients who fear investing in stocks.  And yet the interest rates are historically low, as low as they can possibly get.  Any rise means a disaster in the bond markets. The company keeps advising people to stay very limited in bond exposures.  “I even worry,” he mused, “ about what might happen if bonds were to crash very hard.  Would it take down stocks too?”  Suddenly my memory was awakened.  That’s exactly what happened in 1978-1982, that double dip recession that came on the heels of the Carter administration trashing the dollar in attempt to lower the real cost of government debt.  Before that time it was always considered that stocks rise and bonds fall or vice versa.  But in the late seventies, inflation rose, and both stocks and bonds went down. Then to fight inflation, the Fed artificially raised interest rates again.  There was practically nothing you could invest in that would make money.  The rich, like Ted Kennedy, fled to Swiss bank accounts which paid a half percent interest but the Swiss currency rose 6% a year compared to the dollar. 

It’s déjà vu all over again, Yogi said.  This time it probably won’t be the Fed that increases interest rates, but the world’s investors who fear getting a full dollar back after lending it to the US Treasury.  So Obama wants to simply mint a $1 trillion coin?  Wow!  That ought to inspire confidence about like a carnival token.  Does the trillion dollar coin have chocolate inside?  Think about the movie possibilities for a Pink Panther heist of the trillion dollar coin.  No fear.  Cleuseau got it back.  Whoops, he laid it on his beach chair and a sea gull came along and swallowed it and flew off!

If a corporation has need to borrow a lot of money and interest rises they get hit by a double whammy.  First interest costs skyrocket.  Second, bonds nosedive leaving investors/lenders extremely leery of ever lending again.  With the company’s borrowing ability in question, the stock will crash and burn.  Have this happen over an entire economy and you get the sad situation where there is no safe investment.  It happens at most once a generation.  

Obama is planning on people fleeing to the government for aid when they lose their life savings via inflation.  He may be benign and mean no harm but history is not comforting in times when people are in dire straits.  Hitler used the Weimar hyperinflation to rise to power.  Peron used Argentine inflation to destroy the economy, turning“United States of South America” into a third world country.  The French Revolution and guillotines followed the famine of 1788-89.

Many are stocking up on guns and ammunition.  I am better at solving problems in humbler ways.  Those of us who see this crisis coming need to invest in hard assets that probably won’t increase but will at least hold value.  We need to help organize our families, churches and communities in ways that care for those who don’t have the ability to earn.  In other words, rediscover our values, home and what really counts in life.  No one remembers Mellon’s advice on investing.  But Youngman’s little joke turned into a pithy saying that lasted considerably longer.