Ask Archer: How many crazy things should I worry about at once?
A reader asks: How many crazy things should I worry about at once?
Archer replies: Samuel Butler once said that while the number of knaves in the world is finite, the number of fools is not, “else the knaves would not have enough to live upon.”
Makes sense.
When I was young, I would lie in my room late at night and scan the AM radio dial for faraway stations – New York and Chicago, mostly. The latter – in the person of WLS cranking out 50,000 watts at 890 kilohertz – often ghosted in through the darkness. It was notable as the first US station to give air to the Beatles in February 1963. It carried baseball, too. All good fun.
But there was another, zanier cast of characters lurking in those airwaves, my personal favorite being the radio preacher Garner Ted Armstrong and his The World Tomorrow program. “Why do the heathen rage?” he would ask, echoing a verse in Psalms.
I had no idea.
Many years later, this begs the question: as an investor, how many crazy things should you worry about at once? Those at the margins are loud, insistent, and often colorful but they aren’t usually right. Like fools, they are infinitely present; as with knaves, they have their limits.
Markets, of course, have plenty to worry about without going to extremes – inflation, the Fed, earnings, p/e ratios, sector returns, etc. – to say nothing of macroeconomic and political factors. How nutty are those North Koreans anyway?
Dick Bove (pronounced boe-VAY), a long-time banking analyst most recently in the employ of Odeon Capital Group, announced his retirement in January. Like many on Wall Street, Bove seemed to subscribe to the maxim, “Sometimes wrong, never uncertain.” On the way out the door, he offered the following to a New York Times interviewer, “The dollar is finished as the world’s reserve currency.”
OK. Nothing ambiguous there. But forecasts of a collapse in the value of the dollar are not new, and their stridency tends to grow along with the size of the national debt. Still, its actual capitulation would be a shock.
It makes perfect sense that you can’t keep conjuring money out of thin air without eventually debasing its value. But acting on that sensible observation would have cost you over the last three years when, as tracked by The Wall Street Journal’s U.S. Dollar Index (DXY), the value of the dollar relative to a bucket of non-dollar currencies rose from about 90 to 103. Over roughly the same period - the years 2020 to 2023 - the national debt rose from $27 trillion to $34 trillion, an increase of slightly better than 25%.
If you believe that the dollar is toast, or soon will be, what should you do? Sell all your dollar-based assets and load up on shares of the International Bank for Settlements in Switzerland? Maybe, but there will likely be opportunity costs. (Not investment advice.)
The cratering of the dollar and ensuing Armageddon may yet happen, but currencies are a relative game, and you can’t beat something with nothing. If the dollar is going to fall out of favor it has to be replaced – by the yuan, euro, ruble, Swiss franc, bitcoin, the plate at the Vatican. So far, none of these potential alternatives has been up to the task. So the dollar remains in place by default, if nothing else.
As to the contemplation of low probability, high risk events, possibly some wisdom is to be taken from this exchange between Alice of Wonderland fame and the White Queen in Through the Looking Glass.
“There's no use trying,” she (Alice) said. “One can't believe impossible things.”
“I daresay you haven't had much practice,” said the Queen. 'When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast!”
Six seems a little excessive, but two or three? Why not? Nassim Taleb, he of the Black Swan forecast and book, is currently making the rounds with a “White Swan” prediction (something deemed more likely): a “death spiral” in which the interest on the Federal debt eventually swallows the entire budget, and then the world.
But not every forecaster is chasing down the doom and gloom rabbit hole. Another long-time Wall Street Veteran, Ed Yardeni sees the possibility of a “Roaring Twenties” scenario unspooling over the balance of the decade. Speaking to Bloomberg, he suggests a parallel between the Spanish flu early in the last century and Covid and posits that we may be “in the early stages of a productivity growth boom” that will drive an extended period of prosperity.
Completely ignoring improbable outcomes can be a dangerous game because the improbable occurs more often than most of us think. Pick one. Pick two. Pace the floor deep into the night. Turn your radio on, as the John Hartford song has it. You may one day be right and can then sit back and bask in the glow of your fame as investors abandon the dollar and rush into the Argentinian peso or, per Yardeni, your tree takes flight towards the sky.
Woof!
(NOTE TO READERS: My new book, Radical Problems, Simple Solutions: How Markets can Help Fix the Retirement Crisis and Solve Wealth Inequality is now out. To purchase a copy and support your local independent bookstore, go to Flyleaf Books.)