One learns in early debating class the most important point of debating is to not debate the facts, but to debate the assumptions. Most of life is assumptions and not facts. You go to bed assuming you will get up in the morning. You get up assuming you will not get some deadly disease. You switch on the light assuming the power will be there. You use water assuming it will be there. You drive down the road assuming you will not get in an accident. You get the picture here so like it or not there are really few givens, death and taxes and the saying goes. So it is with investing.
One can only make decisions based upon what they know and how others will react to what you know. Experience is more important than intelligence, but of course in this new culture we live in experience and wisdom are not valued among young people who ASSUME they know everything, which has flipped many years of accepting wisdom comes with age. That simple fact about young people should be kept in mind regarding their impact on the entire economic market environment. Experience tempered by wisdom has told me that people make the same mistakes over and over given enough time to forget the prior mistakes. Emotion driven intelligence is the worst decision player in adult life and even we must temper such when dealing with the stock market in times like these. Our just over 60 years of life on this earth allows us to look back about three generations. Since most people do not live past early 80's on average the worst mistakes of emotion driven intelligence is forgotten by most after about four generations. In essence we live making the same mistakes we made in the late 1930's now. Here is our moment of foolishness in not considering the investing mistakes of the late 1930's when yet another Federal Reserve made the mistakes the current Fed is repeating. They hiked rates then and the nation took another dip into recession having just finally just emerged from the Great Depression. Jerome Powell doing the same now means he of supposedly experience and intelligence is not wisely reviewing mistakes of the past. We also believe he is being driven emotionally to prove Trump will not back him out of a interest rate increase.
The Great Depression took prevailing interest rates from the high single digits down to the low single digits with the fact housing and big ticket purchases demand was depressed and the new normal was less pressure from what had been surging wages and inflation concerns. The late 1930's Fed was living and operating in the assumption that the economic normal had not been radically changed by the Great Depression. The humans running the board made the emotion driven intelligence in their 1920's economy based wired brains that they were right and everyone else was wrong at the time. Sounds familiar huh? We today are living in a new normal where housing, automotive, and big ticket demand is much lower than before and certainly more suppressed due to price, just like it was after the Great Depression when more people rented than bought. We are old enough to remember a time when owning your own home WAS the American Dream. Now many take it for granted, younger people in this country do not anymore due to the reasons noted above. Thus the new normal we live in means mortgage rates will be in the 4% to 6% range for decades not the 8% plus many alive now remember as normal. Take that reduction in the new normal of rates across the board in the economy now as demand is not there anywhere like it used to be. Stores are closing across the land as more evidence. Like it or not we seem to be in a 2% economic growth future versus a more desired 3% growth economy and the Fed is numb to the real economy once again.
So the Federal Reserve got stupid this week raising rates and saying there would be more coming. They are repeating the mistakes of the past as are many in the political field too. Of course the question for investors is simple how to we, or even do we, take advantage of the current economic environment. Using experienced wisdom and some learned history and hopefully very little emotion based intelligence we believe the next decade will not be as kind to investors as the past decade. We do not see a crash, nor anything like a huge downturn in the market. We do see a lot of backing and filling as the Fed learns from their recent errors and the business world adjusts to those errors, nothing occurs in a vacuum in the investing world. Maybe a good idea that you too go take a look at the late 1930's stock market graph at some point too. We in our personal account will be dealing with a lot of leverage gone bad, but believe it we stick tight much of the losses can be gained back via some patience and good trading. It is indeed hard to be patient and not let emotionally driven actions/mistakes take us off our well worn path of success. We are embarrassed we did not do our due diligence in considering that the Fed would make the same mistakes they made four generations ago as we are a student of history. We will be more studied going forward tempered by our losses. If you are young, say under 50, stay the course and accept this market setback is your chance to buy low and let the compounding work for you long term as we did. If you are older than 50 be careful in investing decisions and do something we will be considering at some point later this year and getting back into the municipal bond market where this journey all began for us. Indeed if the Fed is determined to push up rates then we should take advantage of those higher rates that frankly are unjustified and mean one can earn good interest in a demand depressed economy. Never leave stocks in full as Index 500 investing is still the route to safe long term wealth.
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