Sir John Templeton is known for his claim that the four most dangerous words in investing are “this time it’s different.” I think that the most dangerous words are “everybody knows.” Everybody knew that we should get out of bonds. It seems now that Vladimir Putin may have done some of Jerome Powell’s job for him. The Fed chairman could still raise interest rates next month as aggressively as I thought, but probably not. High oil prices should work like an interest-rate hike and slow the economy. For now, bonds are acting as a safe haven for investors. This is why we have diversified portfolios and rebalance periodically.
The Gross Domestic Product of Russia (GDP) is less than that of Texas and the per capita income of Mississippi, our poorest state, is about three times that of Russia. Yet, Russia is a major oil supplier with lots of weapons and there will be disruptions. Fortunately, energy makes up a substantial portion of most of our accounts. We have a dedicated sleeve in natural resources too. This should help.
For now, we are seeing one of the side effects of passive investing through index funds. Selling becomes indiscriminate and the market is like a balloon held underwater. The balloon will remain there until we let go. Then, it will rise to the surface. In the meantime, all of those people we have been warning about for two years, the people who own concentrated positions on margin, will discover what a margin call is. It will be ugly.
Other people’s panic will create opportunities for the rest of us. A tremendous amount of unspent money from the infrastructure bill is still out there. Those bonds that everyone has been trying to get us to sell can be a source of liquidity if we have the opportunity to rebalance into a cheaper market. Until then, remain skeptical about what “everybody knows.”
P.S.
A shoutout to my brother Dale for giving me the benefit of the doubt on heal vs. heel. No, I did not try to make a play on words with a nurse digging her “heals” in. Instead, I still can’t –maddeningly--master the autocorrect feature of Microsoft Word or proofread my own writing. Oy vey!