... is what I learned from a dear friend some years ago. Apparently, guilt is a "derivative" of fear, when accepting the fact that there are only two basic life emotions: love and fear. Mr. Bill Gross, renowned asset manager and co-founder of a fixed income empire (California-based PIMCO), broke the news last week that he feels "guilty" for having enriched himself at the cost of the laboring class. Better late than never, one must admit, and yet with $2+ billion in the bank, the "coming clean" must have felt so much better. Everything else simply is rhetoric.
Maestro Alan Greenspan is also "cleaning house." According to a recent media push, the former Chairman of the U.S. Federal Reserve Bank (Fed) is now unsure if some of his policies (possibly all?) were a mistake, considering that the global financial system is now more indebted than in pre-financial-crisis times. Mr. Greenspan's consideration of debt expansion should not be a surprise to him (topic for another day), and most certainly is not a new "gig" for the Fed itself: since the financial world appeared to end in 2008/2009, policy makers, under the leadership of Greenspan's successor Ben Bernanke, have nearly quadrupled the size of the Fed Balance Sheet to $4 trillion, mainly in an attempt to ease a failing banking and financial industry.
Arguably, investors could have taken comfort in the nation's rescue mission. To note is the nearly perfect positive correlation between growth of the Fed Balance Sheet and the increase of the S&P 500 U.S. Equity Index. For the fearless, this constellation could have translated into gains of +160% (not even accounting for dividends) over the past 4 1/2 years. Considering that $5+ trillion in equity wealth has been added back to household balance sheets, it is exactly the so-called "wealth effect" Mr. Bernanke was interested in. It is estimated that about 2-3% of "perceived" wealth is directed towards consumption and, given that about 70% of U.S. GDP is dependent on consumption, we get the message.
What is Mr. Gross really afraid of? Certainly, it is not the self-declared reduction of personal net worth, by now recommending higher taxation of the ultra-wealthy; more likely, it is the surfacing public recognition that a so-far commonly accepted transformation from a productive to a "bail-out society" has created an uneven distribution of socioeconomic benefits that at one point will need to be addressed. In 2008, Mr. Gross's investments netted $1.7 billion on a single day, after the savvy king of bonds loaded up on Freddie and Fannie obligations, anticipating a Government bailout of the two ailing entities. Sure enough, the Fed granted the wish (related or unrelated may be the fact that Gross was lobbying for a bailout before his big win).
If we allow love and fear to be the judge over our investments, the outcome could become questionable. With a global financial system inherently more volatile, as regular market outcomes are suppressed on the basis of accommodative monetary policies, investors need to be as disciplined as ever. It is essential to establish and follow a goal-based financial plan, and to consider that even this time it will not be different. Value trumps everything, and "herd mentality" when investing has never ended on a positive note. As FDR said before: "The only thing we have to fear is fear itself."