8.30.2019 Weekly Update: What Bernie Madoff Can Teach Us about OUr Financial Future

8.30.2019 Weekly Update: What Bernie Madoff Can Teach Us about OUr Financial Future

by Zach Marsh on Aug 30, 2019

Weekly Recap                                                                        

S&P 500                   +2.64%

10 Year Treasury   +0.20%

Gold                         -0.29%

Volatility                 -5.79%


Weekly Update: What Bernie Madoff can Teach Us about Our Financial Future

I imagine, if I were Bernie Madoff, the best day, over the past 30 years of my life, would’ve been the day the FBI raided my office.  OK, nobody wishes to become one of the most vilified men of the century.  And, at that time, he probably didn’t foresee that his son would kill himself as a result of the burden of sharing the same last name as him.  But still, at the moment the FBI burst into his office, I like to picture ol’ Bernie sitting there, letting out a sigh of relief, with a slight grin creeping across his face, “Finally, it’s over.” 

I’ll admit it’s a bit unusual for a financial advisor to put himself in the shoes of Bernie Madoff, or to even mention the man’s name in a weekly blog.  But, alas, the mind makes unusual connections, and this is where mine took me this morning as I contemplated the current policy of the Federal Reserve, and to a greater degree the behavioral tendencies of us all. 

“The only thing we have to fear is, fear itself”

Here’s a question:  which is preferable, the fear of impending doom, or the doom itself?  I guess it might depend on a number of factors.  First, how “doomy” is the doom?  Some doom is existential, picture Marie Antoinette under the guillotine.  But most doom is exaggerated by fear, picture the subject of Paul Simon’s song 50 Ways to Leave Your Lover, where he was told the “Problem is all inside your head.” 

A second factor is:  can the doom be delayed permanently?  By stalling the danger can plans be enacted to correct the situation or are the efforts to keep the ship afloat just a means of kicking the can down the road.  This might be a question for the city of Chicago.  One way or another the unfunded pension liabilities have to be addressed, is there a “magic bean” solution coming around the bend? 

One final factor to consider might be:  what are the benefits and risks of delaying the inevitable doom?  For the city of Chicago, and quite frankly for all politicians in government, the benefits of not taking painful steps to address pressing issues is a better chance of winning elections.  Keep the system afloat long enough to put it on someone else’s plate.  As constituents we all may recognize and hate politicians for this behavior, but for some reason we tolerate it.  My guess is that we tolerate it because, to a certain extent, we possess the same behavioral tendencies ourselves.  After all, politicians aren’t the only ones benefiting from putting off painful decisions. 

“I’m not bad, I’m just drawn that way”

The Federal Reserve faces another rate decision in a couple weeks.  On July 31st the Fed voted to cut rates by ¼ of percent, with many market participants debating whether it was too little or too much.  The stock market, which has oscillated wildly throughout the month while trying to digest the rate decision and trade tariff tweets, has ended the month not much lower than it began.  But long-term interest rates have cratered, creating concern about an inverted yield curve as prelude to a recession.  Fed Chair, Jerome Powell, referred to the cut as “a mid-cycle adjustment.”  That may be one way of making it more palatable to all the Fed members, but it begs the question, “How much longer can this expansion sustain itself?”  The Fed seems to be doing everything in its power to keep an economy and stock market riding high.  Is this a sign of desperation or hubris?  Is the Fed like a small child who exhausts all her breath just to inflate a balloon, only to watch it deflate in blink of an eye because she can’t tie it closed?  I don’t believe our economy has somehow evolved beyond the traditional business cycle.  Like every other expansion before it, this one will eventually end.  The question is:  why do we fight it so hard? 

Recessions can be painful, but necessary.  Recessions cost people jobs, but they provide opportunity for investment.  A recession delayed by suppressing interest rates can lead to excessive risk taking and inefficient allocation of capital; two things which exacerbated the last recession, turning it into a full-blown crisis. 

So why doesn’t the Fed take its medicine and let the economy correct?  Maybe it’s because the Fed isn’t the only ones who can’t stand pain or restraint.   We all face many similar dilemmas on daily basis.  For example, when we contemplate spending money on something that will give us satisfaction in the present, say a new Mercedes-Benz, at the expense of saving for a retirement to satisfy our future self. 

The truth is most of us for value our present enjoyment or satisfaction much higher than our future one.  In fact, judging by our actions it may appear as if we have as much concern for the stranger walking down the street as we do for our future self; and one day soon we are going to have to live with that person 24 hours a day.  Like the Fed managing the economy, the harder we fight to stave off short-term pain and restraint the greater the suffering will be in the future.  So, like Bernie Madoff facing the resurrection day, we can all feel relief and satisfaction when we make the smart and prudent decisions for the long-term.       

Thanks for reading,

Zach and Dave

Calibrate Wealth






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