The problem with having memory and experience

      "As long as the music is playing, you've got to get up and dance. We're still dancing."

          Chuck Prince, CEO of Citibank July, 2007

The dancing destroyed Citibank, and with it my retirement savings.  I remember that.

The Dow Jones Industrial Average hit a new high yesterday: 35,000.

Today's blog post is less a market prediction of future market turmoil and collapse than it is a reflection on the mindset that can come from memory and experience. I am less bold now than I observe young people to be. I see red flag warnings everywhere.

I may have over-learned past lessons. Home prices seem crazy high to me, priced way beyond what the incomes of purchasers can support. If people need to sell an overpriced house to buy an overpriced house, then experience shows me that before long, prices will adjust down. People buy houses with leverage, a few percent of the price paid as a down-payment, the rest borrowed. When trouble hits many owners owe more than their houses are worth. Banks get the houses back, and they dispose of them quickly. That cascades into more selling pressure and lower prices. High home prices are red flags to me. 

There is more. People are paying high prices for one-of-a-kind images, identical to others available for free, and treating them as investments. I remember the beanie baby boom and bust. Day traders are buying and selling "meme stocks," including companies in bankruptcy. I remember 1998 and 1999, when people with good careers quit them to day-trade. Investors are putting money into blind pools priced at far more than the dollars invested. I remember go-go mutual funds.  Academic economists and central bankers promote MMT--Modern Monetary Theory--now confident that money can be created without limit to buy bonds issued by the government to finance deficits. I see the public employee pension crisis. Eventually people want the government to pay people what they are owed. Red flags.

But I have been wrong in being so cautious, or at least early to think we are facing a coming crisis. We are progressing merrily, merrily, merrily, merrily down the stream, and there has been no waterfall surprise to end the joy-ride. The investment world is full of short, memorable sayings, one of which is "Would you rather be right, or would you rather be rich." The meaning is simple: An investor who is sure that he understands what is right--what ought to happen--may stick to a position while the world passes him by. 

Surely, the stubborn investor thinks, after a burst of enthusiasm for cars, the price of buggy whips would return to their old levels. Surely men would start wearing fedoras again. Surely housing prices in California will "normalize" to something like housing prices in St. Louis. Surely the old realities and relationships would re-assert themselves. Maybe not. Maybe the world has changed.

Republican and conservative media messaging on Joe Biden repeatedly points to his presumed mental incapacities. He is a doddering fool, they say, barely able to express himself, confused, and senile. It is an unfair, exaggerated view, but it has traction because he looks frail compared to many other people his age. The truth may not be dementia, but it may be the incapacity and timidness than comes from knowing too much history--from having lessons of experience burned deeply into one's memory. Humans can over-learn things. When Citibank collapsed, and with it much of my retirement savings, I absorbed a hard lesson about the fragility of markets. I see red flag warnings everywhere now. Maybe I should see them as progress, or at least new realities. Sometimes the world reverts; sometimes the world changes.

Joe Biden is old school. He believes in NATO, perhaps too well. He believes in trade unions, perhaps too well. He believes in trains as the transportation vehicle of the future, perhaps too well. He believes that Republicans will "come around" and embrace bipartisanship like the old days, perhaps too well.  

It would be possible for Biden to mis-understand his mandate and the times. Voters wanted a restoration of comity in our political discourse, but not a restoration of the 20th Century.  Biden has not yet sent clear signals of openness to fresh thoughts. Democrats want new deals and frontiers. He needs to show he is open to new realities. He may not be the person to do it.