Our work here at the Diary is to connect the dots.
And we begin connecting the dots of 2018 by looking over our shoulder at the brightest dots we connected last year.
Three remarkable things happened in 2017…
One for the history books
Second, the lowest interest rates ever recorded appeared on the scene…distorting prices and challenging our most deeply held opinions about time and money.
Third, Donald J Trump was inaugurated as president of the USA, helping us understand more clearly what government is all about.
Yes, 2017 was one for the history books — a decisive, instructive, and rollicking year. What we learned from it is our subject for today and tomorrow. Then we’ll turn our head around and face 2018.
And yes, dear reader, we are back on the job after a delightful vacation at the family farm in southern Maryland.
Just before Christmas, we put our laptop away; we didn’t pick it up again until yesterday.
After reading Clive Bell’s book, Civilization, we thought it may be better to turn away from business and investment and focus instead on things that really matter: truth, beauty, family…and eggnog, heavily dosed with Irish whiskey.
But we couldn’t sit still. Hardly had the vacation begun than we were completely caught up in another project — rebuilding an old barn. (Readers with no interest in amateur wood butchery are invited to skip ahead.)
Southern Maryland used to be full of tobacco barns. The tobacco plants were impaled on wooden sticks and hung to dry in them. But when tobacco farming came to an end in the 1960s, the barns were neglected.
Like lonely old men, they stand solitary in the fields, with trees growing up through their abandoned foundations. Then the siding boards are stripped off — often to give restaurants and bars an ‘antique’ décor — and the skeleton is allowed to collapse and rot.
We can’t bear to watch an old friend suffer. Rather than let another barn fall down, we decided to save it; we will use it as a workshop.
But tobacco barns are intentionally drafty; they were meant to air-cure the tobacco leaves. To make it useful as a workshop, we have to build a new foundation and tighten up the poplar siding.
‘Why don’t you just call a professional; get them to do the job right,’ suggested our partner-in-life Elizabeth…implying that we would make a mess of it.
‘Are you kidding? You wouldn’t hire someone to eat your dessert for you, would you?’
There are some things a man should do for himself.
Left over from other renovation projects were a number of glass panels.
They had been double panes, but the vacuum seals had failed. So we took them apart, built a frame out of recuperated 4×3 posts, and used the single panes to build an exterior wall — protecting the old barn from wind and weather.
The challenge was the weather.
It felt like trying to peel an orange at the North Pole. If you live in Minnesota or North Dakota, dear reader, you must be used to it. But here, 20 degrees is cold…almost too cold for outdoor work.
Fortunately, we found an old pair of Carhartt insulated overalls…and bought some hand warmers. In this outfit, we were able to work without much trouble.
Bill begins construction on his new workshop
[Click to enlarge]
Our work progressed satisfactorily…that is, with much cursing and many false starts. We will return to it next weekend.
Time stands still
But now back to what we learned last year.
In summary, bitcoin helped us to understand money. Donald Trump helped us understand politics. And negative interest rates left us confused and depressed.
Of the three remarkable things that happened in 2017, negative interest rates may be the most remarkable of all.
They shouldn’t exist. A half a bird in the bush tomorrow is not worth more than one bird in the hand today. Tomorrow might not come. You might be dead. The birds might fly away during the night.
Interest rates are a way of measuring and compensating for risk and forbearance. Negative interest rates, on the other hand, turn the lender into a fool.
You give the bird to someone. He eats it. He agrees to give you two wings and a gizzard tomorrow. What kind of deal is that?
It doesn’t make sense. Instead, a reasonable person will only hand over the bird if he expects to get more than a bird in the future — if the interest rate is positive, not negative.
He’ll want two birds tomorrow…and maybe the borrower’s daughter, too.
Negative interest rates imply that time — where risks abide — stands still, so that all the risks of getting to the future — you die, the birds fly — disappear.
Is that what negative rates are telling us? Has the universe changed so completely that time no longer matters? That the future no longer exists? That the old truths no longer apply?
We humans know things by analogy to other things that we know — either by experience or reputation.
Especially, in the money world, we recall the Crash of 1929…the Great Depression…the Eisenhower bull market…President Nixon’s fake-money decision…Paul Volcker’s triumph over inflation…
That is to say, we remember the plots. We remember the heroes and villains. We remember even the famous lines.
Doubt thou the stars are fire;
Doubt that the sun doth move;
Doubt truth to be a liar;
But what if a spaceship landed on stage during a routine production of Hamlet? How would the play turn out?
Truth would be a liar if something completely unexpected…something unscripted…happened. In other words, what if it really were a ‘new era’? What if the old rules…the analogies…the memories…and the price charts were senseless…useless…meaningless?
What if today’s world was so new, history had nothing to say about it?
Is that the meaning of Donald Trump? Of bitcoin?
What are these negative interest rates telling us? Are real time and real money out of style…no longer interesting or relevant? Is up down and down up? Will water flow uphill and the sun set in the morning?
Probably not. So negative rates must be signalling something else…
…and we think we know what it is.
Listen carefully. You can hear the faint whisper, like the last words of a dying man: ‘It’s all a lie.’
Stay tuned…as we explore the real meaning of Donald Trump, bitcoin, negative rates…and the world as we know it.
For Markets & Money