The most crowded investor meeting I ever attended was held in a very large hotel ballroom in Boston. As the event began, the lights dimmed, and the hundreds of analysts and bankers in attendance were treated to a colourful laser show with blaring rock music. Finally, from behind a curtain, a triumphant executive team emerged to a round of applause. The CEO’s name was John Roth. His company – Nortel Networks. The date stamped in my passport was November 21, 2000, mere weeks after now-worthless Nortel’s quoted value had reached its $366 billion apex.
That experience introduced me to one of the investing world’s most dangerous situations, the crowded room. I’ve seen a few crowded rooms since then: one that feted a bearish fund manager as he toured this country promoting an equity fund loaded with over 90% cash (right before a massive commodities and equities rally); and another whose guest of honour touted global base metal demand just as copper and zinc prices began to melt down. And let us not forget the rooms that filled for “peak oil.”
Figure 1: The Plaza: Host to 2010’s Crowded Room?
I do not blame the shining lights of finance for burning a few moths along the way. Each crowded room phenomenon started years before with a plausible, often excellent idea. And early followers who got into a trade in advance of “standing room only” signs and fire code contraventions generally made out quite well. But the thinking investor should always be on guard against the perils of a well-loaded bandwagon.
The Crowded Room of 2010
Surveying the investing scene of 2010, there appear to be as least as many “crowded rooms” today as there were ten years ago. I will ignore for the moment the mere swarms surrounding Canadian bank equities and long-dated corporate bonds in favour of addressing the greatest crowded room of them all – a veritable Lollapalooza – that supports the obscene valuation of United States government bonds. From this great insanity, all the little bubbles draw their courage.
The US bond market’s crowded room moment may be coming soon. My guess at its precise physical location would be New York City’s Plaza Hotel, which hosts the upcoming Bank Credit Analyst conference. Topping the bill at that meeting is a much heralded “debate” between two institutionally-approved hot hands, Gluskin Sheff’s David Rosenberg and Oppenheimer’s Brian Belski. Rosenberg is a leading cheerleader for long-dated US Treasuries who has insisted recently that the United States will never default. As a consequence, “Rosie” is convinced that the currently tiny yields on US Treasuries are juicy given the coming deflation. His “opponent” in this event, Brian Belski is expecting the gold “bubble” to burst any day and projects an increasingly strong US dollar and a continuing economic rebound.
Who am I, a humble analyst from a small Canadian city where business lunches generally involve ketchup, to question such financial luminaries? And yet, it does appear to me that the supporters of US dollars and low-interest US dollar bonds neglect certain key questions.
If it is generally true that people and companies with heavy debtloads pay higher interest rates than people with less debt, why does the United States pay a lower interest rate with debt/GDP at 100% and deficits/GDP of 10% than in any other year in the past forty, when US debts were far lower?
What is the effect of “open market” operations whereby the US Federal Reserve and the Bank of China buy US bonds in the market with freshly created cash? What would American interest rates be without such activity?
How is it that money supply (M2), as measured by the US Federal Reserve can grow at a rate of 7 to 8% per year for the past decade and yet ten year US bonds can yield 2.7%? And if US interest rates actually paid investors fair compensation for money supply dilution (yields of 10%, say), how could America possibly service its massive debt?
Now I recognize that these are not the type of questions that earn one invitations to address a crowded room circa 2010. Perhaps we should check in again ten years from now.