"Top Fidelity stockpicker: Financial markets are ‘colossally artificial
Fidelity’s Joel Tillinghast, one of the mutual fund industry’s best stockpickers over the past 20 years, said financial markets are “colossally artificial”...
“I think it’s colossally artificial, but I don’t see it ending,” said Mr. Tillinghast, who runs the $46-billion (U.S.) Low-Priced Stock Fund for Fidelity Investments in Boston. He made his remarks on Friday in a rare interview.
Mr. Tillinghast pointed to unprecedented central bank intervention around the globe over the past 10 years in the form of quantitative easing, which has resulted in government bonds with negative yields in countries such as Germany, Switzerland and Denmark.
...Mr. Tillinghast made it clear he is not making any prediction about when the market’s bubble will burst. In fact, he said he is bad at forecasting. Before he joined Fidelity, he worked as a research economist at Drexel Burnham Lambert, the Wall Street firm famous for high yield or “junk” bonds, which went bankrupt in 1990.
“I sucked at it,” he said.
So he is not saying when the artificial market, as he describes it, will end.
“How long can we party with our bad selves?” Mr. Tillinghast asked. “You want to know so you can party on until” five minutes before it ends..."
"The Forgotten Financial Panic of 1914
"...As the looming outbreak of World War I became more and more imminent when Austria made an ultimatum to Serbia in the last week of July 1914, the resulting fear in global markets set off a massive financial panic. Investors, fearing unpaid debts, pulled out of stocks and bonds in a scramble for cash, which at this point in history meant gold.
The London Stock Exchange reacted by closing on July 31 and staying closed for five straight months. The U.S. stock exchange, which witnessed a mass dumping of securities by European investors in exchange for gold to finance the war, would also close on the same day, for about four months.
Britain declared war while on a bank holiday.
Over 50 countries experienced some form of asset depletion or bank run.
...“For six weeks during August and early September every stock exchange in the world was closed, with the exception of New Zealand, Tokyo and the Denver Colorado Mining Exchange.”
...Britain and its counterparts in Europe had established central banks, and responded to the war fear with vast infusions of liquidity through the printing press...
...With investor flight causing a rapid dissolution of the country’s gold, the backing for the dollar, Treasury Secretary William McAdoo stopped additional securities sales by closing the stock market, basically a form of capital controls...
Then he ...allowed banks to issue additional bank notes, increasing the money supply.
...that the United States emerged with their financial system relatively intact facilitated a shift from London to New York as the seat of global financial power, although the fact that the war never touched American soil probably also had something to do with it.
...The next 30 years saw the end of the gold standard, the collapse of global trade, a marked reduction in migration flows, the rise of protectionism and the biggest depression the world has ever seen...
Roll forward 93 years from 1914. It’s July 2007 and there have been a few tremors in the financial markets. A few hedge funds have hit problems with their investments in US sub-prime mortgages but most traders are blissfully unconcerned. The assumption is that any difficulties are localised, minor and soluble. There is nothing to suggest this will be any more serious than the peso crisis in Mexico, south-east Asia’s meltdown, Russia’s default or the bursting of the dotcom bubble.
Again, the optimism was unfounded. When the financial markets froze up in early August 2007 it created the conditions for the near-collapse of the western banking system 13 months later.
...We know far less than we think we do.
...Warning signs were ignored, with disastrous consequences.
...The question is what happens next.
Then as now, crisis measures were undertaken to forestall a near-term catastrophe, and the weakness of the overall model never contemplated.
...the Panic of 1914 was a symptom of a greater disease, of a world being dragged into the modern age.
We’re at a similar moment today, so we might want to remember and study the past."
From a conversation about our economy
"most people don’t realize that as big as their investment risks are today with many markets being [artificially] over-inflated and so forth, their biggest risks are actually political risks.
The biggest danger to you is your own government.
...that 50% of Americans are reliant upon the government for their income alone is a [historically likely indication] of bad things to come.
...statistically we’re also getting close to the next recession. Just by the probability, how long the expansion has been, yet we’ve never begun a recession where rates are still at zero. We’ve never begun a recession while they are still stimulating from the previous recession.
...the numbers that they crank out to make everybody feel good [appear to be] almost as phony as the numbers that the Argentine government cranks out.
...I would say that inflation is realistically in the 8-10% range here in the US
...The growth is all a fantasy. It’s all a result of the assumption that there is no inflation, when there really is because what we have is inflation masquerading as economic growth. But the bottom line is the economy is really contracting, that’s why the labor force is shrinking, that’s why we’re using less energy, that’s why the people’s standard of living is going down, and real incomes are falling and job opportunities are disappearing. It’s because we’re in a recession and no one wants to admit it.
...I just wonder what the social consequences are going to be when the economy goes into a free-fall again
...The real bubble is in the bond market, and the bond market is much bigger than the stock market, so when the bubble in bonds bursts, it’s [most likely] going to be very ugly."