A Shocker! The Yellow Brick Road is Really Green

yellow brick road picJohn Bogle, Founder and retired CEO of The Vanguard Group and author of the 1999 book “Common Sense on Mutual Funds” teaches that all you have to do is buy a good indexed mutual fund (preferably Vanguard), tuck it away, forget about it and success will be yours.

Jeremy Siegel, Professor of Finance at the Wharton School and author of “Stocks for the Long Run” says “7% (average) real return on stocks is what I find over nearly two centuries. I don’t see persuasive reasons why it should be any different from that over the intermediate run. In the short run, it could be almost anything.”

Bogle disregards individual needs and emotions, risk tolerance and the world around us.

Siegel has yet to present the two century old man who has overcome the market’s travails. In addition, he refuses to quantify the length of time of the short run and also disregards the world around us.

Bogle and Siegel could never live in Kansas where storm shelters are a part of a house’s design. Tornados are a fact of life and protection from the devastation is most prudent. Just ask Dorothy.

Bogel and Siegel would argue that since the storm will ultimately end, taking cover is a senseless exercise. You should just continue what you’re doing and don’t be troubled about a little wind.

“If you can stay calm while around you is chaos …then you probably haven’t completely understood the seriousness of the situation.”

Now comes Mohammed El-Erian, former CEO/co-Chief Investment Officer of Pimco and current Chief Economic Adviser at Allianz, who says he is “mostly in cash”. Oops! Yes cash. Like in no return on capital. Simply the hope of a return of capital.

El-Erian has managed and continues to advise on trillions of dollars. In addition, his net worth is reputed to be several hundred million dollars. Perhaps he is a man who does understand the chaos which surrounds us.

“I am mostly concentrated in cash”.

“Most asset prices have been pushed by Central Banks to very elevated levels…they artificially lift asset prices…there is a massive gap right now between asset prices and fundamentals”.

El-Erian seems to be echoing a venerable Wall Street legend, Julian Robertson, who concluded: “I don’t think it at all ridiculous to think of a sell-off like we saw in 2008…the bigger this bubble gets, the bigger the burst.”

Apparently, the so-called smart money, bankers of the world, are also echoing a return of capital since the most recent three year treasury auction garnered a measly .865% of yield. It would appear an increase by the Fed, in short term interest rates, is not in the cards since the bid to cover was close to the all time record of 3.25 dollars bid for every one dollar offered. The world’s Central Bankers want our paper. Julian Robertson says the storm is upon us. El-Erian has gone to cash. Yet Wall Street, exemplified by Bogel and Siegel, would simply have us believe that it is a faint wind that blows in the night.

If you don’t have a Scarecrow, Tinman or Cowardly Lion to protect you, then a storm cellar of cash may be the only way to find The Yellow Brick Road.

Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.