Shelter from the Storm | Rêve Mieux
If you’re curious about the French bit in the title, you’ll just have to read to the end (I guess skipping to the end is also a viable option).
My father loved Pat Garrett and Billy the Kid. Anybody who knows me knows that my most cherished earthly belongings are the vinyl records that I got from him. Among them, the Bob Dylan soundtrack to Pat Garrett stands apart from the rest of them still. Maybe it’s because my dad didn’t speak much English and because the album is fundamentally an instrumental record, but it’s always felt like the soundtrack to his life. He knew that. We all did. He listened to Pat Garrett at the end, to soothe his worried mind in the hospital. We played “Billy 4” for him afterwards as goodbye.
“Billy, they don’t like you to be so free… Billy, you’re so far away from home.”
In my romantic mind, I like to pretend that Dylan had met a young rebel from the 20th Arrondissement of Paris before he wrote those lines. But I know the truth. It was just one of those perfect accidents, one that gave my dad meaning throughout his life. I’ll take it. Coincidentally, Pat Garrett came out in 1973. 50 years ago. Beshert.
Meaning is a funny thing. It keeps you steady when the ground is shifting under your feet. It might well be the closest thing to shelter from the storm. And boy, has the ground shifted a bunch lately… The state of the world and the hurt of seeing old monsters rear their ugly heads in broad daylight. Those are too deep to fit within the four corners of this particular page. And then, there are financial markets… Barely two weeks ago, we were talking about interest rates jumping up in an historic way during September. Not to be outdone, we had an history-making jump down over the course of 3 days last week.
What happened?
On Wednesday morning, the U.S. Treasury announced that they had made the very obvious decision to borrow a little less at the long end of the curve than at the short end because… drum roll… long rates seemed high (As far the Treasury is concerned, this probably is 100% optics. It will make little difference to the long-term sustainability of our deficit funding but it’s nice to be in good company).
Then just hours later, the Fed shared with the world equally plain news that it would keep short-term interest rates unchanged this month because… drum roll… the high rates at the long end were doing some of their inflation-fighting, economy-cooling work for them.
And the payroll figures came in “soft” on Friday. In other words, it’s getting just a little harder to get a job in America, more evidence of the economy cooling, and thus less need for rate hikes.
Those events fall under the “catalyst” side of the ledger, but they are not the “why” behind the violent moves in yields. As you recall, the long end of the curve is ultimately out of the Fed’s and the Treasury’s control. Sure enough, the underlying drivers were market participants: A bunch of hedge funds had taken big shorts on long-dated bonds (because of an idea called a “bear steepener.” Please forgive me for skipping the details here. If you really want to learn about bear steepeners, let’s do it. Just call or email, and I’ll walk you through it). Last week, those hedge funds decided to cover their shorts in a hurry (i.e., buy bonds) in light of all the economic data, which of course made bond prices go up and yields go down. If you live to sell Treasury bonds to panicked hedge funds, last week was a good one. They call that a technical move. How relevant will it really be on a fundamental level and how much of the impact of the short covering will stick? That’s open for debate. But let’s leave that aside for now.
How meaningful was last week’s decline in yields? Are interest rates still high after this week’s 3-day fall? My good friend Lance often reminds me of Ted Lasso’s credo, “Be Curious, Not Judgmental.” Reviewing the data seems like a good way to go about being curious.
First off, when you live through big market moves, you always risk having an exaggerated sense of magnitude. “This felt like a big one” is not a scientific measurement. Looking back at last week relative to all weeks in the 21st century is. That’s what the figure below does: Each line tracks the change in the 10-year US Treasury yield from Monday through Friday, relative to the previous Friday. The blue line is last week. It all started innocuously enough, and then yields declined rapidly on Wednesday, then on Thursday, and again on Friday. By end of Friday, it had become a pretty big-deal kind of a week indeed. In fact, last week was among the top 1.5% largest weekly declines going back to 2000. You may wonder what the other 15 or so weeks were: 7 weeks during Great Financial Crisis (2007-2009); 3 weeks during the European Debt Crisis (2011-2012); 2 weeks during the Covid market free-fall (March 2020); 2 weeks during the SVB / First Republic bank failures earlier this year.
So last week saw moves usually reserved for market crises because hedge funds got short squeezed? Sweet! But where are we now? Let’s go back to some of our old standby charts. Long rates are still high — both relative to where they were a year ago and three months ago — and nearly all Treasury yields are elevated in that they are at least in the 75th percentile of all yields observed going back to 2000.
Spilled Milk Won’t Unspill
For anyone who “liked” long-dated bonds a week ago — whether for long-term strategic reasons or as a tactical trade — hindsight tells us that it would have been particularly rewarding to have those bonds in hand going into Wednesday. Now, professional investors know that cognitive biases – starting with Regret Bias – are chief enemies of good investing, particularly in volatile markets. Wishing for yesterday’s prices won’t bring them back. By the same token, going full steam ahead with a pre-ordained decision when the facts have fundamentally changed may be a quick fix for regret, but it can easily sow the seeds of future regret. Kicking yourself now or kicking yourself later: Some choices are best sidestepped. The only thing to do is the right thing right now. The following three principles help:
Check yourself against behavioral biases.
Be analytical and dispassionate in the face of changing circumstance.
Operate from a place of “what is” as opposed to “what should be.”
This also underscores why transparency and a commitment to direct communication matter supremely in this endeavor. It’s all too easy to confuse consistency with authority (Branding 101 calls for saying the same thing over and over again. Somehow that’s what the recipient’s brain responds to best). However inconvenient, the pace of change in one’s analysis and conclusions must be commensurate with the pace of change in the world. Sometimes you have to say, “You know the thing I told you yesterday? Circumstances have changed, and that leads me to think the opposite today.” It takes real hard-earned trust to have that conversation. And then sometimes, the pace of change slows. There is “nothing to see here,” and nothing new to say.
A lot of other aspects of good wealth management are inherently relative — much more fluid, and two-sided — and that’s for a good reason: they’re relative to you. Let’s talk about them for a minute.
Attention, Intention, and Purpose
Your resources represent years of hard work and sacrifice, by you and by those who have worked and sacrificed before you. Those resources deserve attention, intention, and purpose, three overlapping forces that create a virtuous cycle to align your wealth with your vision for the future and empower you to shape the reality you want for yourself, your family, and your community.
Attention: Good Housekeeping
Giving your portfolio attention is like good housekeeping — keeping a watchful eye on all that you've built. It provides you with an intimate understanding of the current state of your wealth, just as surveying each room of your home helps you gauge what may need upkeep or repair. Attention has other benefits as well. It keeps your financial goals at the forefront of decision-making. It enables real-time reactions to changing market conditions. And it empowers you to make proactive choices, rather than reactive ones, in guiding your financial future. It’s also a baseline from which to explore “intention.”
Intention: Answering “What Is This For?”
Getting clarity on this question transforms abstract dollars into tangible objectives like funding a child's education, supporting charitable causes close to your heart, or leaving a legacy for the next generation. It also makes it possible to go beyond “risk and returns,” and think in terms of goals-driven investing instead. Defining “intention” helps ensure your wealth is optimized to fulfill your unique goals rather than chasing the general ups and downs of markets. This aim can shift over time as priorities evolve. Retirement funding may give way to estate planning and multi-generational goals. Supporting parents can become equally important as providing for children. Your intentions provide an organizing framework for all financial decision-making.
Purpose: Define Your Wealth, So It Doesn't Define You
Giving your wealth purpose goes beyond defining its aim — it adds deeper meaning and significance to your financial resources. It helps you manage your relationship with money. Too often, those who don’t define their wealth’s purpose find that their wealth ends up defining them instead. Purpose allows you to see your financial resources as extensions of yourself, not just fungible capital. Your assets become imbued with qualities like providing security for family, funding transformative experiences, or leaving a legacy that upholds your values. Purpose allows your wealth to align with and reflect the essence of who you are.
The Virtuous Circle
Together, attention, intention, and purpose form a virtuous circle. Attention provides intimate knowledge of the current state of your financial resources. Defining your intentions gives practical direction on how your wealth should be structured and invested. The clarity of purpose refocuses attention on upholding the big thinking behind your assets.
Rêve Mieux
On that note, quick Duolingo homework: Translate these lyrics from Orelsan’s “Rêve Mieux.”
Rêve mieux
Mieux qu'l'argent, mieux qu'le pouvoir, mieux qu'les deux
Rêve d'être heureux.
I wish us all to dream better.