Third Quarter 2015 – “Reality Can Be Beaten With Enough Imagination”
Next month, Samuel Clemens turns 180. The man better known as Mark Twain excelled at social criticism, calling attention to class relations, oppression, slavery, and the failures of Reconstruction through his prolific library of important works. Of course, Twain was also known for his biting observational wit, reflected in a number of notable quotes delivered over his lifetime. One of his more famous – “Reports of my death have been greatly exaggerated” – was said in 1897, in response to an inquiry from a reporter for the New York Journal who tracked Twain down in London to get his response to reports in America that he was on his deathbed. The infirmed individual, as it turned out, was in fact Twain’s cousin (who recovered nicely), but this case of mistaken identity gifted history with another wonderful quip from one of its most well-regarded dark humorists, and provided us with an amusing story in the process.
Unfortunately, there’s one problem with this story. Mark Twain didn’t say what we think he said.
To be fair, Twain said something close: “The report of my death was an exaggeration.” But great sayings are said greatly, and the popularized version reflects a cadence and rhythm the original lacks. One can certainly make the case that the details here are irrelevant, that the gist of it was Twain’s and that’s all that really matters. But Twain, a fierce social critic and supporter of truth and transparency, would likely disagree, and argue that integrity existing solely at the surface level is not integrity at all. This is true in cultural matters, and it’s true in financial matters as well, where markets have a tendency to misrepresent truths with staggering regularity. What seems strong and stable on the surface may be weak and tenuous below, and the challenge becomes determining how well perception is aligned with reality.
Nowhere is this better reflected in financial markets today than in an area one may least expect: Bonds. Investors typically look at bonds as the insurance policy of their portfolio, the sector that shrugs when equities, its higher energy cousin, thrashes. But the Dodd-Frank Wall Street Reform and Consumer Protection Act, the government’s regulatory answer to the Global Financial Crisis, may have unintentionally altered the risk profile of bonds by reducing liquidity, one of its more important attributes. On the surface, bonds appear to act as a ballast in one’s portfolio, but digging deeper a different picture emerges, one that may not be as straightforward as investors would otherwise expect….