Boeckh: What Goes Up, We Can’t Let Come Down

For my first time at the CFA Society of Chicago Book Club, I read The Great Reflation: How Investors Can Profit from the New World of Money by J. Anthony Boeckh, published by John Wiley & Sons. He describes how the government is trying to recreate the positives of economy that ended when the bubble crashed in 2008, but without recreating the same excesses. The book is divided into three parts.

Part 1 concerns the causes of the recession. Inflation and debt are conventional and hard to disagree with. Then, in Chapter 3, he turns to a theory of "long waves" in economic cycles. While Boeckh doesn't think that such waves are completely controlling of what will happen in the economy, he also doesn't seem to think economies can escape them. He explains a history where economies are in a positive wave for about a quarter century and then a negative wave for a quarter century. Nevertheless, he thinks we've been in a down wave since the early 1970's, that was interrupted in the 80's and 90's, only to continue. He concludes that this wave will continue for at least a few more years. I appreciate the Schumpeterian reasons he cites for cyclicality in the economy, the argument about the timing for the waves sounds a lot like permanent advocates of a market condition talk no matter what reality is saying that he condemns elsewhere.

Part 2 is about how to invest during the period of reflation. As Boeckh discusses each asset class, however, his advice is mainly that which could be given at any time. For stocks, he recommends fundamental analysis, with some help from behavioral and technical insights; obviously, that was no less true a couple years ago, or even decades ago. He said we were at the end of a long bull market in bonds, which is for the most part necessarily true because nominal interests rates have become so low, although he was writing before the last run up in bond prices since May that he didn't seem to expect. He's bearish on the dollar, but every other major currency has problems too. Gold is probably following a similar bubble pattern to that of the 1970's and early 80's. The chapter on commodities is best; while this class may provide decent diversification and inflation protection in the short run, data going back two centuries shows that they horribly underperform. The real prices of wheat, cotton, and copper are down 75% to 85% since 1800 because technology will always allow the supply to rise to meet the demand. Similarly, the real price of real estate tends to appreciate very slowly over time, with the bulk of returns coming from the flow of benefits, be they rental cash flows or the real benefit of living in a house.

Part 3 tries to tie everything together, but without much success. It's easy to say that the U.S. is in at least relative economic decline, because there was a time at the end of World War II when it had a majority of the world's productive capacity. He seems pessimistic about politicians making what he considers the right decisions about the economy; he probably would like the Tea Party movement even though they are for fiscal austerity. He cites a wave theory of politics and the economy; I cannot take this idea seriously as it says that 1933, when FDR came to office, and 1985, when Ronald Reagan was re-inaugurated, were both "conservative" highpoints. In the end, though, he thinks we'll muddle through.

Most of the other members of the book club agreed with me that the book was disappointing. The investment advice was not very helpful, and the economic analysis was either not very rigorous, too tepid in its conviction, or an unfortunate confusion of fact with opinion.