Shattered Shibboleths

It occurred to me that many of the shibboleths that people of my vintage were weaned on turned out to be untrue, at least in part.  Or if they were true, our elders neglected to give us the qualifications that should have accompanied them.  That is why I am now circumspect when I give advice to young people.  Other than very general bits of advice (which aren’t useful anyway).  The world has certainly made many of the truisms we grew up on obsolete and irrelevant and I certainly do not wish to steer a young, smart ambitious kid in the wrong direction.   Some of these “truths” came from the great oracles---Nobel Prize Winners—esteemed professors and wise mentors.  But without qualification, they turned out to have catastrophic consequences if followed blindly.

·        Stocks  - Spurring me to write this was an article in last Sunday’s New York Times Business Sections which showed that some classes of bonds had materially higher returns than stocks.  

“    ''Invest in stocks for the long run” had been the mantra of all of the finance professors and investment professionals for decades.  Next to “diversify your portfolio,” “invest in stocks for the long run” was a sure way to build wealth….until it wasn’t.  Jeff Sommers article last Sunday made a couple of important points.  “Over the past 20 years—which counts as a very long time for me—investments in important kinds of bonds have outperformed the stock market.”  Worse, the S&P 500 suffered horrendous declines during certain stretches   (losses of 49.2% from 3/24/00 to 10/9/02, 56.8% from 10/9/07 to 3/9/09, and 33.9% from 2/19/20 to 3/23/20).  This means a material change in lifestyle in retirement even if you have saved if you timed your retirement incorrectly.   With companies forcing workers into “early retirement” just as those declines hit, it is apparent that “investing in stocks for the long run” can easily become a trap for workers.

·      Residential Real Estate-  Living in Illinois, this is my favorite.  We were given two pieces of advice from nearly everyone upon graduation from college: 1. Start investing in a 401(k) right away, even if it’s not the maximum amount, and 2. As soon as you can scrape up a down payment, borrow as much as lenders will lend you to buy the biggest house you can buy, and then trade up as soon as you can.  The former was probably sound advice over the long haul.  The second was ok for awhile, until it wasn’t.   The real estate crisis of ’07-’08 shattered this shibboleth.  While real estate recovered in many places, Illinois lagged, and the steady increase in real estate taxes, the $10,000 cap on tax deductibility, and demographic changes have made this leveraged investment much less desirable.  In certain areas of Illinois, most notably the farther north and northwest suburbs, sellers are taking tremendous markdowns, as Crain’s real estate reporter Dennis Rodkin notes on a weekly basis (and this was before the COVID19 crisis). “Of America’s largest cities, Chicago is the most vulnerable in the new crisis to a new round of foreclosures and people walking away from their homes,” he notes in a recent tweet.  While the U.S. Constitution prohibits a “taking” of property without compensation, Illinois seems to have developed a work around by taking your equity away a bite at a time.  Owning your own home might still be the American Dream in some locales, in others it is the American Nightmare as local politicians see you as an ATM.

·    Free trade and China- As recently as two summers ago, free market economists such as Deirdre McCloskey were preaching the gospel of free trade, and excoriating Donald Trump for leveling tariffs on Chinese goods.  At lunch with her during the summer of ’18, McCloskey opined on the tariffs, “It’s just stupid.  Just stupid.”  While I am generally in favor of free trade, and I understand that free trade is an iterative process (we don’t have clean hands with respect to barriers and subsidies), our relationship with China has been disastrous, as the regime’s behavior has made clear during the COVID19 crisis.  While it was probably ok for China to manufacture and for us to import tchotchkes, the idea that we would let China strip out our manufacturing base was a horrendous strategic blunder.  We now see that China not only can and is willing to hold us hostage in pharmaceuticals, strategic components, and medical supplies, our governmental profligacy gives the regime sway over our finances.   None of our Western trading partners—Mexico, Canada, Australia or the EU—would hold us hostage.  Further, as the pandemic ravages our economy and our local governments ban religious services, gatherings and use drones and other surveillance methods to ensure compliance, we must ask ourselves whether China has become more like us or have we become more like China during the course of China’s membership in the WTO.

Finally, other long held beliefs are sure to be challenged in the future.

·        Education – This is one near and dear to my heart.  I am grateful for the education I received, but it has become apparent to me that the education bubble was due to burst and the pandemic is likely the needle that pops the balloon.  While college has clearly paid off for many in terms of lifetime earnings, that no longer hold true.  Dubious disciplines like “gender studies” have permeated institutions.  The admissions scandal rocked higher ed, along with disclosures that the head of Harvard’s chemistry department was arrested for nondisclosure of his relationship with China.  Harvard also graced the notorious Jeffrey Epstein with an office after he was arrested the first time. Scandals and lawsuits at Oberlin and Michigan State spotlighted the degree to which these institutions will protect their power structures and have become ideological mills.   Enrollments are expected to drop by 15% and revenues to decrease by $45 billion next year.  Like owning your own home, a college education is not an unqualified pathway to a more prosperous future.  I see community colleges, HBCUs, and online learning making inroads on traditional four-year colleges.

One Twitter posted sarcastically “Congrats to all new graduates with gender studies degrees.  An amazing future awaits you.”

That post succinctly says it all.

·        Be good.  Yes, we all want good behavior.  But a recent study showed that children that score a bit lower on behavioral conformity often turn out to be very successful entrepreneurs.  Many organizations pay lip service to “thinking outside the box” but mostly value conformity and compliance.  Being good has its limits.

We have entered an era in which conventional wisdom has been shattered.  I only give young people limited advice now.  Think for yourself.  Always be skeptical.  Be nimble.

Many of the old rules no longer apply.  Plan accordingly.