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THE WAGER
ON CENTRAL PLANNERS
JULY 7, 2000
Before the start of this bull market in 1982, our views were controversial. The main one , "no matter how much the Fed prints, stocks will outperform commodities", was impossible according to Street wisdom. This has worked out, but yet to be concluded is the other observation that the Fed would never voluntarily quit its portion of credit inflation.
These points required no great imagination or conjecture. There was no evidence in the literature of a senior central bank ever preventing a financial bubble. Indeed, there is ample evidence of accommodation and even complicity in the speculative furies.
A prudent investor approach would consider that the wager that policymakers can keep a bubble going has never been successful. Keep in mind the "convergence" theory that European spreads would narrow to almost zero with the EU. Promoters of this one didn't do their due diligence. When most countries in Europe were on a gold standard, which is the best common money, yield spreads between, say, Spain and Germany were significant.
The convergence wager was one of the greatest and most expensive blunders in financial history.
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