In my 3 decades in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today. 

It all started with the so-called “Nifty Fifty.” The Nifty Fifty comprised the stocks of companies that were considered the best and fastest-growing – so good that nothing bad could ever happen to them. For these stocks, everyone was sure there was “no price too high.” until you were sitting on losses of more than 90% . . . from owning pieces of the best companies in America. Perceived quality, it turned out, wasn’t synonymous with safety or with successful investment. 

Meanwhile, over in bond-land, a security with a rating of single-B was described by Moody’s as “failing to possess the characteristics of a desirable investment.” Non-investment grade bonds – those rated double-B and below – were off-limits to fiduciaries, since proper financial behavior mandated the avoidance of risk. For this reason, what soon became known as high yield bonds couldn’t be sold as new issues. But in the mid-1970s, Michael Milken and a few others had the idea that it should be possible to issue non-investment grade bonds – and to invest in them prudently – if the bonds offered enough interest to compensate for the risk of default. In 1984, I started investing in these securities – the bonds of perhaps America’s riskiest public companies – and I was making money steadily and safely. 

In other words, whereas prudent bond investing had previously consisted of buying only presumedly safe investment grade bonds, investment managers could now prudently buy bonds of almost any quality as long as they were adequately compensated for the attendant risk. The U.S. high yield bond universe amounted to about $2 billion when I first got involved, and today it stands at roughly $1.2 trillion. 

This clearly represented a major change in direction for the business of investing. But that’s not the end of it. Prior to the inception of high yield bond issuance, companies could only be acquired by larger firms – those that were able to pay with cash on hand or borrow large amounts of money and still retain their investment grade ratings. But with the ability to issue high yield bonds, smaller firms could now acquire larger ones by using heavy leverage, since there was no longer a need to possess or maintain an investment grade rating. This change permitted, in particular, the growth of leveraged buyouts and what’s now called the private equity industry. 

However, the most important aspect of this change didn’t relate to high yield bonds, or to private equity, but rather to the adoption of a new investor mentality. Now risk wasn’t necessarily avoided, but rather considered relative to return and hopefully borne intelligently. This new risk/return mindset was critical in the development of many new types of investment, such as distressed debt, mortgage backed securities, structured credit, and private lending. It’s no exaggeration to say today’s investment world bears almost no resemblance to that of 50 years ago. Young people joining the industry today would likely be shocked to learn that, back then, investors didn’t think in risk/return terms. Now that’s all we do. Ergo, a sea change. 

Now what are the factors that gave rise to investors’ success over the last 40 years? We saw major contributions from (a) the economic growth and preeminence of the U.S.; (b) the incredible performance of our greatest companies; (c) gains in technology, productivity and management techniques; and (d) the benefits of globalization. However, I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all. 

In a recent visit with clients, I came up with a bit of imagery to convey my view of the effect of the prolonged decline in interest rates: At some airports, there’s a moving walkway, and standing on it makes life easier for the weary traveler. But if rather than stand still on it, you walk at your normal pace, you move ahead rapidly. That’s because your rate of travel over the ground is the sum of the speed at which you’re walking plus the speed at which the walkway is moving. 

That’s what I think happened to investors over the last 40 years. They enjoyed the growth of the economy and the companies they invested in, as well as the resulting increase in the value of their ownership stakes. But in addition, they were on a moving walkway, carried along by declining interest rates. The results have been great, but I doubt many people fully understand where they came from. It seems to me that a significant portion of all the money investors made over this period resulted from the tailwind generated by the massive drop in interest rates. I consider it nearly impossible to overstate the influence of declining rates over the last four decades. 

The Recent Experience

The period between the end of the Global Financial Crisis (GFC) in late 2009 and the onset of the pandemic in early 2020 was marked by ultra-low interest rates, and the macroeconomic environment – and its effects – were highly unusual. 

An all-time low in interest rates was reached when the Fed cut the fed funds rate to approximately zero in late 2008 in an effort to pull the economy out of the GFC. The low rates were accompanied by quantitative easing: purchases of bonds undertaken by the Fed to inject liquidity into the economy (and perhaps to keep investors from panicking). The effects were dramatic: 

As a result, in this period, the U.S. enjoyed its longest economic recovery in history (albeit also one of its slowest) and its longest bull market, exceeding ten years in both cases. 

In fact, the overall period from 2009 through 2021 (with the exception of a few months in 2020) was one in which optimism prevailed among investors and worry was minimal. Low inflation allowed central bankers to maintain generous monetary policies. These were golden times for corporations and asset owners thanks to good economic growth, cheap and easily accessible capital, and freedom from distress. This was an asset owner’s market and a borrower’s market. With the risk-free rate at zero, fear of loss absent, and people eager to make risky investments, it was a frustrating period for lenders and bargain hunters. 

That Was Then. This Is Now. 

Of course, all of the above flipped in the last year or so. Most importantly, inflation began to rear its head in early 2021, when our emergence from isolation permitted too much money to chase too few goods and services. Because the Fed deemed the inflation “transitory,” it continued its policies of low interest rates and quantitative easing, keeping money loose. These policies further stimulated demand (especially for homes) at a time when it didn’t need stimulating. 

Inflation worsened as 2021 wore on, and late in the year, the Fed acknowledged that it wasn’t likely to be short-lived. Thus, the Fed started reducing its purchases of bonds in November and began raising interest rates in March 2022, kicking off one of the quickest rate-hiking cycles on record. The stock market, which had ignored inflation and rising interest rates for most of 2021, began to fall around year-end. 

From there, events followed a predictable course that caused pessimism to take over from optimism. The market characterized by easy money and upbeat borrowers and asset owners disappeared; now lenders and buyers held better cards. Credit investors became able to demand higher returns and better creditor protections. The list of candidates for distress – loans and bonds offering yield spreads of more than 1,000 basis points over Treasurys – grew from dozens to hundreds. 

My personal outlook 

Inflation and interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years. While history shows that no one can predict inflation, it seems likely to remain higher than what we became used to after the GFC, at least for a while. The course of interest rates will largely be determined by the Fed’s progress in bringing inflation under control. If rates go much higher in that process, they’re likely to come back down afterward, but no one can predict the timing or the extent of the decrease. 

What we do know is that inflation and interest rates are higher today than they’ve been for 40 and 13 years, respectively. Regardless, I think things will generally be less rosy in the years immediately ahead: 

The bottom line for me is that, in many ways, conditions at this moment are overwhelmingly different from – and mostly less favorable than – those of the post-GFC climate described above. These changes may be long-lasting, or they may wear off over time. But in my view, we’re unlikely to quickly see the same optimism and ease that marked the post-GFC period. 

We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And more importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead. 

That’s the third sea change I’m talking about today. 

As Erich Fromm wrote, “Man is the only animal for whom his own existence is a problem which he has to solve.” 

Today, we face new and complex challenges that demand our attention and action. As entrepreneurial and concerned citizens, it is our responsibility to ask ourselves the tough questions – what kind of nation do we aspire to live in, work in, and raise our families in? What kind of America do we believe in?

We are a nation founded on the principles of innovation, hard work, and determination. Our entrepreneurial spirit is at the core of what makes America great. However, our government has been mired in political polarization, leaving the business of America behind. It is time for each of us to take a stand and make sure our country is not destroyed by apathy and inaction. Each of us must take an active role in the political realm if we want to restore our nation to its former glory.

We are at a crossroads in our nation’s history. The stakes are high, and the consequences of inaction are dire. In this series of thought-provoking blogs, I will be shedding light on the pressing issues that America is facing and offering solutions that will help us thrive in these turbulent times.

One of the most pressing issues in today’s world is America’s healthcare system. Despite having one of the highest per capita health care expenditures in the world, the US ranks 37th worldwide in the World Health Organization evaluation and last in Commonwealth Fund reports in terms of healthcare quality when compared to 11 other developed countries. 

As Americans, it is our duty to ensure that our healthcare system is effective and efficient, providing access to quality care for all. Unfortunately, our current system is failing us, with skyrocketing costs and limited access to care. It is time for a bold, capitalistic approach to solve this critical issue.

Empowering medical professionals to practice their professions without government interference is a start to improving patient-centered care. Physicians should be able to order tests and treatments without the need to meet certain criteria ordained by patients insurance companies. They should also be allowed to have open conversations with patients without the fear of being judged or punished. By finding this balance, we can improve patient outcomes and ensure that patients receive the best possible care.

Additionally, our healthcare system should encourage investment in artificial intelligence and machine learning, providing tax incentives to encourage innovation and improvement in the healthcare industry. To further promote investment in the healthcare industry, our government should offer tax incentives for hedge funds, family offices, high net worth individuals, and crowdfunding to invest in healthcare, as this will create new jobs and help drive up the GDP contribution of healthcare, which currently accounts for 17.9% of the US economy.

For example, AI and machine learning can be implemented to improve patient diagnosis and treatment plans, as well as help manage administrative tasks like appointment scheduling, billing, and even doctor-patient communication. This can lead to improved patient outcomes, increased efficiency, and lower costs. Additionally, investing in health data research through AI could help us better understand the causes and impacts of disease and predict and prevent disease outbreaks, providing us with valuable insights into the health of our population.

Implementing a national health insurance program is another initiative that can reduce costs and increase access to care, as evidenced by the success of such programs in other countries such as Canada and the UK. This program should provide comprehensive coverage without limiting choices or reducing quality of care and should be designed to be portable across state lines. To ensure competition and drive down costs, this program should be implemented by private, entrepreneurial insurance companies, doctor-run conglomerates, union, and community health co-ops. 

The government should also offer tax incentives to foster the growth and development of these organizations, such as providing tax breaks for small businesses offering insurance or offering credits for individuals and families who purchase health insurance. Additionally, we can reduce costs by implementing price transparency, allowing Medicare to negotiate prescription drug prices, and incentivizing value-based payments for healthcare providers to focus on providing quality care rather than quantity of services. This can be done by rewarding providers for achieving specific quality metrics, such as reducing readmission rates or increasing patient satisfaction. This shift away from fee-for-service models can help reduce costs while also improving patient outcomes.

Telemedicine is another key solution that can provide access to care in rural and underserved areas, providing patients with a sense of security and convenience as well as providing care to homebound or time constrained individuals in urban and suburban areas. By utilizing technology, patients can receive care from the comfort of their own homes, reducing travel costs, missed workdays, and unnecessary emergency room visits. 

Additionally, we must incentivize preventative care, invest in primary care, and improve coordination of care to ensure that patients receive the right care at the right time. This will help reduce costs by avoiding unnecessary treatments and tests, while also improving the patient experience by providing timely and appropriate care. Telemedicine will help reduce wait times, eliminating the need for patients to wait days or weeks to receive care. To ensure access in areas with limited internet connectivity, telemedicine can also be provided through mobile apps, online or telephone consultations. Improving access to care in rural and underserved areas will help reduce health disparities in those communities.

The use of new technologies such as virtual reality (VR), open AI, quantum computing, and wearable devices like pulse meters, medical watches, biofeedback devices, heart monitors, athletic monitors, etc., will allow doctors to inexpensively monitor patients from remote locations. Open AI can be used to analyze large amounts of medical data, which can improve patient outcomes and help doctors make better-informed decisions. Wearable devices like medical watches and heart monitors can track patients’ vital signs in real-time and alert doctors to potential problems.

Investors can also get involved in developing new technologies that allow patients to receive care at home. For example, telehealth companies like Teladoc and Doctor on Demand offer virtual consultations with doctors, while companies like Livongo and Omada Health offer digital coaching and monitoring for chronic conditions like diabetes and hypertension.

Another example is the company Biofourmis, which uses wearable devices and AI to monitor patients with chronic conditions, alerting doctors to potential problems before they become serious. By investing in these and other innovative technologies, we can improve access to care in rural and underserved areas, reduce costs, and improve patient outcomes.

As a patriotic American, it is important to consider the monetization opportunities for investors in addition to those listed above in this blog. Companies like CVS Health Corporation, Optum, and Humana are leading the charge in developing new technologies and implementing value-based payments, providing opportunities for growth and innovation. Athenahealth and Cerner are also providing technology solutions that enable better coordination of care and improved price transparency, creating a more efficient and effective healthcare system.

In conclusion, the US healthcare system is in dire need of an overhaul. It is expensive, complex, and inefficient, with costs rising faster than inflation and access to quality care becoming increasingly difficult to obtain. Furthermore, government regulations have led to a lack of patient-centered care and physician autonomy, leaving our healthcare system in disarray. A patriotic, capitalistic approach is necessary to address these issues.

You’ve heard your kids talking about socialism recently. Maybe they didn’t realize exactly what it was, and maybe they didn’t use the proper terminology, but it caught you by surprise. Where could they have learned that? A friend at school? Or even worse, a teacher?

The fact of the matter is that if we don’t talk with our kids about socialism first, they’ll learn about it somewhere else—most likely from someone with their own socialist tendencies.

Everywhere you turn, socialism seems to be gaining popularity with our youth. From popular movies and television shows, to musical lyrics and social media activism, the principles of socialism are being marketed to our youth as the only feasible solutions to the problems they see in society—problems that have been blamed on capitalism.

And herein lies the problem: our children don’t actually know the difference between capitalism and socialism, or any other economic model for that matter.

A recent Pew survey conducted by researchers at Harvard found that more young Americans (ages 18-29) hold favorable views of socialism than capitalism. Yet, among that same demographic, only 27% believe the government should play a large role in regulating the economy. Confusion
abounds.

What is the socialism that is being marketed to our children?

Promises of universal health care and a debt-free college education lure them in like a moth to a flame. Socialism no longer requires a dictator when an army of well paid, low-level bureaucrats can be just as effective. This type of socialism is not scary to our children. It is the only type of government most of them have ever known.

So what can be done?

“Freedom is never more than one generation away from extinction,” Ronald Reagan once said. “We didn’t pass it on to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children’s children what it was once like in the United States where men were free.”

Nearly five decades have passed since Reagan uttered those famous words, reminding us of our obligation to teach the principles of freedom and free enterprise. The situation we face may be different than previous generations, but the responsibility still falls upon us to teach our children how to live free and allow others to do the same. So, how are we going to do that?

• Understand the Dangers of Socialism.
  • Rather than simply decrying anything and everything we don’t like as socialism, and expecting that to sufficiently deter our children, we must be able to explain to them exactly why these policies, and the philosophies upon which they are founded, will harm people. Democratic Socialism preaches a message of inclusiveness, but socialism has been much less friendly to marginalized populations when actually practiced.
  • When we point out the millions who have been murdered or starved as a result of socialist regimes through the 20th century, our children draw a distinction between the tyrants of the past and a more democratic approach to socialism of the day. Without ignoring those victims of the past, we need to also shine a light on modern examples, like young Charlie Gard, who was not only denied access to medical treatment by bureaucrats and judges in the United Kingdom, but whose parents were barred from attempting to take him out of the country to seek medical treatment elsewhere. Such anecdotes are common, but few receive any media attention. These are modern examples of socialism’s failure.
  • Socialism is not dangerous simply because it tends to lead toward political dictatorship, but because it systematically makes bad decisions about how to allocate the scarce resources people use to satisfy our wants, eliminates any possible mechanisms that might provide feedback showing misallocation, then creates barriers to prevent individuals from trying to correct those errors. Austrian Economists Ludwig von Mises and Friedrich von Hayek explained this phenomenon in great detail in their discussions of the socialist calculation.

• Clarity of Language
  • As was noted previously, part of the appeal of democratic socialism is that it promises to deliver on things that appeal to our natural yearning for self- expression and freedom. It does this by using language that is intentionally deceptive.
  • Our best tool to combat such confusion is to consistently and accurately label these ideologies and philosophies. Government interventionism to support business or “protect American interests abroad” are no less socialist because they are embraced by the political right. In many cases, it is the capitalists who are the greatest enemies to a capitalist economic system.

• Intellectual Honesty
  • Along those same lines, if we want our children to be able to discern between socialism and capitalism, we must be honest about the different aspects of our mixed economic model, especially those which are socialistic. Which industries are heavily regulated by government bureaucrats? In which industries does the government exercise an effective monopoly? Are these services really so unique that market principles of capitalism could not provide them?
  • We must also recognize some of the negative outcomes that have been the result of the more capitalistic elements of our economy. The market really does fail, because the market is made up of the actions of regular humans. People make mistakes. We need to be honest about that when it happens (though there is often an underlying rule or regulation that incentivized such an action).
  • Socialists claim that private property rights cannot exist without government intervention, and we often give them intellectual ammunition to support this claim by demanding intervention to protect not only property rights, but property values. Socialism to promote “economic development” is still socialism.

• Allow Them the Benefit of Property Rights
  • The best way to teach the positive value of personal property rights is to allow children to experience the benefits of such a system firsthand. Children have a natural tendency to want to protect what is theirs. They quickly learn the power and utility of the declaration, “Mine!” Unfortunately, the lesson soon follows that crying and an appeal to parental authority can supersede the property claims of others, as mom or dad, seeking a simple method to calm a sibling squabble, will force the property holder to share the toy or game in question.
  • It only takes a few seconds to appeal to the offended child’s own sense of ownership to help them understand why they would want to have the same rights afforded to them. Encouraging children to share voluntarily, then respecting their decision when they decline, will teach them the importance of consent in other aspects of their lives.