We like to believe we control our conscious thought.  But I believe our subconscious – the “hard drive” part of our brain – is far more powerful.  It not only records our experiences but is utterly ruthless in the recall of anything which impacts us negatively.  My first business encounter with that was the day I received a U.S. Treasury certificate having a stated face value of $50,000.  That was an immense amount of money in 1966.  At the time, it was a period of rising interest rates … much as it is now.

The certificate had been sent by a new client, Alfred Dailey, a Chevrolet dealer in Boston.  It was a “reward” (hopefully for the two of us) for having bought him a hundred shares of Digital Equipment two months earlier at $20.  The stock was $30 when I got the “money.” Enclosed was a note, “sell the bonds and buy whatever you like.” Bonds then were unlisted (not on an exchange) and traded over- the-counter (on the phone).   Unlike listed stocks, bonds were transacted in a dark “hidden “market. 

At the time, I was aware fixed income had been in a bear market since 1945. (It would last for 37 years)!   Al had bought the bonds in 1955 when Fed funds were 1.75%.   But by 1966 inflation had been moving up and Fed funds were 4.5%.  The bonds had 20 years left until maturity.   When I called a trading desk in New York to see what I could sell them for, I was shocked.  I had no grasp of the impact rising interest rates - and a bond’s maturity - would have on current value until I got that quote.  I was naive. 

The fixed income trader’s bid for the bonds was roughly $600 per bond.  The treasuries were worth – at the time - not $50,000 but just over $30,000!   That quote would have an impact on my subconscious.   Like most people, I had thought bonds were safe.  After all, wasn’t that why people bought them?  Certainly they were thought to be safer than stocks.  But that was proven to be dead wrong when I got the quote.  Over 50 years later, people still believe what I thought in 1966.  Why would they not?

That’s because there is no institutional memory in the fixed income experience.  Over the past 70 years, fixed income has had two secular bear and bull cycles each going for roughly 35 years.  Few have seen both.  Consider this investment commentary on the recent 2^nd quarter by the largest investment manager BlackRock.  “… Pension funds and sovereign wealth funds were both cutting back on stocks in favor of less risky assets.  Retail investors similarly, pulling $1.6 from BlackRock equity strategies while buying $6.2 billion in bond investments.   Of course, when I told Alfred Daily his bonds were worth 40% less than what he paid for them, he was shocked.  He had bought the U.S. Treasuries in good faith as I’m sure BlackRock’s customers have done.   

It is a very different world now than it was in 1966.  But we are coming off a period of historically very low interest rates.  Thus, I would expect a period – in concept- similar to Al Dailey’s.   If so, the overall stock market will go sideways for a period of time while the bond market continues to decline.  Unfortunately, I did just the one trade for Alfred Dailey.  But I learned from the experience stocks were NOT riskier than bonds.  It was quite the reverse.  Digital Equipment was an absolute “homerun.” 

-Francis Patrick Boland