There was a knock on the door of 221B Baker Street, where the nameplate above the buzzer read “S. Holmes.” A woman opened the door, showing in a sullen, heavily cloaked figure. She was accustomed to silent petitioners visiting her tenant to make accusations, seek resolution, and clear their names. Which would this one be?
The figure stepped into a study warm with crackling fire and the smell of pipe tobacco. A lanky, imposing man stood with his back to the guest, gazing out the window over the street below. He quickly turned and launched the conversation.
Sherlock Holmes: I’ve been expecting you.
Guest: You don’t know who I am.
SH: Of course I do. You are Capital Markets.
CM: You are correct, of course, and I should not be surprised. How did you ascertain my identity?
SH: It was only a matter of time. The headlines have been merciless of course, criticizing you, admonishing you, punishing you. The pressure must be most intense. Your breathing reveals one burdened by expectation that cannot be met, and your shoes shuffle across the floor uncertainly as if you do not know where you are going. Lastly, it is Sunday and you have time to seek my counsel.
CM: You know my situation well, but I do not know how helpful you can be.
SH: State your case.
CM: I am being framed.
SH: The accusation?
CM: I am to be blamed for imminent economic collapse over which I have no control.
SH: Collapse of what?
CM: Just about everything.
SH: A bit dramatic don’t you think?
CM: I’m Capital Markets—I’m unemotional.
SH: What is your evidence?
CM: Start with Pension funds. You know the important role they play in the economy. They provide—or will provide—a meaningful income to a significant portion of the population, people who in turn spend those funds on food, clothing, housing, entertainment, health care, even taxes. It’s a giant perpetual stimulus and must be sustained.
SH: Agreed. So what is the problem?
CM: Well, most Pensions assume that I, Capital Markets, can easily provide returns of 7.5 – 8.5 percent, a task I simply cannot achieve with any strong likelihood over the coming three decades. Pensions with these assumptions are unlikely to fulfill their obligations; then, I will be blamed by the very people who set the unreasonable assumptions.
SH: Surely you are underestimating yourself, for you have achieved such feats in the past, have you not?
CM: Of course I did!
SH: Then simply do it again and all will be well.
CM: Alas! Even the great Sherlock Holmes does not understand!!
SH: Persuade me then, and I will be your greatest ally.
CM: I will do my best. It starts with a bond…
SH: My friend, James?
CM: No. Treasury.
SH: I see. Continue.
CM: Go back to the early 1980’s when Defined Benefit Plans have been broadly adopted by corporations and municipalities, ERISA is in force, and most importantly, you can buy a 30 year US Treasury Bond yielding 12-14%, reaching 15% in the fall of 1981.
SH: Your point?
CM: In 1981, I, Capital Markets, stood at a major inflection point, about to experience over 30 years of falling interest rates, translating to compelling bond yields plus bond prices increasing as interest rates fell. Thus, even the most conservative of bond investors could annualize bond returns in the low teens for the following two decades. If one can earn such return with bonds alone, then earning 7.5 to 8.5 percent per year on a diversified portfolio is easy.
SH: And now?
CM: The other end of the spectrum. The 30 year run has come to an end, for interest rates can hardly go lower. Looking forward, interest rates must stay roughly the same or rise. Either way, I’ll be lucky to get 4% per year from government bonds for the next thirty years, whether I am in the US, UK, Germany, Denmark, Japan—you get the idea, yes?
SH: Yes, for you know my method. It is founded upon the observation of trifles. And this is no trifle. This inflection point should be patently obvious.
CM: You see my predicament. Do you see a solution?
SH: Let’s begin with those who seek to frame you. Who might they be?
CM: Nearly everyone, I suspect.
SH: Be specific.
CM: Pension boards striving to fulfill the demands of overpromised and underfunded benefits, public charities needing their endowment distributions, private foundations seeking to maintain spending power in perpetuity, politicians appeasing their constituents, financial planners…I could go on.
SH: No need. What is their motive?
CM: I don’t know. I’m the Capital Markets. I don’t care about motives and needs and desires and fears. I just am. My facts are my facts.
SH: Of course. However, I have learned that one begins to twist facts to suit theories. Unfortunately, you and your facts are in the way of many stakeholders who need you to be different.
CM: But I cannot be different than I am!
SH: Then they can blame you when things don’t work out.
CM: Is there no way out of this muddle?
Suddenly, the lights go out and the shades swing closed. The room, plunged into darkness, becomes a cacophony of crashing furniture, shouts and cries, and a sudden and conclusive thud. Footfalls run down the stairs and out to the road below as a low slow groan echoes through the room. Groping in the dark, Holmes finds a candle and matchbox and soon an eerie glow fills the room. His newest client lays sprawled out on the floor, blood seeping from his forehead.
SH: Are you all right then?
CM: (moans) Not worse.
SH: Did you know those assailants?
CM: (another groan) If I knew them, then I would not be here seeking your guidance. I know they torment me day and night. They come en masse and they are brutal. They don’t like what I represent or what I say.
SH: I know them, I fear.
CM: I thought you might! Who are they?!
SH: They are that dangerous gang known as American Public. An unforgiving lot, really. And there is nothing that they hate more than an obvious fact. And that, my friend, is what you are.
CM: How do you know it is American Public?
SH: Clearly you see but you do not observe, for the little things are infinitely the most important. Consider this: They hound you constantly, so they are obsessed with you even as they invalidate you. They confront you in darkness, not in light where facts and realities can be seen. They let politicians speak for them when in fact they have the most at stake and drive the politicians. And then the violence. Look how they strive to flatten you, to twist you. I am reminded of the famous case of Japan v. Japanese Public as well as echoes of that early case Roman Empire v. Romans. Similar situations, unfortunately.
CM: So, am I doomed?
SH: I don’t think so. American Public is relentless and hounding, but if you shift your own point of view a little, you may find it pointing in an equally uncompromising manner to something entirely different.
CM: How so?
SH: Well, at the end of the day, you win. American Public can manipulate you, exhaust you, and blame you for all kinds of ills, but as you yourself said, you are rather unemotional, so it should not matter, correct?
CM: Are you saying that I should do nothing?
SH: Not exactly. Be yourself. Just because they demand 7.5 – 8.5 percent per year and plan their lives and economy around that expectation does not mean that you are at fault for not meeting it.
CM: But then they will fail…
CM: So down the road…
SH: American Public doesn’t care about down the road. Down the road is for them nothing but an escape, one already used by our assailants tonight and one they will continue to use so long as they can. They do not care about the road ahead and neither should you. You have a job to do and must do it.
CM: You are cold.
SH: I, like you, am bound by facts. Ultimately, in time, the facts win out. You should recognize that even better than most.
CM: Case closed, then?
SH: As closed as it can be.
And so Capital Markets left the office on Baker Street. Not happy exactly or even satisfied, but understanding. Sherlock Holmes had reminded Capital Markets who is in charge, and that neither pleading nor threats from American Public could change Capital Markets.
Capital Markets felt a kinship with Sherlock Holmes, for both in their own way represent “the most perfect reasoning and observing machine that the world has ever seen.” And that, the American Public cannot change.
American Public would continue to be a nemesis, but more to its own future than to Capital Markets. And perhaps, just perhaps, one day American Public would deduce the reality of the situation and stop looking to Capital Markets to solve its economic problems. Perhaps.
The author thanks Sir Arthur Conan Doyle for the occasional Sherlock quote woven into the fabric of this conversation and hopes to have done justice to the spirit of his efforts.
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