Road Kill on the Greenspan Highway

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You have
heard the phrase, "Frozen like a deer caught in the headlights."
The phrase is incorrect.

I am an expert
in deer that get caught in headlights. Also in broad daylight.
Also at dusk. So far this year, I have hit three of them. One
of the collisions cost me several hundred dollars to fix my brand-new
1993 Dodge van. (If you ever hit a deer with your Lexus, you will
wish you drove a 1993 van.) Another collision somehow merely dented
slightly the front end of my luxurious 1986 Honda, the car my
wife refuses to ride in. Given the fact that I was going about
40 miles an hour when I hit that deer, propelling it upside down
across the road, the lack of damage (to the car) was something
of a miracle.

Let me assure
you, a deer caught in a car’s headlights doesn’t stand still.
On the contrary, it goes forward. These animals think they can
outrun a car by running directly in front of it . . . or even
by walking. They have no understanding of what a fast-moving car
can do to them.

They remind
me of investors.

One of these
deer started running from the far side of the road on my left.
It didn’t run across it at a 90-degree angle. It ran forward at
about a 30-degree angle, as if it was trying to head off my car.
It whacked the left side, knocking the side view mirror inward,
making the glass pop off and fly into the car. Then, having learned
that hitting a car is not productive, the deer angled off to the
left back into the brush.

These animals
often go in pairs or trios. The first deer spots the car barreling
down the road, and it runs across the road. It’s time to hit the
brakes, because one or more deer may follow the first one that
has just crossed the road and headed into the brush. The followers
pay no attention at all to the fast-approaching car. They follow
the first one dutifully, not always at a run. They trust the judgment
of the first one, which had a head start.

As I said,
they remind me of investors.


A deer decides
to cross a road. It instinctively moves forward when it’s scared.
So, it sees a car and decides to run. But it runs only forward.
I have hit five of them, and they all have been moving forward
when I hit them. It never occurs to them to stand still, or else
turn and run back into the brush behind them. They see the trees
across the road, and they imagine safety. They see a car coming,
and they do not compare their speed with its speed. Fear = run
forward: this is the limit of a deer’s response to a car. Headlights
or not, a scared deer runs forward.

The deer
that is second or third in line follows the leader. If it sees
a car coming, it gives little visible awareness of the fact. The
first one makes a judgment to move across the street at some rate
of speed, and the followers match this rate of speed. If deer
#1 walks, they walk. They stay in line.

They are
the equivalent of mutual fund investors. They want to know they
are doing the right thing. They follow the crowd.

are different. They run alone. You never see three squirrels trying
to cross the road at once. A squirrel will look, stand still,
make a decision to run forward, stop, and then make another decision.
Sometimes the squirrel makes it. Sometimes it’s thump, thump.
But it usually gets hit while it’s moving. It may be moving forward
or reversing its field. But at least it isn’t programmed to move
forward in every instance. It doesn’t play follow the leader.

They sit
still, look at the looming crisis, run, stop, look again, and
then try to get away. Sometimes they wait too long. But at least
they give the impression of trying to assess the threat and select
a proper response.

are like investors who buy individual companies.

There are
more mutual fund buyers than buyers of individual shares. This
was not true two decades ago, but it is now. Investors want safety
in numbers. They want to follow the crowd. When the market changes
on them, the early ones get across the road. The late-starters


The squirrel
is a loner. It is willing to make its own assessment of risks
and rewards. It moves fast, but then it stops. That’s what gets
a squirrel run over. It stops. It just can’t make up its mind.
It keeps reassessing the situation. Then it tries to get out of
the way. If it would just let a car speed over it, it might survive.
It sits immobile in the middle of the road, which is safer than
any other location if the car is almost upon it. But it refuses
to sit still. It always decides to run.

The deer
in a line lets the lead deer make up its mind. Once the lead deer
decides to move forward, which it always does, the followers proceed
at the same pace.

The deer
by itself runs straight ahead. It leaves the safety of the far
side of the road in a vain attempt to get to safety on the other
side. It thinks it can outrun a car, no matter how fast the car
is moving.

If they were
pure squirrels, more investors might survive. A squirrel feels
no compulsion to run into the street. Its problem arises when
it has made the move into the road, and then a car comes. It gets
into the freeze-run-freeze-run mode.

Most investors
are pure deer, and usually deer following a leader. They hear
of this or that trend, and they get in line. They want some other
person to take the lead. There isn’t a trend to follow until there
are some lead deer. Investors feel comfortable following the lead
of an industry or sector in some fund. They think there is safety
in numbers.

There isn’t.
The people in a mutual fund stay in because most others are staying
in. They keep their eyes on the guy in front of them. They would
be better off by paying attention to the approaching vehicle.


What has
amazed me about deer is that they don’t have any response other
than moving forward when they see a car. They don’t stand still
or move backward. They know only one direction: forward.

This car
is being driven by Alan Greenspan. Greenspan has learned to drive,
as they say, ahead of his headlights. When darkness falls, he
drives faster. He has become confident in his ability to beat
the odds.


It should
have become obvious to any intelligent investor a decade ago that
the world’s stock markets will have to be liquidated when the
baby boomers of every Western industrial country hit retirement
age. When the American stock market’s dividend rate went below
2%, with fund management fees at more than 1%, anyone with an
ounce of sense could see that income generated by stock dividends
will not be able to support retirees. Retirees will have to sell
their shares to get their hands on enough money to live on.

Now the Federal
Reserve System has used money creation to force down the federal
funds rate to the 1% range. Savings accounts and bonds are now
paying a third of what they paid two years ago. There will be
no alternative to liquidating capital — stocks, bonds, savings accounts — to
generate income unless rates go back up. But if rates go back
up, this will knock the stock market onto its back again.

investors are now going back into stocks. Corporate insiders are
selling like there’s no tomorrow, but the equity fund managers
are buying. Investors are pretending that the car is not fast
approaching. They keep their eyes only on the hind quarters of
the equally nave investor in front of them. They keep moving

They don’t
care about economic fundamentals. They make no attempt to time
their entry into or out of this market. They make no assessment
of how near the car is or how fast it’s going. They have decided
to move forward, and the details regarding the car don’t interest

They know
there must be a sell-off at some point. They don’t care. They
assume that they will make their money, sell their shares, and
find a high-yield investment, despite the fact that the baby boomers
will start retiring in 2011. They assume that the next decade
will be a replay of the 1990’s, which was a replay of the 1980’s.
Their instincts and the investment gurus tell them that most of
the time the stock market goes up. "Most of the time"
will protect them. Most of the time, deer get across a road, too,
as long as it’s a country road.

What saves
deer is that they stay off the interstates. But this is what investors
refuse to do. They have decided to cross where the traffic is
high and increasing. The more that the Federal Reserve pumps in
new credit money to keep the economy from tanking, and taking
the stock market with it, the brighter the headlights become.
But the deer know only one response: keep moving forward. Don’t
change course.

4, 2003

North is the author of Mises
on Money
. Visit
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