This week really has been about hope and change, up close and personal. One gets the sense from the breathless adulations permeating so much of media “content” that all that matters this week is the extravaganza happening within the Beltway. Yes, it is a big deal, something that only happens every four or eight years, and as previously remarked in these columns will definitely be changing up the rules on many a game. This is not the change I had in mind, however. Out here where the orbits of Austin and San Antonio almost intersect, and the goats and the armadillos roam (some deer, no antelope), very real change has come crashing in. As of late last week, High Road Value was transformed from a weekend avocation into a full time job. Whatever nascent plan I might have had to eventually transition from a traditional job got accelerated by the now all too familiar phenomenon of market panic causing share price erosion resulting in mass client defections resulting in severance packages. The good news in this is that despite the dramatic compression of that significant portion of my net worth that has been in stocks, I have the financial flexibility to spend a couple of years trying “something you always wanted to take a shot at”. Therein lies the silver lining, that High Road Value is going to get my full attention and become whatever it was meant to become, sooner rather than later, if it was meant to be at all.
In the weeks ahead, big changes will come to HRVA, including a new site to carry High Road Value Research. What is not going to change is our persistent “ruminations on things that matter for thinking investors” a credo that has carried us through journalistic misadventures stretching back now for the better part of two decades. At this juncture, the top of the list of “things that matter…” might be summed up in the question, “Will the next upturn in the Market be a regression to the upward skew that 100+ years of observation has defined as normal, or will it merely be an overdue decompression rally in the Great Terminal Bear Market?” A plausible case can be made either way. The next posting after this one will explore the possibility that something about the exceptional experience that has been the United States of America has over the past couple of decades been so irreparably damaged that this time, the center will not hold, and the discounted present value of claims on the fruits of enterprise will deteriorate in fits and starts for the rest of our lives.
Viewed in the light of civilizations that have come and gone over the past six or so millennia, the probability of this outcome is not insignificant. We will examine this potentiality in terms of “If it comes to pass that the center did not hold, it was probably because…” I take this tack because it has always been a good idea to bet against “the end of the world”. Betting otherwise always struck me as problematic: So you were right, now how, where and from whom are you going to collect the payoff? As the present disposition of my financial assets (whose identity will become a critical part of HRVA in the near future) illustrates, I do not see terminal decline as the most probable outcome. It is, however, sufficiently probable that it cannot be ignored.
My operative viewpoint continues to be that the financial asset valuations are extremely compressed due mainly to liquidity factors and will eventually decompress. We have just undergone what is probably a once in a lifetime liquidation sale of assets, many of which were purchased under the blithe assumption that they would never have to be sold, or if they did they would be as easy to sell as they were to purchase. This kindled a panic that turned into a roaring inferno with no small help of news media that is as corruptible as it has ever been (a low standard indeed). If, in looking to history for some clues as what the very near future might hold, one shifts his focus from millennia to that recent era demarked by the presence of the Dow Jones Industrial Average, the case for optimism gets a little more compelling. Part of the reason is because there is just so much more actual “history” (contemporaneous observations one can access and assess) to work with, as opposed to having to rely upon “expert” (typically someone with an ideological axe to grind and tenure buffering him from any kind of accountability) assessments of what seems to have been going on based on what little was written down in, say, 709 AD. What I have found is that however daunting the crisis du jour seems to be as we face it a day at a time, a random stab at nearly any date in our recent past will quite likely reveal a world fraught with at least as much peril.
This notion was recently reinforced as I was pondering how dramatically different the second decade of the 20th Century turned out from what anyone might have reasonably expected in late 1908. (Reading A Soldier of the Great War, by Mark Helprin, an excellent novel about an Italian soldier’s experience in WW1 might have helped this along.) Like the decade we are in, that first decade of the century had a major financial panic. Other than that, I had been inclined to understand it as an interlude of relative calm, best remembered by scientific advances by the likes of Albert Einstein and technological advances by Ford, Benz, the Wrights and many others. The kernel of a “lull before the storm/who knows how history will repeat itself in the decade after this one” article started to form. This notion abruptly evaporated, however, when I happened upon a book review in The Weekly Standard (Jan 5). American Lightning is about what came to be called the crime of the century, wherein on October 1, 1910, labor unionists blew up the Los Angeles Times building. Apparently, in twilight of that Gilded Age, a truly disruptive new technology was finding its way into the hands of some highly P.O.ed individuals. Alfred Nobel, who a century later we should excoriate for underwriting a Fund that would buttress the credibility of one truly lunatic prophet of global warming, figured out a way to render the destructive power of a barrel of black powder into a single easy to carry, easy to hide stick. Dynamite provided anarchists who previously had to settle for such tropes as assassinating heads of state, and socialists, many of whom were seeing astonishing success in elective politics, with a new and improved way of getting attention.
Put yourself in the shoes of an investor 100 years ago. (If you are over 47, you have already outlived your life expectancy. You are also very grateful that in 1899, a wonderful new drug called aspirin became available, making it possible for you to be less reliant on ethanol and opium to alleviate your aches and pains). In addition to having endured that 1907 Panic which Mr. Morgan was able to stem and eventually profit by, you live in a world where hundreds of thousands of violent men (200,000 dues paying members of the International Workers of the World alone) are seemingly trying, by whatever means necessary, to unionize every enterprise employing more than a few family members. (How pallid does the upcoming legislative brouhaha over “card check”, which if enacted will make it a little easier for unions to pitch their lousy value proposition, seems when compared with that world of private armies and bombs going off?) It is a world where settling grievances by means such as dueling and lynching has not quite died out. All over the country, not just in a few instances, or even dozens of instances, but at hundreds of workplaces, homes of business leaders, bridges and rail yards, bombs were going off. (Sounds worst than Iraq for the past year or so!) People were being killed for being of the enemy class, or simply at the wrong place at the wrong time (21 at the Times building). Even a cursory look (Google up “wobblies”, or “Wheatland Hop Riot”) bears out that as much as capital seems to be under attack today, it was much worse 100 years ago.
Despite all that visceral chaos and uncertainty, indeed, however much the Market has occasionally swooned in the face of manifold crises, the underlying trend has been up for as long as it has been measured. Anarchy, the wanton slaughter of World War, the outbreak of an epidemic perhaps even deadlier than the war that help precipitate it and the emergence of powerful states wholly given over to a totalitarian embrace of ideology completely at odds with the inherent dignity of the individual did not prevent a DJIA that was then a two digit number from reaching five digits at the end of the century.
The future is inscrutable, and the past is only so helpful in providing clues as to what might happen next. If it turns out that the Mega Bear is upon us, that the light of “life, liberty and the pursuit of happiness” that illumined a departure from squalor that had been the millennial norm is about to flicker out, one’s portfolio will be among the least of one’s concerns. More important decisions will revolve around emblems of conspicuous affluence, which would become liabilities in a world where resentment can be whipped up and then channeled into all kinds of unthinkable behavior (Google up Stalin and kulaks, for one of many examples). Such a prospect remains, at least for now, little more than idle speculation. For my money, “this too shall pass”, and a portfolio stocks representing durable enterprises will be worth a lot more in a year or two than it is today. However, the case that this precious thing called America has been damaged by what Lincoln called “the silent artillery of time” is much more compelling than in 1991, when I first started writing in the mode. I thought I saw the Mother of all Bear Markets then. I was wrong, and eventually saw things differently and spent most of the years that followed on the right side of history. On the other hand, maybe I was just way too early. Stay tuned.
Thomas J. Lewis
DJIA: 8228.10
Thursday, January 22, 2009
Saturday, January 10, 2009
Hope, Change and Perennial Hobgoblins
This first workweek of the New Year finds us almost recovered from an extended bout of “holidays with the families”, hopeful that the fire sale of “less liquid than they were supposed to be” assets by failing speculators and their erstwhile lenders is nearing its end, and pondering whatever changes to the Great Game might await us in the months ahead. To 2008, we can all say, “Good riddance!”
While it is likely that 2009 will see financial assets of all stripes recover dramatically from their once-in-a-generation oversold condition, substantive good news (anything more than pinpricks of comforting light at the end of the tunnel) is still a good ways off. We should expect the Market to climb a wall of worry, an edifice that is in large part attributable to what H.L. Mencken observed many years ago, that “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary”. I would have left off the last clause, as the hobgoblins tend to have at least some basis in reality. That the world is awash with manifold reminders of what the ancients called “fallen-ness” is real enough. Mencken simply observed what Roman political boss Crassus and his successors down to this day put into practice. Politicians find a way of treating each and every blemish on an otherwise well ordered world as a threat to our collective security and happiness the likes of which we’ve never encountered before, you better let us fix it for you before it’s too late. Anyone who has studied history beyond a Cliff Notes or docudrama level should understand that almost every moment of recorded history has some threat much more dire than what the talking heads are bludgeoning us with today. And as if it weren’t enough that the well-remarked ideological bias of the news media has degenerated to the point it has (J-school = indoctrination), it is a safe bet that the rapidly deteriorating outlook for so many journalists’ careers, that funereal atmosphere in newsrooms everywhere, is adding yet another wet blanket to our collective discomfort.
We should expect the news to remain dreadful until well after the changing of the guard in Washington DC, and steel ourselves against the temptation to despair. Clamor is important when one is trying to deliver the Granddaddy of all Pork Barrels in the form of a “stimulus package”. Clamor is also helpful when one is trying to “move on” past the decidedly fishy election in the Land of 10,000 (apparently more polluted than we thought) Lakes in order to confer the title of Senator on a decidedly unfunny “comedian”. (Does anyone remember anything memorably funny this guy ever said or did? I certainly can’t.) Investors are all clamoring to understand how new policies will affect the economy and the companies that make it up. Unfortunately, what is likely to end up mattering most over the rest of our investing lives will have very little to do with legislation being promoted by the President-elect and his pro forma re-election committee. One suspects that among the foremost beneficiaries of the proposed “tax cuts” will be Berkshire Hathaway, considering how of it is likely to end up in venues like Dairy Queen, underwriting a frenzy of super-sizing for the non-working class, so many of whom could stand to miss an occasional meal. The real mischief is going to happen in the judiciary. Liberty will suffer death-by-a-thousand-paper cuts at the hands of soon to be appointed judicial activists and their cronies. Tort Inc. certainly suffered some setbacks during the past half decade or so, with many marquee lead counsels ending up in exile or incarceration. That destructive beast has been wounded, but is a long ways from dead. Expect extortion-as-a-part-of-life, a stealth “tax” collected via insurance premiums that get loaded into the cost of everything, to become more apparent in the years just ahead.
The one thing that one can take to the bank when there is electoral change, a rule that should short circuit pointless speculation about anything ideological the political class and its enablers may have said along the way, is that it is all about changing “the rules”. The rules I have in mind are not written down anywhere. They are the ever changing rules of the semi-rigged version of the Great Game of buy low and sell high. The object of these rules is not the rules themselves but that changes are necessary to confer opportunity to one’s faction. In the vast swaths of the economy where commerce and government are intertwined, it is damn difficult to make money when everyone knows exactly what “the rules” are. It is less so if when the rules change one is a part of a limited coterie that knows and can act before everyone else figures it out (imitators) or reads about and then acts on it (idiots).
To glean a hint as to who might presently be sitting there licking their chops over the prospect of acting on this timeless truism, we have one of the most important of the permanent rules of politics: the Golden Rule. And by golden, we are not talking about the ultimate ecumenical bromide about doing unto others. No, this rule might better be deemed the golden rule, Chicago style: them with the gold makes the rules. Someone well equipped for investigative journalism needs to “follow the money”, to shine some light on just how much of that tsunami of cash that rolled into the DNC last year ultimately originated from the deep pocketed speculators who have their hands, or know someone who has their hands, all over what has come to be called the “bailout” of the financial system. It is highly doubtful that anyone planned and orchestrated what the financial system just went through, in the sense a whole mini-industry has sprung up around lunatic 9/11 conspiracy theory. However, it is not implausible to suppose that to the extent speculators want to buy as “low” as possible, the perpetration of fear, as close to the brink of collapse as possible without slipping over the edge, would be in the interests of those who buy low and sell high for a living. It is also helpful, once the ill-prepared and less informed have been rendered despondent or otherwise forced to sell, to maintain an atmosphere of gloom so that the “ones with the gold” can have bargains aplenty to choose from.
We went through something like this in 1990 with the S&L crisis, and fortunes were made by many parties who figured out the “new rules” re Resolution Trust Company. Not a few of today’s deep pockets scored some juicy gobbets off of that, and they want to do it again. The deep-pocketed smart guys who got together to purchase IndyMac, for example. That deal, whereby an entity that was a significant part of the problem (a distressed asset) will become a part of the solution (a buyer of distressed assets), is a clear sign that the tide of the financial crisis of 2008 has started to turn. It will embolden many other prospective purchasers of distressed assets, legions of deep-pocketed smart and perhaps not so smart guys who have been waiting in the wings, trying to make sure they are not “way too early”. The narrowing of spreads that has started to happen in the credit markets is yet another indication that things are beginning to get unstuck. After much strenuous application of the plumbing implements of fiscal management, the clog is about to come unstuck and going whooshing down the drain hole of history. A day at a time the weeks ahead will continue to be creepy, but I suspect that by year end we will look back with wonder at how many hobgoblins either shrank into insignificance or evaporated altogether. Of course by then, politics as usual will have at least sown the seeds for their replacements.
While it is likely that 2009 will see financial assets of all stripes recover dramatically from their once-in-a-generation oversold condition, substantive good news (anything more than pinpricks of comforting light at the end of the tunnel) is still a good ways off. We should expect the Market to climb a wall of worry, an edifice that is in large part attributable to what H.L. Mencken observed many years ago, that “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary”. I would have left off the last clause, as the hobgoblins tend to have at least some basis in reality. That the world is awash with manifold reminders of what the ancients called “fallen-ness” is real enough. Mencken simply observed what Roman political boss Crassus and his successors down to this day put into practice. Politicians find a way of treating each and every blemish on an otherwise well ordered world as a threat to our collective security and happiness the likes of which we’ve never encountered before, you better let us fix it for you before it’s too late. Anyone who has studied history beyond a Cliff Notes or docudrama level should understand that almost every moment of recorded history has some threat much more dire than what the talking heads are bludgeoning us with today. And as if it weren’t enough that the well-remarked ideological bias of the news media has degenerated to the point it has (J-school = indoctrination), it is a safe bet that the rapidly deteriorating outlook for so many journalists’ careers, that funereal atmosphere in newsrooms everywhere, is adding yet another wet blanket to our collective discomfort.
We should expect the news to remain dreadful until well after the changing of the guard in Washington DC, and steel ourselves against the temptation to despair. Clamor is important when one is trying to deliver the Granddaddy of all Pork Barrels in the form of a “stimulus package”. Clamor is also helpful when one is trying to “move on” past the decidedly fishy election in the Land of 10,000 (apparently more polluted than we thought) Lakes in order to confer the title of Senator on a decidedly unfunny “comedian”. (Does anyone remember anything memorably funny this guy ever said or did? I certainly can’t.) Investors are all clamoring to understand how new policies will affect the economy and the companies that make it up. Unfortunately, what is likely to end up mattering most over the rest of our investing lives will have very little to do with legislation being promoted by the President-elect and his pro forma re-election committee. One suspects that among the foremost beneficiaries of the proposed “tax cuts” will be Berkshire Hathaway, considering how of it is likely to end up in venues like Dairy Queen, underwriting a frenzy of super-sizing for the non-working class, so many of whom could stand to miss an occasional meal. The real mischief is going to happen in the judiciary. Liberty will suffer death-by-a-thousand-paper cuts at the hands of soon to be appointed judicial activists and their cronies. Tort Inc. certainly suffered some setbacks during the past half decade or so, with many marquee lead counsels ending up in exile or incarceration. That destructive beast has been wounded, but is a long ways from dead. Expect extortion-as-a-part-of-life, a stealth “tax” collected via insurance premiums that get loaded into the cost of everything, to become more apparent in the years just ahead.
The one thing that one can take to the bank when there is electoral change, a rule that should short circuit pointless speculation about anything ideological the political class and its enablers may have said along the way, is that it is all about changing “the rules”. The rules I have in mind are not written down anywhere. They are the ever changing rules of the semi-rigged version of the Great Game of buy low and sell high. The object of these rules is not the rules themselves but that changes are necessary to confer opportunity to one’s faction. In the vast swaths of the economy where commerce and government are intertwined, it is damn difficult to make money when everyone knows exactly what “the rules” are. It is less so if when the rules change one is a part of a limited coterie that knows and can act before everyone else figures it out (imitators) or reads about and then acts on it (idiots).
To glean a hint as to who might presently be sitting there licking their chops over the prospect of acting on this timeless truism, we have one of the most important of the permanent rules of politics: the Golden Rule. And by golden, we are not talking about the ultimate ecumenical bromide about doing unto others. No, this rule might better be deemed the golden rule, Chicago style: them with the gold makes the rules. Someone well equipped for investigative journalism needs to “follow the money”, to shine some light on just how much of that tsunami of cash that rolled into the DNC last year ultimately originated from the deep pocketed speculators who have their hands, or know someone who has their hands, all over what has come to be called the “bailout” of the financial system. It is highly doubtful that anyone planned and orchestrated what the financial system just went through, in the sense a whole mini-industry has sprung up around lunatic 9/11 conspiracy theory. However, it is not implausible to suppose that to the extent speculators want to buy as “low” as possible, the perpetration of fear, as close to the brink of collapse as possible without slipping over the edge, would be in the interests of those who buy low and sell high for a living. It is also helpful, once the ill-prepared and less informed have been rendered despondent or otherwise forced to sell, to maintain an atmosphere of gloom so that the “ones with the gold” can have bargains aplenty to choose from.
We went through something like this in 1990 with the S&L crisis, and fortunes were made by many parties who figured out the “new rules” re Resolution Trust Company. Not a few of today’s deep pockets scored some juicy gobbets off of that, and they want to do it again. The deep-pocketed smart guys who got together to purchase IndyMac, for example. That deal, whereby an entity that was a significant part of the problem (a distressed asset) will become a part of the solution (a buyer of distressed assets), is a clear sign that the tide of the financial crisis of 2008 has started to turn. It will embolden many other prospective purchasers of distressed assets, legions of deep-pocketed smart and perhaps not so smart guys who have been waiting in the wings, trying to make sure they are not “way too early”. The narrowing of spreads that has started to happen in the credit markets is yet another indication that things are beginning to get unstuck. After much strenuous application of the plumbing implements of fiscal management, the clog is about to come unstuck and going whooshing down the drain hole of history. A day at a time the weeks ahead will continue to be creepy, but I suspect that by year end we will look back with wonder at how many hobgoblins either shrank into insignificance or evaporated altogether. Of course by then, politics as usual will have at least sown the seeds for their replacements.
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