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.