As J.M. Keynes Was Saying...

As intimated in the previous edition, I have been wrestling with the temptation to turn pessimistic about the Long Term Trend. Indeed, this present moment would be the third time that this normally “turn that lemon into lemonade” observer of human folly has been tempted to despair of a future that does not compare favorably with the past. The other two would have been at the midpoint of the Seventies and in early 1991. The former instance coincided with that time in life of trying to figure out what to do with the results of sixteen or so years of desultory education. The Seventies were a squalid and dysfunctional time, awash in the detritus of New Deal programs and their progeny, ideas which had certainly seemed like good ideas when the best and the brightest minds of the Ivy Establishment were proffering those versions of hope and change. Not a few of our peers were adamantly reticent to bring children into such a world, sentiments that fortunately (as we await the imminent arrival of a couple of more grandchildren) we did not quite buy into. (Apparently an endemic lack of the courage to reproduce is not unique to present day Europe and Japan after all). In the latter instance, too much was made of what seemed like a “fast forward Bull Market”. I was struck by the rapidity with which equity values had recovered from recession and the uncertainty posed by the initial phases of the Gulf War. Also troubling was the installation of a new co-presidency which juxtaposed claims such as “I tried it but I didn’t inhale” with the promise of “the most ethical Administration ever.” What good could possibly have been in store for us?

Of course, in both instances the Market found ways to look past the towering ugliness of the moment and produce outsized returns for practically anyone who had the courage to show up and play. That string of “fat years” for value investors in the latter part of the Seventies, a time when a peanut farmer turned President seemed to epitomize the spirit of the age, is particularly intriguing, especially in light of the way 2008 has treated investors so much like 1974. But it was also a part of that time when for almost twenty years, the EKG that is the long term trend of the Market (it is, after all, the perceived present value of the future fruits of a nation’s enterprise) departed from what viewed over the entire American experience has been a distinct upward skew. Pessimism ruled that age, as it threatens to again today. The experiences of the intervening decades have conditioned us to an optimistic perspective, but we are wondering if this might no longer be appropriate. This edition will explore the sense in which bearishness probably makes more sense than bullishness, as a means of establishing a framework for an effective and profitable tactical outlook in the weeks, months and years ahead.

That all things living will eventually see decay is probably not what Keynes had in mind when he reminded us that in the long run we are all dead, but it serves our purpose. While tactically speaking, a bet against the end of the world will be superior to the other side of that bet because it makes the same logical sense as Pascal’s Wager, the fact remains that anything that has been organized in any way, from cigars to civilizations, will eventually come undone. Over six-plus millennia, every civilization that flourished enough to leave a mark eventually declined and then disappeared (or nearly so). Why should ours be any different? We have a seemingly inborn bias against even recognizing this eventuality until, one supposes, it is so advanced as to be irreparable. This bias arises from ours being a New World nation that came into being at just the right moment to incorporate both pre-modern influences (e.g. ethics rooted in Calvinism) and the good fruits of that revolution in thought that called itself the Enlightenment. That Markets would fluctuate wildly to reflect to the wrenching uncertainties of the moment but always regress to an upward trending (at a rate exceeding the deterioration of purchasing power we call inflation) mean was indicative of the fact that ours was an ascendant civilization. At some point, this will no longer be true. Indeed, since the apex is probably only be visible in the rear view mirror, how do we have to wonder if it has not already arrived.

What Lincoln called “the silent artillery of time” has been at work for many generations. In every era, but especially during times that do not challenge us the way, say, the decade and a half the ended in 1945 did, a stultifying inertia works to insinuate itself into the social fabric. As peace and prosperity come to be seen as a normative experience to be taken for granted, people become less creative, less willing to take risks, and more interested in amusing themselves and in securing “rights” to that which makes them feel secure and comfortable. Widespread prosperity seems to beget a broader adoption of upper class mores, permeating the population with characters reminiscent of the dirtbag aristocrats depicted by the great satirists and novelists of the past. This is not the stuff of ascendancy. What’s tricky about this, though, is that such symptoms are almost always present. It is a matter of degree. Like a big oak tree with a bit of rot showing, the edifice might be stronger than any storm or wayward motor vehicle, or the rot within might be so pervasive that the next thing that bumps it will bring it crashing down.

I think that a good starting pointing for diagnosis and prognosis can be found in recognizing the duality of so much of Nature. Along with the positive and negative charges of chemistry & physics, male & female, light & dark, and entropy as opposed to the force we call “life”, there seems to be a duality at work in how humans interact. It arises between the inherent worth and dignity of the individual on the one hand, and collectivism (a.k.a. “the greater good” or “the soul of the hive”) on the other. The former might be understood as determined by either innate self-interest evolved out of a survival imperative, or derived from something transcendent and therefore in a sense non- negotiable, as in the words penned by Thomas Jefferson, “endowed by our Creator with certain inalienable rights.” The latter half of this duality has also drawn support from Evolution based theory, but invariably finds its impetus in rascals seeking to make some temporary advantage they have carved out more or less permanent. The tension between these two forces is unceasing. It was a resurgence of collectivism that made the Twentieth Century by far the most lethal; that these forces did not triumph (as seemed at times inevitable, even in 1976) was due to resistance imbued with a profound belief in the inherent dignity of the individual.

The United States of America has managed to be an ascendant civilization for as many generations as it has, despite factions, folly and having initially tolerated the systemic evil that was chattel slavery because our founders understood the unceasing tension of this duality. They recognized human nature for what it is (that a recent Inaugural address included a charge to “end tribalism”, which is nothing more than the human tendency to give preference where ties of blood and familiarity exist, is hardly encouraging in this respect) and while they saw and took pains to accommodate the tension between Faith and Reason, they did not see these two as antagonistic alternatives (Michael Novak addresses this splendidly in On Two Wings.) They also understood the importance of subsidiarity, a principle which holds that in the inevitable hierarchical structures of human affairs, and contra totalitarianism, entities in the higher strata, such as nations and kingdoms, should foster and otherwise serve those in the lower strata. (The natural conflict between subsidiarity and despotism defines innumerable disagreements today. Much of the venomous elite opinion aimed at the Roman Catholic Church is attributable to it being the foremost champion of subsidiarity, as well as its insistence on giving priority to the family, and not the state or the individual, as the primary unit in social hierarchy.)

As noted earlier, the fortuitous outcome of the Founders’ experiment in ordered liberty owes much to timing. A half dozen generations at least since that first wave of religious separatists and mercantile opportunists came ashore had passed when they got together and did their business. That evangelists like John Wesley and Ben Franklin’s good friend George Whitefield found such “fields ripe for harvest” is ample evidence that the early Puritan influence did not exactly have a stranglehold on mores and culture. It is reasonable to assume that the fact that there was a Great Awakening in the years leading up to Independence from the Old Order of Europe indicates a widespread though hardly universal willingness to acknowledge Authority greater than kings or princes. At the same time, a secular rejection of the tottering Old Order was gathering steam. It came to call itself the Enlightenment. This revolution has roots in the thinking (on scientific method) of Francis Bacon, but emerged as an alternative to ecclesiastical understanding in the work of Immanuel Kant. Prior to Kant, human longing for a future that would be less evil than the experienced present was typically understood, or at least articulated, in terms of “seeking the Kingdom of God”. This arguably innate trait (to the extent humans derive some sense of purpose and meaning from acting toward some identifiable end) always needs an outlet. The Old Order, which included a Church that had been for a time subverted by collectivist rascals of the sort previously noted, was decrepit and no longer capable of providing it in the Western World. (In the rest of the world, such human longings were subservient to the whims of whatever thugs or mandarins were in charge.) Kant unleashed the notion of “progress”, that limitless improvement by strictly material and human means was not only attainable but could be an end in itself.

Looking back, this “Enlightenment” proved to be a curious thing. It informed the thinking of a number of the founders at least as much as their nearly universal Christian heritage (belief and practice being another, endlessly controversial, matter), serving us well on the Western shore of the Atlantic. In France a few years later, it didn’t wear so well. I see a “good enlightenment” and a “not-so-good Enlightenment”. It was good that scientific methodology found favor, even with the faddishness that came along for the ride. The Old Order was very much in need of shaking up, having weathered the silent artillery of time itself. Where it soured and then some can be traced not only to its impulses being adopted by faddists, fanatics and popularizers, but in the very word itself. Perhaps I am overly influenced by Socrates (in the matter of the beginning of Wisdom) and George Orwell, who so adeptly portrayed the propensity of demagogues, dictators and their enablers to subvert the meaning of words to further their selfish ends. If it really was an “enlightenment”, in any noble sense of the word, I suspect they would have called it something else, something a little more humble.

As a matter of fact, it did take on a new name. A generation or so after Kant, the prophets Engels and Marx arrived on the scene. By the time they were done, “seeking the Kingdom of God” was understandable in thoroughly material and human terms, no longer coming from only from science but from politics. Marx had a great diagnosis of the evil of his day, but owing to his obtuseness with respect to human nature he had nothing to say about what to do once the old order had been brought down. He did mention an “intermediate” phase that, with an assist from Lenin, would proscribe human freedom until the “kingdom” was ushered in, but we all know how that turned out. The totalitarian form of socialism that quite quickly (in the objective sense, if you lived there or actively served in the fight against it certainly didn’t seem quick) found its way into the dustbin of history was not the new name I had in mind. What grew out of enlightenment thinking and thrives to this day is Progressivism, or progress for progresses sake.

It should no surprise that like Science and other constructs that have on balance served us so well, Progress could become an object of cult worship. We have recently seen a resurgence of this cult, and it is a troubling development. Among the hallmarks of civilizations losing their way would be the widespread (as in permeating beyond a single narrow class) worship of such false gods. The last time Progress enjoyed mainstream adulation began with the New Deal. Its failings were masked by the distractions of a World War followed by a mass impulse to get on with life. The passage of enough time to dim the memory of “how that turned out” opened the door for a last hurrah in the form of the Great Society programs. That the Market went basically nowhere from 1966 to 1984 was indicative of an unspoken consensus that the goddess Progress had failed and as such our civilization was in decline. We will visit the evolution and enshrinement of this bitch goddess in the weeks ahead. Our next edition, however, will explore why many astute stock pickers enjoyed stellar returns during the seven dismal years leading up to the 1982 Market bottom despite ample evidence pointing to “the end of the world as we know it”. Stay tuned.