A Whole Lotta Stimulatin' Going On

This edition of Musings finds us unable to make good on a commitment made in the last edition. We had intended to explore the reasons why the years following the last 40%+ Market donnybrook were so profitable for value oriented stock pickers. That this edition does not quite get around to this is solely a function of the audacity with which the putative ruling class has inflicted its whims on the rest of us over the past few weeks. These are trying times indeed for any investor with a predisposition and accumulated positive feedback to seek out the “silver lining”, the reason to hang in there and bet against the seeming end of the world.

Not too many weeks ago, we were promised hope, change, a restoration of ethics and transparency. (...and no tax increases if you make less than $200K/year. Is anyone still holding their breath on that one?) It has been a challenge of late to think about much of anything other than how all that is playing out. To be fair, many of us are indeed hopeful. We find ourselves hoping to wake up suddenly and realize that it was all just a bad dream. Spending more than a few minutes watching the billions become trillions (can gazillions be far off?) feels like nothing so much as a bad dream. I, for one, find myself hoping that there is at least a little something to Lite version (as opposed to Lunatic) of Global Financial Conspiracy Theory. At this point, it would be a blessed relief indeed to learn that so much of what we have had to endure (to the extent we can bring ourselves to watch or otherwise engage it) of late is in the main loosely orchestrated theatrics intended to facilitate the transfer of assets from the hapless multitudes into the pockets of the in-the-know. (Perhaps this is what that wily industry vet meant when he told us, during our first few weeks at the brokerage firm that would eventually be laid low by that intrepid derivatives pioneer Mr. Joseph Jett, that it was “all B--- S---!”) Fear and greed are the friends of the speculator who is deep-pocketed and in tune with whoever is calling the tune of the moment, the enemy of those who let strangers do their thinking for them. Would that it were only an enormous con game being pulled off by the coterie that put up the money for this new regime, as opposed to a size 15 EEE boot in the pants down the road to serfdom.

And what’s changed? Well, the numbers have certainly changed. It is stupefying to ponder for more than a moment or so where the gazillions are going to come from, where they are going to go and where they are going to end up (Clue to latter: find where the money that came pouring through the Internet under dubious guises during the late days of the election campaign actually came from). The names and faces stuck in at the primo spots in the trough of taxpayer largesse have certainly changed. But has the basic, sordid game of get while the getting is good and let the descendants of those classes who can still manage to perpetuate themselves pick up the tab, has that changed? Hell no, it has merely gotten more so. We got us a “stimulus package” that was wonked together by the minions of a woman whose formative years were spent at the knee of a Baltimore ward heeler. In the spirit of the “new bipartisanship”, the opposition party was allowed not so much as a peep of protest in the House process. This “package” was then sold to us by a chief executive who after “the second coming of the president who freed the slaves” wore a little thin, was made over by his media handlers into FDR redux.

So what exactly has happened to the spirit of “We have nothing to fear but fear itself”? Is this right here, right now any more scary-making than the world as it looked in January 1933? (Actually, there was plenty to fear at that time, even for those as financially well situated as the Roosevelt clan. Fear is a natural and normal reaction to danger, which is always out there and sometimes comes looking for you. The question which this leader stepped up to was whether his listeners would succumb to their natural fears or choose otherwise.) This time around, the putative leader of the non-tyrannical world invokes “catastrophe”, the strongest possible word for something bad happening, i.e. enormous and irreparable harm. We are left with no choice but to accept this bill, 1073 pages of “how its going to be for you suckers” that ABSOLUTELY NO ONE had read. Again, to be fair, somebody somewhere knows exactly what, why and what it will mean in terms akin to “it fell off the back of a truck” for many, many parts of it (see aforementioned campaign contributors). But no one knows what’s in this bill in a sense that is within shouting distance of democracy as manifested in town council meetings where, say, $300 for a new sign at the dump gets talked to death, or at least until an hour or so after everyone is wishing that the old guy in the Members Only jacket lived somewhere else (but the sign only goes up if the project was legitimate in the first place).

They call it a stimulus package, and what, how much and when exactly it is going to stimulate is already a well furrowed journalistic dirt patch. Again, my fair-minded nature informs me that despite the protestations of the economists I most respect, this is one highly stimulative piece of legislation. It will stimulate a resurgence of the Meddling Class that Clinton’s welfare reform had managed to tamp down at least a little. It is stimulating a lot of skilled workers and business owners with dim but visceral memories of when the overripe fruits of New Deal and Great Society programs were like so many banana peels on anyone’s path to prosperity to just say to Hell with it and downshift into a less materialistic but also less productive lifestyle. Others will migrate into that shadow economy that gets stimulated into existence whenever collectivism has been on the rise (see Italy, or the US circa 1979.) The creepy-crawlies who occupy the lower, actual-work-doing positions within that extortive enterprise we might call Tort USA, Inc. are certainly receiving memos stimulating them into action against newly minted “targets of opportunity” that our insurance premiums will be underwriting for the rest of our lives.

One also suspects that this “package” being doused with the lighter fluid of urgency and slipped onto our collective front porch is stimulating outrage among Republicans and dissonance among voters of an independent cast. Of the latter, you have to think there is a whole lot of “Is this what I voted for back in November?” going on. I strongly suspect that not a few registered Democrats, and not just the kind who might have preferred a Reagan to a Dukakis, have woken up in a cold sweat after a visit from that particular specter. If properly channeled, and if credible alternatives can be presented, reaction to this monstrosity will indeed stimulate the beginnings of a power shift in November 2010; especially if “We won” continues to be used as justification to “do as we damn well please”. Democracy based on mere plurality and unencumbered by the edifices of (note the lower case) republicanism has never been very effective or successful for very long. Indeed, it tends to piss people off to a degree that sometimes get messy in a sanguinary way (see ancient Greece, where the beta versions were tested).

So where does this wretched turn of events leave the investor? The operative question is not whether this is good or bad but is it as bad as it seems. Put another way, is “the end of the world and then some” already in the price of the stock? If it is, then even if it turns out that it’s “almost but not quite the end of the world”, the stock will eventually regress upward toward that reality. As I have written previously, a bet against the end of the world is always better than the alternative because of how problematic it is to collect on true “catastrophe”. There is also another truism that comes into play. As a practical matter, things almost never turn out to be as bad as they seem or as good at they seem. Of course there is a sense in which, yes, sometimes they do. The doctor’s X-ray, the ice forming on the wings and countless other situations come to mind. The Shoah (a.k.a. Holocaust) turned out a lot worse than it must have seemed to some even after the National Socialists had made it part of a taxpayer funded stimulus program of their own. But as a practical matter, for most of what goes on in that maelstrom of popular delusion we call the Market, this truism will almost always serve us well.

So just how close to the brink of “enormous and irreparable harm” might we be? Is it really that much worse than in early 1975, at the last Big Bear Market bottom? Is the political situation different in kind from when the Watergate scandal opened the door for that scurrilous crop of rascals that made up so much the Congressional class of 1974, or set the stage for the elevation of a sanctimonious peanut farmer to Commander in Chief? We won’t find out until November 2010 whether irreparable harm is being done to the functionality of that form of recourse we call midterm elections. Cultural indicators, where trend matters at least as much as level, are ambiguous, but wasn’t 1975 right about when disco was starting to ooze out into the mainstream? Internationally, disgrace at the hands of the hands of the Ayatollah was just over the horizon, and last helicopter out of Saigon was only a few months away. Contra the assurances of the pragmatists and other defeatists, this certainly does not appear to be the outcome of our latest military “line in the sand”.

How about economically? We keep hearing this is no Great Depression, but this is a bit of a straw man. I would rather compare it with localized situations of more recent vintage. Is the economy today worse than Houston in 1986, or Seattle in 1972 when Boeing was down for the count, or Pittsburgh when the Rust bowl rusted out? (And how did each of these down & outers look 10, 20, 30 years later?) For that matter, how well were countless towns tied to extractive industries in the Western United States doing before they were bailed out by Greenspan’s last bubble (recession in the Seventies, federal policy changes in the Eighties, friends of the spotted owl infesting the Lincoln bedroom quid pro quo in the Nineties)?

There are at least a couple respects in which the situation might be “worse”. We hear that Japan is experiencing its steepest drop in 35 years. But how surprised should we be, that a nation that has fewer consumers of its own with each passing week, and whose economy is reliant on its masterful ability to sell big ticket consumer goods into an increasingly “just-in-time” global economy, should see at least a quarter or two of abrupt slowdown? We are barraged with reports about layoffs, and the “skyrocketing” rise in the unemployment rate. We forget that shortages persist for some skills, and that many of the companies that are announcing headcount reductions are also continuing to make selective hires. It is a testimony to the increased litigiousness of our society that what used to be called the “trimming of deadwood”, the helping those who have retired-in-place or have otherwise deluded themselves into thinking they are gaming the system to move on to a higher calling, now takes the form of a 5% headcount reduction. (Think about what percent of a workforce turns over through normal attrition anyway, and 5% probably becomes almost nominal.)

I think what “this time” has going for it is that just as the aforementioned Houston, Seattle and Pittsburgh situations were depressions if you lived there but not so awful for the rest of us, this time we see depression being inflicted on both the financial services and media (certainly print and radio) industries. These industries also happen to be concentrated in locales where real estate values were ripest for a fall. Everyone in the greater NYC or LA megalopolis is in deep financial distress or knows someone who is. These two venues have an outsized share in setting the tone for what we call a national conversation. It’s like late 1987 and early 1988, when the gloom that followed the Market crash lingered over Manhattan and Boston long after it started to lift out in the goods producing parts of the country, only more so.

My advice at this juncture would be to remember that it is no crime to be wrong on an investment, but it is always wrong to despair. Despair is what many of our ancestors called a sin. It is not the same as “losing heart”, which can occur in the midst of any battle, unless we choose to let it become a permanent facet of who we are. It is a loss of hope, by which I mean a virtue as opposed to the mere emotion that some would pretend it to be, and life without hope is not worth living. Either things are going to eventually get better, or they are going to get a whole lot worse. If you are an investor, you look ahead and choose accordingly. If you cannot do this, you are not an investor, and should go do something else. As I see it, if you choose the former, you are presently placing at least nominal bets (there is no law that says you have to go “all-in”, ever) that equity values will recover over the next few years. The alternative, carried out to its logical conclusion, is that your time would better spent working on your bunker, checking the seals on all those canned goods and making sure you have good lines of fire in all directions. This will buy you at least a few extra weeks in event your “choice” was correct, unless you die of boredom or old age first.

The next edition will get to the previously promised exploration of what made the DJIA go from under 600 in December 1974 to nearly 900 by July 1975 and 1000 by February 1976. I will also describe my encounter with Ms. Erin Gray as she was just beginning her transition from fashion model into the actress who would play Col. Wilma Deering in “Buck Rogers in the 25th Century”. Stay tuned.