Detour on the Turnpike to Perdition

Just a few hours after we posted our previous edition, which opened with the observation that further Market recovery would require some kind of evidence of fundamental economic improvement, Intel came out with word that things in the world of computer hardware weren’t quite so dreadful after all. (One wonders about just how much time ought to spent keeping up earnings models when all of the forty or so sell-side analysts whose job is to follow Intel and not much else can miss so badly.) Looking at one’s portfolio has gotten a whole lot easier since then. It’s not as if things are somehow getting a whole lot better. In the world of tech, though, all the processing and storage of data that the great engine of technical progress that is Intel has made ever more available to ever more people, it seems that while indeed the baseline of growth has indeed been re-set, the re-set is not quite back to the Stone Age after all. 

It is heartening to have so many companies confirming one’s sense that not only has panic subsided but that the panic induced a spell of outright paralysis that came unstuck as the quarter progressed. Once again, it almost never turns out to be as bad as it seems (or as good as it seems when the pendulum is out that other way). The Market is cheering the prospect of an at least modest and plodding recovery, as opposed to a rerun of Japan Inc.: The Zombie Years. I would like the think that the delightful action of the past two weeks has been a validation of my “global tech supplier base finally reaching rationality” (akin to what really drove the Aerospace Super-cycle until development issues and financial crisis derailed it). More than a little of the renewed vigor we have been enjoying can be attributed to the likelihood that however badly consumer confidence got rattled last winter, the innate desire to partake in “all things digital”  is alive and well and continuing to sweep the planet. The number of  companies who are in a position to profit by providing what is needed to scratch this itch has dwindled considerably, setting the stage for the survivors to post what could be a long series of positive earnings surprises. And it has been seemingly forever, arguably a decade, since Tech has been “the place to be”. Intimations of “refresh cycle” are starting to appear. But however plausible it might be to attribute the Market’s restored spirits to signs of economic recovery, I can’t help but wonder if something else didn’t help it along.

That something else just might have been the wheels coming off of the HopeNChange Express, that nexus of Chicago City Hall and the Goldman Sachs Alumni association that seemingly wants to make the US look a lot more like Old World Europe. (“All you peasants get back on the bus and enjoy your Netbooks. And stay away from our beaches and ski slopes!”)  Or at least like that part of North America which most resembles what our ancestors risked all in order to get away from, which would be New Jersey. Earlier this year, investors sensed the possibility of the whole project that has been America becoming more like that crowded, over regulated and overly governed state. I understand there are more municipalities in NJ than in California. I lived there for about eight years until 1994 and can attest that that while it has certain virtues (like Carmine’s Pizza in Netcong), it is a place where not much of anything can be done without influence of the sort that gives politics a bad smell. If you want a vision of what will happen as banking or health care or anything else becomes more political, look to the Garden State. If you know, and are willing to owe, the right people, maybe it will be not so bad. But for most of the folks, the price to be paid when the conniving drive out the enterprising comes at you like a cloud of biting flies, impossible to quantify but excruciating nonetheless.

We have been faced with the prospect of more politics being inserted into more and more of what constitutes making a living, or just plain living, since power shifted the way it did last year. But as I have noted previously, its one thing to propose, its another to execute. We had already seen indications that this regime would not likely make the most of their considerable advantages. Over the past few weeks, though, what seemed unstoppable to some has shown signs of breaking down and rolling into a very boggy ditch. Climate change legislation got rammed through one vote, but the last remaining shreds of what passed for scientific underpinnings for human caused global warming are being rendered even more risible as this Summer makes its run at “coldest ever”. That one looks more or less DOA. Health care legislation is similarly dying under the glare of cost/benefit scrutiny and the electorate's preternatural aversion to “We’re from the government, we’re here to help you.” The present system might be less than perfect, but it is a whole lot less scary-making than some of what has been written into the present bill. The stimulus isn’t stimulating anyone except the law firms hired to deal with all the extra layers of red tape that have buried all those “shovel ready” projects. In very short order, this government has reminded us of their capacity for over-promising and under-delivering, to a degree that registers in polls and so has a very large swath of the legislative branch contemplating their job security. 

As usual, though, it was something obscure, like the nail of a horse shoe, the lack of which felled a king, that caught my eye regarding what seems like Enemy #1 of the Ownership Class having lost its aura of invincibility. The oh so familiar spectacle of municipal officials in the Garden State being led away in handcuffs last week was a reminder of why so many of us have moved to where there is less, not more, government. It was the incident of the cop and the professor, though, that exemplified the attitudinal shift that is starting to gather momentum. It was one of those mundane little incidents that might have cycled in and out of the news in 24 or so hours if  “friends in high places” had not gotten involved. 

I have felt for the past fifteen or so years that the principle fault line in our society was in the process of shifting from race to class. This incident did not so much stir awareness of racial conflict as it reminded us of the degree to which the New Class (see Musings April 7, 2009) has asserted itself to the detriment of those us who have to pick up the tab. With about the same incessant regularity with which we have heard about wearing seat belts and not smoking, we have for the past fifty or so years been reminded that some people groups have experienced more injustice than others. Frankly, some of who over the course of a long life have witnessed, indeed participated in, a marvelous amelioration of the objective substance of racial animus in this country are a bit weary of hearing such subjectively based grievances. The real sore spot that got rubbed here was the spectacle of what  could be described as the Alpha Elite second guessing and chastising a lowly prole on behalf of a fellow Elite. The good news is that the obtuseness with which this little injustice was meted out was yet another “tell” heralding “Not so Unstoppable after all”. The vanguard of the resurgent New Class is not as clever as they think they are. Their ability to inflict permanent damage is real, but seems to diminish every time a credibility destroying incident like this one comes along. The Market applauded Clintonian Gridlock post 1996, wherein government ties itself up in knots and so by default leaves the rest of us alone, relatively speaking. It just might be anticipating the same sort of prospect. I continue to expect that 2009 will end up being a memorably good year to have owned equities.

The Summer of Our Discontent

(Encouraging developments out of Tegucigulpa of all places. 1270 words)

Midsummer finds us not only struggling against the systemic torpor alluded to by the venerable Market maxim, “Sell in May and go away” but also enduring the Disconnect Phase which is a normal part of every cyclical bull market. The Initial stage, when it goes like a bottle rocket because “it ain’t the end of the world after all”; the panicky, eggy-faced short sellers discovering that its not like found money after all and the fear of being left behind becoming the only palpable fear still in the room, all that has flamed out now and slipped into the past. In this Disconnect Phase, insistence on “fundamentals” begins to assert itself, but the here & now fundamentals, and even the foreseeable future fundamentals, remain pretty darn dreadful. So the stocks that got way out ahead of themselves (i.e., about 80% of my portfolio, the remainder being the stuff that managed to sleep as if dead through all that April-May excitement) and in so getting there produced about two good years of return in ninety or so days have given some of it back. In some cases, a good bit has been given back. That the past four or so weeks have so vividly reminded us of just how discontinuous returns from equity investing are has abraded our spirits. It has also not helped that any objective assessment of the current political climate suggests that however gradual we expected the eventual economic recovery to be, its going to be even slower than we thought. It is as if anything that can be done in a non-totalitarian state to dim the animal spirits of commerce is trying to find its way into the mix. Many of us find it very difficult to follow the news and maintain any sort of bullishness. But believe it or not, the last few weeks have seen a number of seemingly unrelated events which have, for me, strengthened the only conviction necessary for long term bullishness in times like these.  All is not lost, and regression to a proximate “normal” which is conducive to material prosperity is not quite yet an unreasonable expectation. 

So what happened? It would be humorous if one were viewing it from the safe remove of, say, another solar system. While the purported “last remaining superpower”, that beacon of light which so illumined the 20th Century, finds itself lurching in the direction of failed Peoples’ Republics a la Omar Bongo, more benighted precincts have seen a sudden quickening of that spirit which says “enough already” to El Jefe and friends. The Revolution (i.e., the thugs in charge for the past thirty years) in Iran has managed to apply a hefty dose of fertilizer to the long languishing seeds of discontent. That genie is out of the bottle now. It might lay low for a time, but change is coming to Greater Persia. China, which is said to have violent demonstrations on a more or less daily basis, saw a spate of riots that were too big to keep out of the news. The left leaning coalitions which administer that comatose realm we call Europe seem to be losing ground to political entities of a more “mad as Hell and not going to take it anymore” variety. It was a couple of political backwaters right here in our own hemisphere, though, that did the most to raise my shopworn spirits. The power couple that seemed only a year ago to be well on their way to feting Argentina with Evita: The Sequel   has been sent packing, and Honduras is providing a splendidly theatric illustration that people can and will rise up and just say No when the dead head of statism becomes unbearable. We have been reminded that the march to 21st Century Socialism, an implacable enemy not only of ownership but of rule of law, is not inexorable after all.

Who would have thought that scruffy little Honduras could provide such an illustration of the curious state the world finds itself in? I don’t pretend to know much about its institutions or the key players (does anyone, really?), but I can certainly empathize with what it would be like to live in a place where the chief executive officer is cozying up to the likes of Chavez and Castro and orchestrating all kinds of extra-legal activities to circumvent a Constitution which limits his tenure. I think the Hondurans have shown remarkable restraint, if not grace, in short circuiting what was shaping up to be yet another caudillo. I am not sure I could be so restrained in dealing with a politician so bent on making my country more like Cuba, which would have collapsed into a Haiti-like stink hole without decades of patronage from the Soviet Union, or Venezuela, which has only survived the loon in charge because they can pump gushers of money out of the ground every day. Honduras has bananas and people willing and able to cut & sew. But it apparently also has people who refuse to go along with the seeming spirit of the age and defend a constitution they see as a bastion against the real source of their historic oppression. The attempts to spin this defense of rule of law in Honduras as some kind of coup have been laughable, the coalescence of support for the erstwhile strongman a veritable who’s who of the self-anointed global gentry who rule on behalf of their cronies and through the instrumentality of a cadre seemingly endued with congenital bossiness. (Am I the only person who has figured out that sometimes the only way to make any sense at all of a really abstruse development is to wait and see which side certain “usual suspects” line up on and then know that the opposite must be closest to the truth?) We might find out a few months from now that Honduras only replaced one opportunist with another, it sometimes goes that way in these places, but so far I think what we are seeing is animated by the same spirit which was sweeping Poland twenty years ago. 

The human spirit is alive and well. The oppressors who would stamp these impulses out and in so doing demoralize (and so impoverish) everyone around them might win a few, but lately they are back to their losing ways. Time does not seem to be on their side after all.  It is still too early to short Western Civ. My worst fears of late have not been that the enemies of prosperity, those who traffic in the politics of resentment and contort policy so as to cater to the ravenous factions who hold them by the purse strings, are suddenly so competent as to be unstoppable. Rather, it has been the seeming dearth of those who would overcome evil with good and defend the Truth. To the degree that material comfort, a sense of security and the ubiquity of that cheap novelty which traffics as entertainment seem to have enervated the longings of our souls, it is tempting to suppose as much. We are constantly reminded, though, that things really are seldom what they seem. That retrograde load of crap going under the name of Progressivism (a.k.a., 21st Century Socialism) might play in Brussels or Belfast, but it doesn’t seem to be going down so well in our hemisphere. This fight is a long ways from over. We are in a difficult season, midsummer in a drought year, but it too shall pass. Stay long, and stay strong.