Waiting Out the Squall

This week finds us in a waiting-it-out mode. Waiting out gloomy winter weather that keeps us inordinately attentive to the wood stove, and waiting out yet another of the Market’s corrective phases. We need to remind ourselves that there is an ocean of money sloshing about that is oblivious to our multiyear investment orientation. Who knows just how many $B are all about day-at-a-time, or even moment to moment. This money prospers to the extent it can discern whether the path of least resistance in share prices is up or down. Every day it has to test that direction, and the rest of us go along for the ride. When a change of direction becomes discernible, it piles in, and we feel it. As it becomes less apparent that what has been the path of least resistance still is, it trickles back to the sidelines. Apparently, “up” stopped being the easiest direction for this kind of money to push prices sometime around New Year, and for a few weeks the path of least resistance was down. This becomes less apparent with each passing day, and at some point, it will be easier to gull the crowd in the direction of buying than to convince them to sell, and the “correction” will be over.

Of course, the keepers of consensus will manufacture excuses for every little price squiggle, and this latest pullback has been no exception. We are supposed to be alarmed by the deteriorated credit worthiness of a couple of Euro states, as if Greece and Portugal were somehow more reprobate than they were a month or a year or a decade ago. For reasons that as of yet are not forthcoming, the travails to these two comatose principalities are threatening the stability of the global financial system. Now, I would grant that perhaps there is information value here with respect to the feasibility of the whole concept of a Euro-zone, of intractable problems in integrating such diverse people groups into a single economic entity that only the passage of time was going to reveal, and now it has. If it comes to pass that this “incident” is just one in a series of indicators pointing to a “What were we thinking?” moment in Belgium a few years from now, then a moment of pause might be in order. But really, should anyone be surprised that at least a couple of the more decrepit states within that long doddering venue that is southern Europe would not try to game their more responsible brethren? These are not exactly economic powerhouses to begin with. The GDP of Greece is about a third of Mexico’s, and in line with the Gross State Product of Massachusetts. At least a dozen U.S. states are larger. Florida is twice its size, California, which is afflicted with some of the same budget busting issues, more than five times its size. Portugal, which seems to have boomed on alternative energy, tourist venue development and remittances from New England is roughly two-thirds the size of Greece economically, about the size of Indiana or Tennessee. Is what goes on in Lisbon or Athens really that much more economically significant than what goes on in Nashville or around Elkhart or within a dozen or so miles of Rt. 128? Why the outright disappearance of either of these two Euro-backwaters should cause the value of U.S. equities to shudder for more than an instant or so is mysterious indeed. It is on our minds at all because day to day, the Market as voting (as opposed to its longer term weighing) machine runs on excuses, and any old “crisis” will do.

So we wait out the correction, ignoring as best we can the noise generated by the fast money and its enablers, and focus on the main chance of favorably evolving Commercial Reality. As the most recent Musings have noted, this is most apparent among companies who own proprietary capabilities that are enabling Web 2.0. The virtuous cycle is back, and this time its not just “WinTel” and “if we build it, they will come”. Indeed, the future that the Tech Bubble was anticipating 10-12 years ago is arriving. The value proposition, as perceived by the billions of people who are willing to pay for devices, access and perhaps even content on a carte blanche basis, is being persistently improved by a gamut of technologies. Many of these technologies are getting tricker to push forward, but what the end customer sees, buys and experiences is still a palpably improving value. It has occurred to me that one of the worst things about investing in Tech in past few decades is now working in its favor. That would be the tendency for states like Korea and Taiwan to pile into markets and in so doing wreck them as businesses. They were preceded by Japan in this respect, but with the passage of a few decades the supply chain has bifurcated into the highly proprietary and the highly commodity. Both types of components need need to get better and/or cheaper for the value proposition to continue to advance. Once upon a time, Asian DRAM makers threatened Intel’s existence. Now, Intel does what only Intel can do, DRAM is a whole other market, open to anyone who want to pour money into it. To the degree that cheaper DRAM is a part of what makes computers more affordable and functional, Intel actually benefits from the DRAM guys beating each others brains out as if to try and end up the “last man standing”. These manifold, interdependent markets have sorted themselves out. Not all of them will prosper their shareholders, but the ones who have proprietary, damn-near-impossible-to-replicate process and product technology, who are within shouting distance of last man standing, are just beginning to reap a reward that was decades in the making.

I have also noted that one of the things you want to have a clear understanding of in assessing the Commercial Reality of an enterprise is as basic as possible an understanding of the human needs that its offerings address. I have posited that Web 2.0 has the legs it does because it addresses an appetite for “connectedness on one’s own terms”. It is very appealing to be able both holding favored relationships closer and to manage a broader array of less intimate, perhaps only vicarious (as in “connecting” with celebrities) ones at a comfortable, controllable remove. Further inquiry suggests the basic attraction of what the Web provides is even more basic than than that. The relative leisure that has marked my circumstances for the past year has given me a chance to study some of the things that eluded me (or I eluded them) during my formative years. (e.g., some of the writings of St. Thomas Aquinas, which are as foundational to Western, modern thought as any). One of the things that has gotten clearer for me is that humans are endowed with a need to know that is as essential as their need to breathe. Like any other need, or appetite, this need is essentially good, but it tends to be corrupted. I learned that in the classic sense of the word, curiosity connotes a vice, an aspect of human nature gone bad. (The complementary virtue, or impulse cultivated toward its intended end or good, was called studiousness.) Through the eyes of those who studied human nature before electricity was understood as anything but the issue of heavenly fracas, we can see that what seems to be a perverse need for 24/7 connectivity is not so surprising after all. Our natural, inborn need “to know” can be attenuated by bad or deficient nurture, but more often is corrupted into a lust, conflated with other vices (like greed, pride or sloth) into something that grows steadily more a master and less a servant.

Why is this? It is that restlessness, that dhukka or “out-of-jointed” as diagnosed by the Buddha, perhaps best put in the observation by Blaise Pascal that all the trouble in the world can attributed to a man’s seemingly inability to sit quietly in his room. We are restless because we are lost in the cosmos (Walker Percy’s 20th Century classic). Stumbling in the dark, we seek connection with both the novel and the familiar. Indeed, these two desires are endlessly in tension with each other. When the familiar gets too much so, we crave novelty and seek it in adventure. Then when adventure gets too much so, and our lostness wells up in anxiety, we yearn to connect with the familiar. Always looking forward to the next adventure, then looking forward to getting back home. Web 2.0 makes the easy management (in the sense other addictions are managed) of this tension available to almost everyone.

Another, related, construct that has crossed my path is that of spectacle, which is that fascination humans have had with things like bad accidents or public executions. This was remarked upon by Augustine in his Confessions, citing a friend who found himself addicted to attending blood sport spectacles. It seems to be about managing the dhukka, of diverting our attention from our inner restlessness. Most people in most times and places got all the diversion they needed just struggling to meet their basic needs. We seem to be hardwired to struggle, but postmodernity has dealt with basic necessity to a degree that billions of us only find struggle vicariously and/or synthetically. Again, Web 2.0 makes this cheap, easy and ultimately addicting.

The notion of spectacle wrought wirelessly into the home or office brings us full circle to waiting out a Market correction. It has helped me to understand a certain lurid fascination with the carnage that sometimes appears in the form of stock prices. Though I know that daily price movements mean next to nothing with respect to the rationale for owning what I own (i.e., a convergence of Price reality toward a hopefully improving Commercial reality working itself out over the next several years), I seem to be no better than the most Mountain Dew addled video game enthusiast when it comes the hold that such spectacle can sometimes have on my mental state. In this age of such readily available informational feedback, much of which ends up being counterproductive, it is paramount for investors to recognize and avoid such diversionary spectacle. Yet, although able to dodge or contain nearly every other vice that life has thrown at me, the siren song of Yahoo Finance holds us in its thrall. Paraphrasing Augustine, “Oh Lord, make me indifferent to whether my stocks go up or down today, but not just yet.”