The Bull Turns Two

So here we are at the second anniversary of what we still can’t help but hope was the end of a “once-in-a-lifetime, worst bear market ever”. Two years on, the outlook is still not exactly rosy, but it is worth reflecting on just how dismal and downright scary it got back then, how within-in-a-hairsbreadth-of-utter-collapse the world seemed to be. That the Market has come as far as it has is really not all that remarkable, at least in terms of past experience (i.e, the decompression that marked the two years followed similar generational lows in 1932 and 1974). Yes, it has come a long ways in a hurry, though more so in terms of the past six months than the walk-back from the gates of Hell that has been the past two years. Since Labor Day, the Market has so overachieved that it really deserves to take some kind of a break. That it is having such a difficult time staying in “red mode” for more than a few hours at a time, in the face of so many global class uncertainties, is a strong testament to how badly money-at-the-margin want in. We may yet get that bit of news that tips us into a real correction, but it sure looks to me like we are heading down that path to the Market becoming The Only Game In Town, which last happened in 1997-99.

Speaking of news that tips things over, our HDD (hard disk drive) thesis that was the subject of the previous Musings got a gigantic shove from the news that Western Digital (WDC) is acquiring Hitachi Global Storage. This is a truly meaningful increment of industry consolidation. Once the deal closes later this year, WDC will have nearly 50% of the market (31%, plus HGST’s 18%, less at least a bit of share loss). Seagate is best positioned to pick up share from its recent 29%. This leaves nearly 80% of the market in the hands of WDC & STX, and roughly 20% with Toshiba and Samsung, who are increasingly hard pressed to stay in a game that is about leveraging scale and the cost advantages that come with backward integration into key components. HGST was probably the most disruptive, WDC clearly the best disciplined of HDD companies for as long as anyone is remembering. The CEO of HGST was at WDC before taking that job and will return as President of WD. WDC did an exemplary job of acquiring and integrating head and media capacity, and the lessons of how NOT to merge two drive entities derived from HIT + IBM have not been forgotten. I predict a surprisingly smooth merger and WDC going from strength to strength for years to come (and just bent my “wait for a meaningful correction” guideline to add to my position). This is also good for Seagate, in terms of both likely market share gains and the likely effect on the industry’s ability to maintain relatively disciplined pricing. And this is all to the good for HTCH, in that WDC is by far their largest customer, whereas HGST was committed to the Japan Inc. dictum of preferring Japanese suppliers unless there is no alternative but buying from the gaijin (which seems to be the case for suspension assemblies used in enterprise drives). Look for this merger to drive a big part of the market share recovery that HTCH needs if it is going to remain a viable part of the the HDD supply base.

And speaking of driving, how about the price of gasoline? The fellows with all the world’s spare capacity say there is plenty of oil being delivered into the system, and yet the price remains steadfastly elevated. Speculators have once again feasted at the expense of consumers paying an inflated “anxiety premium”. The problem seems to be not that the freedom agenda inspired unrest has picked up speed but rather that a certain stasis has set in. Here we are with a world class, gold-plated tyrant, a strong candidate many years running for Public Enemy #1, and what passes for leadership in the western world can’t seem to come up with a plan to hurry him along into luxuriant exile. Instead we have the specter of rag tag armies expending a lot of ammunition with little effect (except in those instances where the target is slow and defenseless). It struck me as unconscionable, the feigned helplessness about being unable to enact some kind of no-fly zone as Libyan aircraft took to the skies against the rebels. I mean, do we need a screening of Hotel Rwanda at the White House and the State Department to reacquaint the powers that be with the human toll of such fecklessness? Then it quickly became apparent that these guys are either unable or unwilling to deliver ordnance in a manner that produces anything but noise and a harmless cloud of dust. (To be fair, placing a bomb on target is not as easy as our technology has made it look.) Unless arrangements are being made for the His Ugliness and sundry perfidious offspring to move to a palatial and heavily guarded villa at least a two day’s drive from Tripoli, this pathetic conflict will drag on, and eventually be a drag on a consumer led economic recovery. Neither side looks particularly endowed with martial ardor (one suspects that the list of famous Libyan war heroes would not quite make up a commemorative postage stamp), but both sides know that unless there is some kind of geographic partition, a grim reckoning awaits whomever is on the losing side, so backing down is kinda sorta not an option. Let us all hope that His Ugliness has the G-5s gassed up and ready to roll.

The drama in the Middle East is affecting our household budgets and includes gunfire and occasional explosions, so it is probably distracting us from the much more consequential drama playing out in Madison, WI. It is consequential because it is about much more than “rights” to collective bargaining. It, and similar struggles in other states, represents a turning point in a class struggle that has gone on for the past several decades. We are seeing the beginning of a serious push back against what Mr. Irving Kristol in 1975 referred to as the “new class”. He was referring to a “post industrial” emergence of a class of largely college educated administrators, bureaucrats, scientists, lawyers, etc. who derive their livelihood from the redistribution of income. An “elitist” orientation and a “hostility towards capitalism” were two marks he used to describe a class that was emerging from “what we used to call the intellectuals”. This phenomenon got a certain amount of play in the vanguard leading the Reagan Revolution, and its progressive insinuation into the trough of “public” largesse was slowed for a time, but not stopped. A generation or so later, it got really obvious really quickly that the parasite was about to consume the host. On an intellectual level, this was perhaps best articulated in Angelo Codevilla’s tour de force article in American Spectator last summer. On a more visceral level, it’s like the lightbulb went off when workers whose retirement fund was a badly shriveled 401k, or who had no retirement plan at all, realized that their taxes were paying for defined benefit plans that enabled public employees to retire at 50 and then loaf comfortably or go double-dip. When the most economically secure guy in the neighborhood is doing it on the tax payers’ dime, the tax payers take notice and expect the politicians to step up and do something about it.

The idea of collective bargaining rights for holders of what amounts to localized monopoly power has been tried and found wanting. A New Class that derives its power from the recycling of union dues and variously dependent hangers-on (the Utterly dependent, made up of various victim classes, and the functioning dependent, whose paychecks come from activities evocative of the footmen and handmaidens who attended the elites of previous eras similarly tinged by feudalism) can no longer be sustained. The resistance to implementing the necessary reforms is as ferocious as it is because a whole lot of players, some of whom are very high up in the scheme of things, know in their guts that if this gravy train ends, the next best deal for them is a long ways down. Fortunately, they are on the wrong side of history, and they are up against a fearsome force of nature. That would be the Grandmas (and likely future grandmas), the women who make up so much of this nebulous uprising that is called the Tea Party. They are stirred up not because they studied economics and can crunch the numbers. They probably didn’t and couldn’t, but they don’t have to. No, they are fired up because they know that if nothing is done about the recent profligacy, the open-ended obligations entered into by politicians who will not be held accountable, it will be a crushing oppression not on them but on their grandchildren. And you don’t want to harm, diminish or even threaten anyone’s grandchildren. Anyone with two brain cells to rub together not utterly beholden to the progressive redistribution scam understands this. And, increasingly, all but the most craven of political leaders understand this, too, so there is a level of seriousness in the political arena that I have never seen before. It doesn’t quite make me optimistic about how the next thirty years will go (kind of hard to see how we ever get out from under all that debt, but it was pretty darned hard to discern “light at the end of the tunnel back in 1979, too.) but it is a basis for optimism unlike any I can recall. We should be delighted, though hardly surprised, given the damage that a couple of generations of such folly has inflicted, that the state that launched so much of the early Progressive movement is now leading the way back. Perhaps the neo-feudalism that calls itself Progressivism is not as debilitating as many of us were tempted to believe after all.