Class Warfare

This edition of Musings finds many us basking in the warm glow of moderately re-inflated net worth, but at least a little bit nervous about the “so far, so fast” nature of the Market’s advance off of the March 9 low. By my intraday measure, it coincides quite neatly with the rally that carried it off of its November 21 low until January 6. We should not be surprised if in the weeks and months ahead the Market finds ways to pause, stutter and otherwise unsettle us. The potential energy that powers decompression inevitably spends itself, most likely before the fuel of improving fundamentals has ignited in a meaningful way. That said, I find it increasingly likely that March 9 did indeed demark a moment of Maximum Pessimism, the likes of which I suspect my generation is unlikely to ever experience again.

My efforts to draw on history as a way of understanding all of this “uncharted territory” we have supposedly entered continue to remind me that there really is nothing new under the sun. Since I last wrote about the late Seventies, I dug up a very illuminating book that I had read during grad school. Written in 1978, A Time for Truth is essentially William Simon’s account of his service as Secretary of Treasury and what seems to have been Energy “czar”. In vivid detail and the tones of one trying to rally his countrymen to the defense of all he held dear, it was quite the wake-up call. (I remember also seeing a PBS series based on Milton Friedman’s Free to Choose.) The reader has to constantly remind himself (noticing how small the dollar figures were, as in “..and this Agency spent almost $25MM…” helps in this regard) that he was not writing about our present situation. The very chapter titles are redolent with the seeming spirit of 2009: Freedom v. Dictatorship, Dictatorship in Microcosm (about government’s role in mismanaging the energy industry into a crisis) and Disaster: Visible and Invisible. At the time I had been only dimly aware of how close both New York City and the UK economy were to failing (being quite preoccupied with more proximate concerns). This book made it clear just how potentially catastrophic those situations had become. A leisurely skim would be a useful tonic for anyone suffering under the delusion that we are presently, in every sense of the words, in “uncharted territory”.

Perhaps what impelled me to reach back into the shelves was a sense that, okay, history repeats itself, but some things do change. I wanted to flesh out what might really different this time, besides the dollars having shriveled since when a pitcher of beer might be had for less than $1, minimum wage was $2.35 and having $1MM meant you were rich. Musings has already touched on a few. The ubiquity of what we call “news” and the incessant need of its purveyors to “out-shrill” each other, as opposed to what three channels provided for a couple hours at the end of the day, springs readily to mind. This has to have had some effect in exacerbating the emotional currents which define markets. I think it also matters that “investing” is much less a spectator sport than it was a generation ago. I remember hearing Sir John Templeton in April 1984 predicting a sort of peoples’ capitalism, in which in the years ahead share ownership would become much more the norm. It was hard to imagine at that time just how important 401ks and such would become to so many households. Market volatility strikes much more deeply into whatever sense of security these households might have than it would have then. This has the potential to make demagoguery that much more efficacious. It renders plausible, to a people who seem ever more given over to subjective considerations of reality, that capitalism and those who champion it have failed us.

The one concept within Simon’s assessment of the situation a generation ago that struck me as most apropos to today was his discussion (attributed to Irving Kristol) of what was called the “new class”. Herein we find a seemingly endless struggle of the age, the perceived outcome of which sets the direction of the long term trend of the Market. It is class warfare, but not along lines that “class” is commonly understood. Writing in the WSJ in May 1975, Kristol noted that this “new class is not easily defined but may be vaguely described. It consists of a goodly number of these college-educated people whose skills and vocations proliferate in a ‘post industrial society’; scientists, teachers and educational administrators, journalists and other communicators, psychologists, social workers, city planners, bureaucrats..”. He goes on to note that this class does not “control the media, they are the media, just as they are our educational system, our public health and welfare system, and much else..”. He notes that this class is not interested in money so much as in power, “power to shape our civilization-a power which, in a capitalist system, ought to reside in the free market. This “new class” wants to see much of this power redistributed to government, where it will then have a major say in how it is to be exercised.”

Reinforcing for us that then as now, there is nothing new under the sun, he notes, “..One used to call this group “the intellectuals”, and they are the ancestors of our own “new class”, very few of whom are intellectuals but all of whom inherit attitudes that have flourished among intellectuals for more than a century and a half. This attitude may accurately be called “elitist”- though people who are convinced they incarnate “the public interest”, as distinct from all the private interests in a free society, are not likely to think of themselves in such a way. It is basically suspicious of, and hostile to, the market, precisely because the market is vulgarly democratic- one dollar, one vote.”

I think what the Market has struggled with over the past few months (and, more prospectively, for the past ten years) is a resurgent “new class”. Just as there is nothing really new about “New Age” (is that expression even used anymore?) Kristol intimates that the new class is not exactly new. What was new in 1975 is more so today, that what had been mere coteries had reached out to each other and found ways to collaborate and grow their numbers to a degree that registers as a class. It seemed to be working for them going into the Seventies, but as Paul Johnson has pointed out, the whole collectivist project had lost confidence by the end of that decade. Every day in every way, one could look around and see that despotism hard and soft had been found wanting. Most of the world was good and ready to give freedom a chance, which led to a couple of decades of a rising tide lifting most of the boats that came to be thought of as normal. We should not be surprised that the passage of thirty years has caused the lessons learned during what Johnson called America’s Suicide Attempt to wear a little thin and given this “new class” a bit of purchase to reassert itself.

The Market knows that freedom and prosperity have enemies, and it is trying to decide if these preconditions can be adequately defended against a resurgent enemy class. Viewing the matter superficially, one is tempted to despair, as the various components of Kristol’s new class have put down roots and broadened their constituencies. It is as if the old “Establishment” has been redefined. However, I am not so sure that much like the Soviet Union twenty years ago or the newspaper publishers, what, maybe three year ago, what seem to be towering monoliths might actually be tottering edifices riddled with dry rot. Corruption takes its toll just as easily when the operative lust is for power or approbation as when it is for money. I think that this enemy at the gate looked a whole lot more formidable in January and February, when it was like a distant horde coming over the hill for the first time. Everyone within the walls of our great city got a little weak in the knees. Then as they started to have to actually execute maneuvers, the Market saw that however vast this horde seemed to be, its victory was far from assured, and courage was renewed.

“Know Your Enemy” It seems almost countercultural of late to even talk in terms of having enemies. I mean, why can’t we all just get along? The fact of the matter is, though, is that there are sizeable blocs of people who for whatever psychological, ideological or otherwise convoluted reason are resentful of other peoples’ good fortune. The Politics of Resentment are ageless. Whenever such people gain an upper hand that cannot be remedied by electoral process, a reversion to Hobbes’ “brutish, nasty and short” ensues. Kristol’s “new class” is a fair enough way to characterize this, but I suspect the makeup of this “class” can be clarified. I see it as an amalgam of three interest groups. The largest and so most politically important might better be called the Meddling Class. It would seem to consist of those who are given over to that lust for power that impels them to want to boss other people around (if only by imposing rules, regulations and thought-codes). This is true to an extent, but I strongly suspect that the big headcount is more about “rice bowls” and “place”. By this, I mean that however earnestly many of these folks might have started out, as the slog of life wears on, a spiffed up form of serfdom, variously called tenure or seniority, gradually takes hold. (Exhibit A would be that institution we call Education, which over the past generation has done an enviable job of securing for its members a sweet and seemingly intractable place at the trough of taxpayer largesse. And now, there is movement afoot to make this entity, untouched for over a century by anything resembling what the private sector calls restructuring, an even more voracious incinerator of what would otherwise be household discretionary income.) The Meddling Class is not just a place for those for whom it is important to look good and feel good while doing good (important as this is in an age of radical subjectivism). If you toe the line your moderately comfortable place on the plantation will be assured. In Modern Times, Paul Johnson described how when what used to be called “the Establishment” had lost its clout, it opened its ranks and promoted those who had complementary interests (i.e., political power). These burgeoned into the Meddling Class. The remnants of said Establishment, whoever they are, would be a second component of the enemies of “one dollar, one vote vulgarity”.

I am inclined to think that the third and most intriguing enemy of capital is a subset of capital itself. Nikita Kruschev’s prediction that capitalism would provide the rope for its own hanging had a seed or two of truth in it. It would be the height of naivety to suppose that among the personages who populate the heights of finance there are not at least a few who will make a deal with anybody if the believe there is gain to be had, even if that other party wishes them ill if not dead. A misplaced sense of invulnerability is part of the Master of the Universe syndrome. Among the speculators we call hedge fund operators, and those remnants of the Establishment who sit astride the most established of corporations, one sees a certain Neo-mercantilist leaning. What greed addled Master of the Universe wouldn’t want to see more and more of the most important decisions rendered by persons with whom he (or one of his high-dollar factotums) has formed a close, personal relationship? If one finds themselves in such an advantageous position, one very rationally seeks to defend and enhance it, even if they call themselves a capitalist. So what we are getting is that the Meddling Class brings the votes while the Neo-Mercantilists pony up the funds. They might not actually want to see the engine of prosperity rendered feeble, indeed they have become accustomed to enjoying its fruit, but to the extent to which they crowd out, disadvantage and otherwise discourage those who might be called the Productive Class, that is the effect.

My expectation is that the Market will continue to fitfully decompress until the passage of time brings us closer to that referendum that is midterm elections. Then it will strain the poll data for clues as to whether the enemies of capital and their enablers have rediscovered the cleverness with which they seized power, or squandered their political capital, alienated the independents and aroused what had been the somnolent elements of their opposition. (For what it’s worth, I lived for twelve years in the 20th District of New York, East Chatham to be exact. They are presently awaiting absentee ballots to determine the outcome of an otherwise deadlocked election. We are told to wonder “if the Republicans can’t win here, where can they win?” Based on the demographic shift that gathered speed between 1994 to 2005, towards a sort of giant outdoor theme park for “second home” city people (at least a couple of whom I have overheard on the train talking of voting at both residences) it should have been a slam dunk for the Democrat.) It surely won’t get there in a straight line, but I think the Market could easily be up another 20%+ from here (DJIA: 7935) over the next twelve or so months. Then we will probably be looking at one tough call.