A Way Too Interesting Decade

The New Year finds us awash in journalistic reflections upon a decade variously referred to as the Oughts or the Naughts. From an investor’s perspective it was ten way too interesting years, more or less book-ended by the bursting of two Bubbles of the sort that most decades are spared of altogether. The last couple of years have been unusually difficult for unusually large numbers of us, but the pretense bandied about of “worst decade ever” is risible indeed. Compared to the 1930s? Get real! This past week our Netflix queue happened to serve up a peek into the 1940s in John Ford’s They Were Expendable. This 1945 film starring John Wayne, Robert Montgomery and Donna Reed was more than a dramatization of the US Navy’s struggles at the outset of hostilities with the Empire of Japan. Movies in those days were great (however loosely they depicted the actual events upon which they were based) because their creators met the audience were it was. In the 1940s a massive plurality (as opposed to today’s larger than normal minority) of Americans were seeing their livelihoods and most precious personal relationships being ripped apart and subjected to fears and uncertainties that make “Great Recession” seem almost trivial by comparison. One suspects that the recency of this decade’s jaw-dropping, gut-wrenching immolation of multi-$Trillions makes it seem worse than that endless migraine that was the Seventies, but was it really?

I would submit that to the extent we want to define history by decades, the Thirties were a time of trial and testing which prepared us for the Forties, which were a time of standing up to and ultimately triumphing over a wide ranging eruption of evil. Life has taught me that tough times have an uncanny way of making us better able to rise to subsequent challenges, and I think this played out in that era. In the Fifties we were rewarded for passing that test, while the Sixties were a time of losing our way. In the Seventies we stumbled about in dazed confusion, but the Eighties saw us groping back toward the Founders’ vision of an exceptional City on a Hill. It was salubrious even if we got nowhere near the destination that had been our heading. The Nineties saw us reading the wrong message into the end of the Cold War, an “end of history” which would prove short-lived. Leadership which “felt our pain” and “tried it but didn’t inhale” attenuated our capacity for noble struggle and otherwise debauched us with temptation to narcissism. The Naughts for the most part echoed the Seventies in their dazed confusedness.

A brief cataloging of what I take to be the most defining moments of the Naughts would start with a little anecdote from its dawning weeks. We had all woken up to find that “Y2K” ended up resembling nothing more than a lame practical joke. I was writing about how the Tech Bubble was starting to lose air faster than the “pumper-uppers” could pump it up. At the end of January I attended an Analyst meeting for a company (which has since “realized value” in multiple directions) that was held at a ski resort in Utah. I remember being bombarded with images of just how flush a large slice of America’s households were with discretionary income of the sort that is needed for families to subsist in high-end resort towns at high season. It was common knowledge that demigod Naz was going to deliver 20% forever and early retirement for all who cared to partake! I clearly remember sharing a chairlift with a guy who, upon hearing about my involvement in the world of investing, asked me what he should do with his money. You should have seen the look on his face when I told him he should fold it up and keep it in his wallet. Who knew, so many years into stocks being The Only Game in Town, that this flip remark was the best possible advice your average “investor” could have received? Then on the way home, I watched a guy with one of those primeval wireless devices for day trading (Quotrek?), furtively working under the cover of a newspaper as we prepared for take-off, and not seeming to be having a good time of it.

Those were actually great years to be a value investor, when the life that had been sucked out of “everything non-BITT” (remember that?) since about 4/98 started to flow back in. It goes without saying, though, that the Great Game of buy low and sell high was rendered into trivial pursuit on 9/11/01. History had not ended after all. The silver lining was that it is always end up being a good thing when collective delusion gets swept away. Nearly a decade later, the visceral memory of that kick in the guts lingers in a plurality of Americans. I find it puzzling how after executing against the Taliban in Afghanistan with awe inspiring economy of force, but finding ourselves bogged down for years in Iraq, nearly a decade later it looks like we won in Iraq but we are still trying to “figure it out” in Afghanistan. The lesson seems to be that warfare has become quite asymetrical, that having the wrong game plan can easily undo any manner of material and technological advantage.

One consequence of the reaction to 9/11 was the apparent near demise of the aviation industry. I remember in March 2003, with the war going live in the desert and something called SARS killing a lot of chickens in China, paying something less than $500 for a pair of round trip tickets, Boston to Munich. And there were lots of empty seats on the return flight! This moment also denoted a stupendous buying opportunity in aerospace stocks, as not only was a never-ending war back on the front burner, but air travel would prove (as I wrote in June 2003 in Not Going Back to Greyhound) to be an indispensable part of how burgeoning millions of us choose to live.

The economy was seemingly pulled from the ditch by an engine that was all about real estate. By mid decade, this “asset class” was the face of a bubble that had been decades in the making and of a magnitude that was too big for any of us to see. A personal milepost in this decade would be May 15, 2005, when I took my leave from what seemed like the rapidly gentrifying hollows of Columbia County, NY and alighted in the Texas Hill Country. This transition attuned me to when the leakage quickened in the bubble that was Real Estate. It would be a couple of years before it was broadly obvious, but the media event that was Hurricane Katrina marked the beginning of the end. Let’s just say that the market for second homes in the Hudson Valley went from white hot before September to something not quite red hot shortly thereafter. The drama of Katrina broke the fever. It also was an inflection point in the political stream, a stumble from which the Administration would never recover. (It was reminiscent of how after “owning” his adversaries for years, Reagan lost the upper hand during the Iran/Contra affair and was never quite as effective thereafter.) I suspect that thrusting New Orleans into the spot light was inherently unsettling, a reminder of how much corruption and decay can lurk below a patina of frivolity and passable functionality (being below sea level doesn’t help, either!)

The next “big moment” turned out to be July 2007, when the “ix-nay on that triple A” started to emanate from the rating agencies on whose unimpeachable veracity legions of bagholders had made highly leveraged bets. This happened on more or less the same day that the SEC’s conclusion that the “uptick rule” was more trouble than it was worth took affect. A couple of similar developments at that time escape my recollection, but I remember a definite sense of sea change before that month had run its course. That peculiar Market action that defined the next few months (days with lots of stocks up >10% and down >10%) turned out to be smart hedge fund operators beating a path to the sidelines so as to start to work on the next game plan. There were so many signs, so obvious in hindsight (like, maybe, it having been 35 years since the last one?) that we were due for a once-in-a-generation purge of delusional excess, but who knew? Virtually all of us paid a heavy price, in treasure as well as self-esteem, for not recognizing what Time it really was. I for one find myself with mixed feelings about the prospect of living long enough to “go through that again”, despite having had the fortitude and buying power to take advantage of and eventually profit mightily from a situation that was a day after day, head to toe world of hurt.

If I were allowed only one more “moment”, my first choice would not be the 3/9/09 nadir of sentiment as defined by the DJIA. As Musings was wondering out loud at approximately that time, the political drift since mid-Decade in the direction of Progressivism was showing signs of being short-lived. In retrospect, I can state a little more clearly that said political movement was at high water on 1/20/09. That tide has been creeping, and then rushing, out ever since. As also noted in Musings, these enemies of liberty, who hold in low regard the rights and responsibilities of the individuals who create wealth, will do us damage, but that damage is likely to be a good bit less extensive than we were tempted to believe. The rate at which these plundering factions have discredited themselves has exceeded my most wildly optimistic expectations. Shuttered by ideology that has seeped down so deep into their souls that it is recognizable only from afar, they are insensate to the hopes and dreams of the real people they purport to govern. This nightmare will not pass without doing damage, and it will not pass without a fight, but it will pass. Circumstances may come to pass which preclude an outright recapture of the House by the opposition party ten months from now, but in any case a swelling popular reaction is putting what our forebears called “the fear of God” into quite a few of those who must stand for election. The Market recognized that this Emperor had no clothes early on this year, and I suspect will continue to applaud a popular insistence on a retreat from that retrogression that is Socialism by any other name.

The one thought as to what the dawning decade will bring that I would propose revolves around a construct that gained currency in the run up to the liberation of Iraq and then mysteriously simmered down. Remember the Arab “street”? I took this to be the millions people in those latitudes running from Morocco to Indonesia who would be so offended by our newfound assertiveness that they would sign their kids up for Suicide Bomber Summer Camp. (Recent events have indicated that the supply of competent suicide bombers might be a good bit more dried up than we had supposed.) Events gave lie to this notion. It appears that Islam is at least as susceptible to “backsliding” as Christianity, that most Moslems are as “nominal” as they can get away with, and that regime-sanctioned demonstrations are well nigh the only way one can cut loose and act out in these repressive, humorless societies. So they go for it with all the “death to America” gusto they can muster and then go home and see what’s on TV. The “street” yawned and went about its business in 2003, but in June 2009, a variation on this construct emerged in response to the craptactularly orchestrated elections in Iran. The streets turned Green, and then red with the blood of martyrs. Brutal as the response was, this movement is not likely to be denied. When Poland shook off its oppressors, we in the West did not know the names of its martyrs, like Fr. Jerzy Popieluszko, but the Poles did. This struggle in Iran is at least as far along as that one was when that priest was tortured to death by Marxist thugs. So if I have to pick one catalytic, course of history changing event, the “curve ball” which is beyond the Market’s uncanny ability to discount in advance, it would be unrest emanating out of what is now very much in play in and around Teheran.

A little shy of a hundred years ago, at a time when anarchists were running amok and “bomb thrower” was not just a figure of speech, who knew what the assassination of a Balkan Archduke would set off? Within the bounds of the proverbial “everything else being equal”, we can expect the value of equity to continue to recover from its near death experience, but there is a very good chance that what ends up surprising us most about “the Teens Decade” will be the rippling consequences of what is happening in Iran right now.