March came in like a lion for small cap value investors. There was a franticness to trading on Monday that had to include a good deal of short covering. It was one of those days that you really had to be there, as in being one of those handful of days in a year that end up generating most of that year’s returns. (Such is the nature of value investing.) Two simple explanations presented themselves. The most fundamental was seen in the latest batch of “big honking premium” bids takeover bids. Similarly, the price offered for a piece of AIG reminded us that even that which had been lumped with “toxic” a very short while ago is worth a lot more to someone in particular than to the rest of us in general. Coupled with yet another snippet of confirmation of recovery among the enablers of Web 2.0 (i.e., global chip sales rose in January, a month which normally sees a decline), this had to make it very uncomfortable to be short any but the most rancid or liquid of situations.
I suspect the speculative crowd also woke up Monday a bit aghast at how the recent Greek drama has played out, but not in the sense of a collective sigh of relief that this tempest-in-a-teapot crisis is being managed away (or at least kicked down the road a few years). No, reading between the headlines, it seems that at least some of the big speculators have gotten the message that the “authorities” have wised up to their game (i.e., using derivatives to simulate/exacerbate volatility in financial instruments, which reflexively undermines the viability of the enterprise, in this instance nation states). It’s about time that someone drew a line in the sand and said “proceed at your (pecuniary) peril”. This does not mean that the authorities will necessarily prevail in dissuading the big speculators who are trying to exploit the flaws in the Euro system, but they seem to have made it clear that they are going to push back. Smart speculators heed the lessons of history, which suggests that while governments don’t always win, they win often enough when they put their mind to it (see attempts to corner gold and silver). My sense is that in a way akin to August 2007, at least some of the smartest and largest hedge funds have recognized this as enough of a sea change to back up and re-group, which would include no small amount of short covering in the small & mid cap parts of the Market.
These developments explain why portfolios skewed to small cap & Tech (like mine) rose 3-5 times the Dow’s +0.8% on Monday, but they should not obscure a large and more enduring drama that is playing out. As we approach the anniversary of 3/9/09, “How’s that HopeNChange thingy working out for you?” is the gift that keeps on giving. There seems to be much more to it than the hubristic overreaching that Musings recognized very early on (see 3/25/09). It turns out we are looking at much more than hubris begetting inefficacy, which is what I discerned back then. The body politic has been energized by a plurality of the productive class having realized that they are well on their way to being enslaved by a new petty aristocracy. This bad news has been delivered variously, most notably in the reports that government “workers” are now better paid than those in the private sector. At a time when private sector workers were swallowing pay cuts and sweating layoffs, the ranks of government employees making $100K+ were exploding. These “workers” also enjoy vastly greater security in retirement, a security that is funded by a non-negotiable call on what the productive class produces. It is also not so secure, insofar as the shortfall in the pension obligations to public employees is one of the things that the Downturn made worse, to the tune of $1T+.
To the degree that the value of ownership, which is to say, stock prices, is dependent on the long term viability of the host organism (i.e., nation), that a vigorous resistance to the Parasite class has developed is quite encouraging. It may come to pass that the parasite has gotten bigger than the host and will prove impossible to extricate, but at least the host has been made aware and is starting to fight back. A favorable outcome cannot be assured, however. Indeed, it is problematic to handicap the outcome of a struggle where one side is defending something specific and tangible and the other something diffuse and less tangible. In this case, it’s the jobs and sinecures of what the late Irving Kristol termed the “New Class” against the marginal tax rates of a number of the rest of us. It is much easier to mount a hedgehog defense of something like “jobs” and “retirement” than it is roll back something understandable only by metaphor (e.g., the dead hand of the state) and experience (which passes with each generation). Nonetheless, the vanguard of this class having overplayed its hand has had the effect of waking the dead, or at least seemingly dead. The US will not be sleepwalking its way to Euro-inspired decrepitude after all.
That the New Class has evolved from its putative idealism to being all about the welfare of its members and clients should not be surprising. Nor should we be surprised that if uninterrupted the parasite will eventually overwhelm its host. This has been a very long time in coming. I can remember being struck by what seemed like imminent crisis with respect to municipal pension obligations living in New Jersey 20+ years ago. I was struck by how many towns, counties, etc. had contracted with their employees to provide very generous pension benefits. Life expectancies having lengthened as they have, one could easily envision a situation where the rate payers end up supporting several “generations” of retirees at once (twenty years of service leaving 45 years of life expectancy). Somehow, a rising tide of prosperity covered these manifestly irresponsible obligations, but all that came undone in 2007. Private sector workers not only endured pay cuts and lay-offs (and the threat thereof) while their public sector neighbors hunkered down behind their union contracts, they also saw their retirement funds withered. Over the past 25 or so years, defined benefits plans have been replaced by the much more fiscally responsible defined contribution plans and stock option programs in virtually all of the nonunion portions of the economy. So those whose long term financial security is in 401k not only experienced the haircut of a lifetime, they learned that as taxpayers they were on the hook for the gargantuan shortfall to fund public sector defined benefits plans. The boiling point was probably reached when the Administration didn’t bat an eye in extending this “hook” to future generations, i.e., our grandkids.
I continue to think that the host on which all of us, parasites and producers alike, subsist is much more viable than we give it credit for. We are groping our way toward a recovery that is much more essential than mere cyclical upswing. Liberties seem to have been eroded, but we are still the Land of the Free, at least in the sense that we aspire to be free and respond to that which threatens liberty. This could get ugly in the sense that it will amount to an attack on the “jobs” and “security” of a putative protected class, but it does not have to get ugly in the sense of literal blood being spilt. There was a similar rebellion against the New Class thirty years ago. It bought us about 25 years. The Market is figuring out that history is trying to repeat itself.
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