Monday, November 23, 2009

Feeding the Beast--Our Insatiable Need For Villains

The truth?  Jack Nicholson was right.  We can't handle the truth.  Either that or we just prefer not to hear it..

The truth is that America is still suffering from what is likely to be a very long hangover after a decade of binge spending.  Led by George W. "Keep Shopping" Bush and his friends in Congress, we spent most of the last decade digging ourselves into a deep and wide economic hole.

No one behaved like a grown up.  We elected and supported representatives who ran our government into debt while we ran ourselves into debt with the help of our financial institutions who loaned too much money to people who couldn't pay it back.  When all the bills came due at once, no one had any money to pay them.  So the government is printing money and the ultimate bills will be paid by our creditors, our kids, and people who own dollars that will buy less and less over time.

If this wers a movie, we would come away from this humbling experience chastened, embarrassed, wiser and determined to get it right the next time.

But in real life it's apparently much easier to just get angry at everyone except ourselves and look for villains to blame.  We are told that we didn't do anything wrong.  We're the victims here of the bad guys who brought us down and continue to screw us at every turn.  Nothing is our fault--it's all about those horrible folks who did us in. 

At first the villain was simply called Wall Street Greed but that was too general to be truly satisfying.  During the last few months that problem was solved by simply blaming everything on Goldman Sachs and the people who run the company.  The depth of our addiction to bad guys became clear when even the New York Times piled on last week with an editorial saying that Goldman--only Goldman--should be ashamed of itself.

The international crisis was created by Merrill, Lehman, Bear Stearns, AIG, Fannie Mae, Freddie Mac and the other Goldman competitors who leveraged up themselves and the system to levels that caused a true meltdown when their bets went wrong.

To blame Goldman--which was not the major player when it came to creating the toxic assets and which did not leverage itself up on one bet like the others did--would be like blaming a manufacturer of automatic weapons for what happened at Fort Hood.

The system didn't get brought down by bad mortgages.  It was brought down by major investment firms (not Goldman) who decided to leverage up 30 and 40 to 1 in a single asset class. As result, instead of just taking a hit on a bad bet--which happens all the time--they were wiped out and the international financial system was put at serious risk.

The government (not the taxpayers because we haven't paid a dime yet) bailed out AIG to the tune of $170 billion and counting. Goldman received $12 billion or almost exactly 7 percent of that money. And yet, they are the only name ever singled out as the bad guys who ought to be ashamed of themselves for having the nerve to benefit so dramatically from the recovery in the markets because they're better than everyone else.

What about the companies and people that got the other 93 percent? Do you ever hear any of them singled out for special demonization the way that Goldman has been?  Is there any indication that anyone at Goldman committed a crime or did anything illegal? Has anyone been charged?

Goldman did what investment firms are supposed to do.  They invested legally and wisely in a way designed to make themselves and their shareholders wealthy at the expense of others who were less insightful.  Until a year ago, that's what American success was all about.  A "good" accountant is one who figures out a way to help his clients pay as little tax as is legally possible.  A "good" lawyer is one who can get you off no matter how guilty you might be.  A successful person or company is one that makes an enormous amount of money.  Someone must have changed the rules without telling the rest of us.

For many angry Americans, the Big Three--Obama, Pelosi, and Reid--have been the ultimate villains since their first day in office.  It's ironic that there are two major seemingly contradictory complaints about Obama.  One is that he is doing too much and he's ruining the country.  The other is that he hasn't done anything at all and he's ruining the country.  But when you're dealing with demonization, facts become an irrelevant nuisance. The important thing is to get really angry and encourage others to do the same.

So at the very time when we face serious problems and desperately  need intelligent and nuanced discussion of complex issues, we are getting the exact opposite.  At the time when we most need to become reacquainted with true patriotism involving shared sacrifice, we are being told that we are not the cause of any of our problems so there is no need for us to be part of the solution. 

Instead we are told to get really angry and focus on the villains who got us into this mess with their greed, avarice, and evil motives.  It certainly won't help solve any of our problems but it is not nearly as painful as looking the real nature of our challenges and the key to surmounting them squarely in the eyes.

For most of us, those eyes stare right back at us when we look into the mirror.

Monday, November 16, 2009

The Outsourcing of Patriotism

Each of us interfaces with major news events in our own way. We take reported facts and run them through the personal opinions and filters that we use to shape our view of the world.

So when Major Nidal Malik Hasan opened fire and gunned down dozens of his fellow servicemen at Fort Hood, it was predictable that some would conclude that you just can't trust Muslims while others saw it as yet another sign of the ancillary tragedies of war. Some came away concerned that there would be an outsized backlash against Arab and Islamic Americans while others called for just that. Was Hasan a lone wolf acting on his own or part of an international terrorist plot?  Inquiring minds want to know.

Not really.

We claim to demand answers to these questions but, in truth, we don't care so much.  The questions are rhetorical. Politicians and ideologues take snippets of information and use them to support conclusions and positions reached long before anyone heard of Major Hasan.

That's because at no time in U.S. history have so few of us had any personal or finacial skin in the game of defending our country.  Most of the victims at Fort Hood, like most casualties of our current disastrous wars, were from small rural towns that most of us don't even know exist. Only 2 of the 13 who were killed hailed from metropolitan areas.

The rest were from West Jordan UT, Bolinbrook IL, Mountain City TN, Havre de Grace, MD, Kiel WI, Woodbridge VA, Willistron ND, Plymouth IN, Racine WI, Tillman OK, and Cameron TX.

The vast majority of Americans live in cities with populations of more than 100,000 but 85 percent of those killed at Fort Hood and most American victims of the war did not.  I've been checking the hometowns of our war victims for years and they are always disproportionately rural.  Try it yourself.  You'll be shocked.

The sad truth is that we have outsourced virtually every aspect of our military effort to paid government contractors and young rural men and women who are attracted to the economic package of six-figure enlistment bonuses, death benefits, and educational opportunities available in the military.  Adding to the irony is that Major Hasan himself apparently enlisted for financial reasons--not because he longed to serve America.  He just wanted a free trip to medical school and was willing to do his time in the service to pay for it--until he wasn't.

Being patriotic used to involve actions and not just words. Patriots were those who enlisted in the military--not those who bought an "I Support the Troops" decal at a gas station. Patriots were those who gladly paid higher taxes to support the war effort--not those who demanded tax cuts and held tea parties to complain that they had to pay any taxes at all.

The sadder truth is that most of us have substituted words, blast emails, blogs, and rants we hear and see in the media for truth and actions. The politicians and angry screamers on cable TV and the radio argue incessantly about what we should do in Afghanistan and Iraq but the fact is that most of us really don't care. Very few people could find Afghanistan or Iraq on a map or know a single soldier who has ever served there.

Each TV and radio station has dozens of hosts and guests who argue constantly over what military course President Obama should take but most of those same stations have no reporters on the ground actually gathering facts and covering the wars in which our country is engaged.

Most of us don't complain about the lack of coverage because we just don't care. Most of us lose more sleep over the ups and downs of our favorite football team than we do worrying about the fate of Americans (no one we know) serving in the Middle East.

Shortly after 9/11 most Americans wanted to know what we could personally do to help fight the new terrorist threat.  President George W. Bush told real patriots to "keep shopping" and pay less in taxes--not more--even as the U.S. was about to embark upon a dangerous ordeal that would cost tens of thousand Americans their lives and health and would run up a tab of more than a trillion dollars.

That became the model for the new patriotism. Don't enlist, don't encourage your children and grandchildren to serve their country, and don't even think about making financial sacrifices to help pay the bills. Just keep shopping, vote Republican, and question the courage and patriotism of those who raise questions.

Don't worry about sending your kids to fight. We'll just keep raising the bribes we pay to poor rural kids who want and need the money enough to risk their lives and then once we get them in we'll send them back for four and five tours. Those soldiers who survive may be physically or mentally crippled for life but your kids and finances will be fine.

Since Obama was elected, it is no longer required to even pretend to care. The "I Support the Troops" decals are hard to find now. We have become sadly complacent and comfortable in our new role as armchair patriots.  We're too busy getting angry, demanding new entitlements, and feeling screwed by our government as we pay the lowest tax rates in our lifetime.

Now, just a couple of weeks after the horrific murders at Fort Hood, not even the news media pretends to care so much.  After an initial flurry of reports and commentary, there are hardly any news stories about the massacre. Much more airtime is being given to Sarah Palin's book tour than to the wars, Major Hasan, or his victims.  The compelling and important story of the Ballon Boy got at least double the coverage.

That's the real story from Fort Hood. It's not just about a Muslim officer who maimed and murdered dozens of his fellow American soldiers. It's about the consequences of the outsourcing of patriotism in our country and the sad fact that most of us don't even care enough to be ashamed.

Tuesday, November 10, 2009

The Market's Not That Complicated

The markets continue to frustrate most investors as trends that have been in place for much of the year remain operative long after most of the experts believed they had already gone way too far.

Most pundits have been advising caution for months as world stock markets continue to march higher. They have been declaring buy-and-hold strategies to be long dead in this new age of high-speed trading strategies and risk management.

The new way of thinking is perhaps best showcased on CNBC’s Fast Money—a daily one-hour program where the underlying assumption is that intelligent trading and investment strategies change every minute and the only way to make money in this complex world is to shorten one’s time horizon accordingly.

I couldn’t disagree more.

There are new developments on a daily basis that do affect the prospects for specific industries and companies and one does need to pay attention to the news. But the trends that have been driving the markets this year are macro and secular and should be with us for a long time to come.

Here are the four themes that have driven and continue to frame my investment approach:

1. The U.S. and other countries that were devastated by the financial meltdown last year have responded by printing mountains of paper money that is backed by no tax revenues or assets in an effort to stimulate their economies and avoid what would have been a systemic collapse.

As a result, it is taking more and more of those pieces of paper to buy real stuff—hard assets like gold, copper, energy, and other basic materials. The pundits keep talking about the falling value of the dollar but it goes beyond that. We are in the early stages of a period where the currencies of many countries should be viewed with suspicion as the weak economy and low tax rates continue to reduce tax revenues as the printing presses around the world continue to crank out more and more pieces of paper money.

This is not a trend that is likely to change in the foreseeable future.

2. The U.S. has developed a culture of entitlement and our demographics make us far less attractive to investors than many other markets.

I am part of the problem. I’m a baby boomer who will be a productive, tax-paying worker for several more years but for most of the rest of my life—which will hopefully be several decades—I will become an expensive national liability consuming social security, Medicare, and other entitlement dollars.

I am not alone. It seems that countries like Brazil, India, Taiwan, China, Korea, Australia and other nations where the average age and national and personal debt levels are much lower are better positioned for growth going forward.

Fortunately, it has never been easier for investors to buy into specific geographies and industry sectors as part of a portfolio strategy than it is today.

3. There is an apparent disconnect between the U.S. economy and the stock market. The market has advanced for eight straight months and hundreds of companies are reporting excellent earnings even as unemployment has risen into double digits and many people remain deeply in debt.

There are actually two trends at work here, neither of which is likely to change in the near term.

First, most companies have eliminated lots of jobs and have cut other costs dramatically. They are more focused than ever on getting more work and productivity out of the employees that remain. From an investment perspective, this trend has helped the business of technology companies and others who provide products and services that enhance productivity and make operations more efficient.

The second trend relates to the weakness of the dollar. Those U.S. companies that do most of their payroll and manufacturing spending in dollars but derive most of their revenues from overseas are doing very well in this environment and are likely to continue to benefit going forward.

4. Interest rates on U.S. Treasuries and government guaranteed deposits have been kept artificially low by federal authorities who are trying to keep the cost of funds to the banks at rock-bottom levels and create the illusion that there is still solid demand for our nation’s debt.

I believe this has created a ticking time bomb for conservative investors who remain heavily invested in cash equivalents and government bonds. At some point, inflation and higher interest rates will have to kick in and when that happens, investors who have sought safety will find that they had the same number of dollars as they did before but those dollars may buy far less goods and services than they used to.

We continue to monitor the economy and the markets carefully and I will keep you posted regarding the situation going forward.