Dis and Dat - Change is in the Air - April 2009

James Pope | Apr 15, 2009

Change is in the Air

We hope that everyone enjoys the change between winter and summer as much as we do. Besides the beautiful spring days we find the “births or rebirths” of things that were labeled “Dead” a few weeks ago exciting & energizing. We wanted to share with you a few thoughts on the “seasons” that seem to be occurring in our economic system. First of all, no one has been able to forecast all of the changes that have occurred over the last couple of decades. That topic along with our last newsletters topic regarding getting your investment advice from the media has culminated in the battle of the host of the daily show Jon Stewart and the host of Mad Money Jim Cramer. Stewart’s main point is that if Cramer and CNBC can not see the future then they shouldn’t act like they can. We can’t see the future either.

What we would like to discuss here is the present period and similarities with a time when our nation transformed its economic system from agriculture to manufacturing. We believe there is a similar transformation from that industrial revolution, which will only be properly titled with the benefit of hindsight. One of the similarities includes a huge increase in our standard of living caused in part by this revolution, which has lead to an increase in the number of individuals with a level of wealth and income above what it takes for the bare essentials. This has caused great uncertainty in where to place that “excess capital.” Since 1996, we have seen a boom and bust in technology, when many thought they had this revolution figured out. Recently money poured went into commodities and housing, when many thought they could just invest in the basics. Now we seem to have a boom in treasuries and savings, when real uncertainty is upon us and most think there is no place to invest. This is also recognized as investor sentiment peaked near 75% bullish in the first couple of months of 2000, totally transforming around 73% bearish just a few weeks ago. This “bullishness” for assumed safety is one major difference between the 1930 period. It seems to be related to FDIC insurance which has given confidence to savers regarding their funds placed as deposits in FDIC insured banks.

One of the driving factors of this revolution, which is similar to that industrial revolution is the “Consumer” in all of us. We are still more likely to spend money on products and services that improve our standard of living. The consumer decided the automobile was better than the horse and buggy for their transportation needs. For their communication needs the consumer has a history of dropping the old in favor of the new with examples such as the progress through pony express, telegraph, telephone, printing press, cell phone, email, text, internet. Entertainment choices have changed as well from reel to reel, thirty-three records, forty-five records, cd’s, music videos on cable and now you can download digital files of movies and songs.

We want to share with you what we see as the structure for these changes and how the process we are going through now is necessary to bring back balance. The structure is that of our corporations. The corporation has been the means of production and the store of value when that production is exchanged. As we see it, the corporation has stake holders, which need to be balanced in order for it to work properly. In order for it to be balanced, these stake holders have to be motivated enough to make an investment of time, work, capital, and ideas for some possible future return. The stakeholders include consumers, shareholders, lenders, employees, managers, and government. Group them together and it becomes our society, in which each one of us individually can play multiple roles. The managers are in the middle to attempt to manage these varied interests, and need to be balanced themselves. During this revolution, we believe some of that balance was lost as the “Shareholder” of the corporation became complacent instead of self-interested due to the wealth that was generated over the 90’s stock price boom. This complacency allowed the managers too much freedom as long as their stock price went up. The consumers were doing their job in being self interested and searching out better quality products and services for lower prices. The employees were adopting the new technology and becoming more productive. The lenders, such as bondholders, were keeping their standard rate of inflation plus maybe 4% for their required return on investment. The government was continuing to take taxes from the workers and corporations to spend in other areas. The “shareholders” in us let the managers have huge pay packages along with wealth diluting stock options, exchanging long-term wealth creation for short term “stock price increases”. This also increased the wage gap between the highest compensated in our society and the middle class. As we believe is correct, the government then stepped in as “lender of last resort” in a time period when the system became so unbalanced as to threaten the entire economic system itself. The government acting in its self-interest when seeing the potential revenue drop stepped in with the now labeled “bailouts”. This was done in order to bring some stability to consumers and employees, before the entire system broke down. As described in previous paragraphs, fear continued to grow.

From this role as lender of last resort, it seems the government is attempting to “manage” the companies and we are finding the “fear” turn to “anger”. As the loans went in, the governments began telling managers how to manage their corporations. They sent in an enormous amount of money to some institutions that did not even want the funds. The government then became upset when they used the funds to acquire assets the managers believed attractive. The government then said no meetings, no jets, etc. The government then said no dividends to the shareholders. Now they are saying no payments to employees as bonuses. With no where else to put these funds, I wonder if the government expects them to lend the money to unqualified borrowers similar to what helped bring about these problems. I am not making a “judgment” on whether these are the right or wrong actions. I am saying in order to get back to a properly running system that has created this better standard of living for all of the stakeholders, each “stake holder” needs to do its job, and not rely on the others to do it for them. That’s where we as individuals come in. Last time we wrote about avoiding having the general media arrive at your risk tolerance and objectives for your portfolio. This time we are saying don’t listen to the government to bring back this systems balance, for the government has its own self interest. After 9/11 they said “just keep spending”. Now they are saying “just let us handle it”. We believe more is needed.

What can we do as individuals to “balance the system?” To bring balance we think we as individuals need to work for our self interest as consumers, taxpayers, share holders, bond holders, employees, and parents. If everyone does this it should keep the others in line.

So what does that mean? As consumers we shop for high value and low prices, as citizens we become informed and vote, as shareholders we vote on the board of directors, who set executive pay, and we vote by selling shares of companies that are not creating “true economic value” instead of just relying on promises of a higher share price; as bond holders we try to get the best rate possible for the quality of the company; as employees we work to increase our production or service and we demand proper pay; as parents we love our children and educate them for a better life than we had. The managers of us must try to balance these self interests, and it’s not easy. The executives of banks, auto manufactures and insurance companies are finding this out the hard way. The hope is that we can get back to producing value for each other by following our personal paths to the “American Dream” instead of living out of fear and anger. This dream of a better future for the next generation is so powerful, that it can hardly be referred to as only “American” now.

As this stock market reached 12 year lows a few weeks ago and that investor psychology transformed to 73% Bearishness from 75% Bullish at the 2000 peak, we are left with one question … Is this time truly a different scenario in which we let our fear and anger to lead us toward less production and a lower standard of living for that next generation?

We will all answer this question by our “actions” to our responsibilities in the various roles we play in this society. It will require an investment of time, money, work, and ideas from each of these stakeholders.

If we choose fear and complacency of the short term, over risk taking and production of the long term, then our collective futures may become less “Dreamy”. Because of the risk that everyone becomes short term oriented and accepts as “investors” U.S. Treasuries yielding much less then inflation we must know our future cannot be guaranteed, cannot be predicted.

There is no government program, no corporation, no investment product that will save us. We must work at improving our lives in our individual roles, if we are to turn this economic winter into spring. I take the fear and anger we see daily now as hope that we are awakening from our winter hibernation, from complacency and neglect. This transformation is not automatic it takes work and education to produce a period to where we can enjoy the benefits of a “harvest”.

See you next time.

James Pope

The information contained here in is the opinion of James Pope, Shane Haag, and is not intended to be investment advise.

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