No pundits I know, when offering forecasts for the next year, ever bother to put in front of their readers what they said a year earlier. This is now my fourth year of trying to anticipate “themes” for the year ahead for Minyanville. And at the risk of embarrassing myself, here is what I’ve offered to date:
At the end of 2007, I wrote The Courage to Choose
, suggesting that our Age of Aspiration was ending and offering that “with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.”
At the end of 2008, I wrote The No-No Years
, proposing that “if our most recent economic cycle could be characterized as the Go-Go Years, then, by applying Newton’s Law … what we now face are the No-No Years: The years where less is best.” I even went so far as to suggest that we would see “corporations hoard cash”; that “those most able to borrow money simply won’t” and that demand for “public transportation and public education will explode as the economy demands 'just-enough' solutions."
And at this time last year, I wrote 2010: The Robin Hood Economy
, offering that there would be a “battle ahead which attempts to reconcile the interests of individuals versus large corporations; large banks versus small; current and former state and local municipal employees versus municipal bond holders; and dare I suggest 'developed' versus 'developing' nations. The 'faced' versus the 'faceless.'"
Well here we are at the end of 2010 -- three years after I first suggested that “austerity” would replace “aspiration” -- and the word of the year
according to Merriam Webster is “austerity." Finally! (Although I must note that it is only because of “austerity” in Europe, not here at home.)
And who knew that two years later, “corporate cash hoarding” rather than signaling investment indifference, would instead become market-speak for “Buy this stock because there will be big special dividends ahead,” or that within nine months the Robin Hood Economy would be espoused by Jim Cramer as a viable investment strategy where its was great that “instead of paying Wells Fargo
(WFC), you’re spending at TJX
(TJX) and Ross Stores
(ROST) and 'dressing for more' as Wells gets less.”
As I have reviewed my prognostications, I would conclude that I had the right economic themes but the wrong human/market reaction and clearly the wrong timing. Never would I have I imagined that “bad” could be this “good” for this long.
In hindsight, I suppose, I should not have been surprised. It is human nature to deal with crises as “events” not “eras," and as we are now dealing with struggling political -- not just financial -- entities, how could there not be extraordinary measures involved. Clearly I underestimated the not-on-my-watch mindset of not just Washington, but capitals all over the world.
Still, when asked lately to characterize our post-banking crisis world, I have come to borrow the title from Joan Didion’s book chronicling the year following the death of her husband, writer John Gregory Dunne, from a massive heart attack: The Year of Magical Thinking.
To these eyes in all segments of the economy, we have traded hard “choices” for denial. But I can’t help but wonder if the ultimate consequences from our Years of Magical Thinking will be far greater than had we made the tough choices beginning in 2007, particularly as governments (at all levels here at home and in Europe) have leaned heavily on “financially engineered” solutions. Maybe it’s just me, but QE2, the second round of fiscal stimulus, the securitization of tobacco settlements, the ESFS, and so forth, all resemble variations on the same “off-balance sheet” liability theme which began this crisis.
As I look at the world, wherever possible, elected officials have traded more contingent liabilities for time.
But beyond the financial implications of this trade, there have also been immense social consequences. As I offered earlier this month in Our Increasingly Dangerous Asymmetric Economy
, I am very concerned that our Years of Magical Thinking have widened an already tenuous divide between “The Haves” and “The Have-Nots." And not just here at home, but in Europe as well.
To these eyes, 2010 represented a doubling down by developed-nation policy makers on the bet that what we have experienced is nothing more than a temporary recession which can be righted by extraordinary measures. That through financially engineered CPR, the distressed patient can not only be brought back to life, but ultimately thrive anew. But looking at bank loan portfolios, where with the exception of credit cards, delinquencies today are comparable to levels a year ago, I still have my doubts.
But I would also note that in Kubler-Ross’ Model of the Five Stages of Grief, the end of the denial phase is marked by “heightened awareness” of the problem. And while others may think that what the market knows doesn’t matter, the fact that everyone today “knows” and speaks openly about the problems of our cities, states, and nation (not to mention the periphery of Europe) suggests to me that rather than recovering, we are actually moving from the first to the more troublesome second stage of grief: anger. And one need only look at the periphery countries of Europe for examples of anger. (And here I would again note that phrases like “overlord” (used to describe Germany by those in the periphery) clearly capture the feelings of rage and envy of those experiencing the second stage of grief.)
Among the observations in The Year of Magical Thinking, Ms. Didion offers, "I know why we try to keep the dead alive: we try to keep them alive in order to keep them with us. I also know that if we are to live ourselves there comes a point at which we must relinquish the dead, let them go, keep them dead."
To date, and for obvious reason, we have been unwilling to relinquish The Age of Aspiration. We have tried to keep it alive and to keep it with us. And reading the financial media, there seems to be uniform agreement that 2011 can be yet another Year of Magical Thinking.
But to me that requires not just an economic recovery, but an economic resurrection. That denial transitions not into anger but to sheer joy.
Can that happen?
Based on my track record above, I am clearly the wrong guy to ask -- at least for now.
Position in SPY, SH, and JPM.
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