“Nine mile skid on a 10 mile ride, hot as a pistol but cool inside.”
-- Grateful Dead
It was a pleasant autumn afternoon when I sat to share these thoughts. The weather was perfect and I had just returned from spending the morning with my fiancé Jamie and our newborn Ruby. I had a rare few hours to spare before we took the children to the pumpkin farm; an idyllic wind gently blew the trees as sun splintered through the shuttered window.
Why did I decide to spend that time inside writing this column? Inspiration, I suppose. As I read the newspaper at the breakfast table earlier that day, I turned to Jamie and said, “Remember last year when I told you that I wanted to move our family outside the city before the riots arrived—and you called me a conspiracy theorist?”
“These are demonstrations, not riots,” she responded as she sipped her coffee, “There’s a difference.” I nodded my head slowly and pushed the newspaper to my right so she could see the photo of the demonstrator choking a police captain on the streets of Manhattan.
I reflected on what I previously posited about the Occupy Wall Street movement, which has now spawned to 1500 cities throughout the world. I posted a vibe here and there but nothing substantive; certainly nothing that spoke to the enormity of the underlying condition or the ramifications of our rapidly shifting social mood.
Among those vibes was a short article
—one that vaguely touched on unintended consequences surrounding the movement, such as the tax-revenue shortfalls for an already crimped New York City budget—and one gentleman, in response, offered that he sensed “some kind of fear, anxiety or distaste; perhaps something antipathetic.”
Based on my musings the last week or so, perhaps he was right.
Setting the Stage
Minyanville has labored intensively to raise awareness of the cumulative imbalances that have percolated under the seemingly calm financial surface for almost a decade. That effort began long before people were aware of the shifting social disparities; many were content to live off the residual grist of The Grand Experiment, few thought to question the status quo.
I had an inside-out view of the financial machine. While I detailed my personal transformation following the attacks of 9/11 in my book, The Other Side of Wall Street,
the other, more pertinent story was the genesis of Minyanville, which was created to effect positive change through financial understanding.
The social discord and income disparities we’re seeing weren’t magically created overnight; they have evolved through years of policies, agendas and motivations, many of which were openly discussed among the Minyanville community.
In our 2005 conference in Ojai,
we shared some hard truths; a few of them are listed below:
The following year at our mountain retreat,
As business cycles go, we’ve yet to absorb the other side of the bubble or chew through the overcapacity that remains. The onus is on us to recognize the evolving dynamic and proactively position ourselves for what's to come.
There is a difference between legitimate economic growth and debt-induced demand; the Federal Reserve knows the stock market is the world's largest thermometer and they took historic fiscal and monetary strides on the back of the bubble, in the aftermath of 9/11, during the invasion of Iraq and into the election.
The economy is growing, but why? Because real estate speculation is driving growth. Why? Because long-term interest rates remain low. Why? Because investors are still buying financial assets. With what? Liquidity that is being created by more and more debt.
As we edge through the new world order, our economic ranks and societal structure will continue to shift. While last year’s election brought the dichotomy between blue states and red states to bear, a more disturbing conundrum has evolved that has little to do with party lines or political affiliations.
As we digest initiatives of eminent domain, understand the motivation of the new bankruptcy laws and realize social security and pension programs are inherently flawed, the growing chasm between the “haves” and “have nots” will become increasingly apparent. The middle class is steadily eroding as we balance the lifestyles of the rich and a struggle to exist.
Almost 40% of all US wealth is in the hands of the top 1% of the population, compared to 13% 25 years ago. As this dichotomy manifests, the implications for consumer spending, real-estate investment and long-term savings will be profoundly impacted.
I am particularly wary of the financials, the main beneficiary of the easy money policies these last few years. As the yield curve flattens, margins get squeezed and compression builds in the system, the risk/reward seems particularly unfavorable.
A complex maze of derivatives has tied together the balance sheets of the world’s largest organizations.
With the emergence of bearded financials such as General Motors (GM), General Electric (GE) and Ford (F)—all of which have considerable finance arms—a ripple in Fannie Mae or JPMorgan (JPM) would have an exponential impact across a wide array of sectors and industries.
The problem that comes from engaging in high risk behavior for which the consequences are absent, even if only temporarily, is that such high risk behavior begins to appear normal, and the entire scale of risk gets adjusted and pushed out.
I offered a more sobering message; the crisis had crystallized in my mind’s eye. As markets ascended higher, I shared, “The probabilities of a prolonged socioeconomic malaise entirely more depressing than a recession are higher than most have factored into their risk assumptions.”
I again spoke to “the growing chasm between the 'haves vs. the have nots', the steady deterioration of the middle class” and the ramifications that would affect “not only our societal fabric but…the growing trend of nationalization and tendencies of international hoarding.”
“Thousands of new media channels were being birthed each day on the Internet” I continued, and “the democratization of information had leveled the playing field of true understanding.” I foresaw “that we’ll eventually live in a two-pronged society rather than a three-class system.”
This isn’t a victory lap or a back-pat; trust me, there were—and are—musings I’ve missed by a mile and many more that I hope prove untrue
As a registered independent—financially conservative and socially liberal—I’ve watched this storm build through the years. One could say I saw it coming from a mile away; which is good—it means we’re one mile closer to where we want to be: an inevitable and cumulative comeuppance of our collective social conscious.
Nobody who is antipathetic
would spend 10 years trying to prepare people he’s never met for an outcome that nobody wants. It was a tireless and, at many times, thankless task; we’re talking a full decade here, and we were early.
It wasn’t easy telling folks that Wall Street was effectively insolvent
as the Dow Jones
ticked to all-time highs and the financials were the biggest weighting in the S&P.
When those fears were realized, it was equally difficult encouraging optimism
as people’s dreams were being shattered in real-time.
We even launched The Minyanville Underground Railroad
in an effort to address many of the issues overheard these days in Zuccotti Park; not in a radical way, but as a progressive attempt to fortify the values passed down from previous generations.
Last year, when we edged into The Eye of the Financial Storm,
with the first phase of the financial crisis behind us and the sovereign sequel on the horizon,
we offered the following foresight:
“Free market capitalism hasn’t been allowed to dictate the process of price discovery for a long time as policymakers have attempted to engineer the business cycle. As we’ve learned before and we’ll again see, it’s never wise to mess with Mother Nature.”
Mother Nature is at the front door and she has an attitude, with the world’s children as her army.
We have always believed that nobody is bigger than the free financial markets—not the Federal Reserve, not the Treasury Department and not the European Union. We’ve been given drugs that mask the economic symptoms rather than medicine that will the debt disease—but still, we keep digging and digging and digging.
We now find ourselves in a world where capitalism is considered evil and those who worked their entire lives to achieve a semblance of wealth are viewed as part of the problem.
It’s been—and remains—my view that once we get through this second storm, perhaps by the back-half of this decade, there will be generational opportunities; there will be a world where I can spend a Saturday with my family and focus on the laughter of little kids rather than the anger of grown men.
What’s yet to crystallize is the path we take there; whether it’s a gradual bleed as politicians scotch-tape European policy—and year-end performance anxiety kicks in—or with fast speed, as the chasm between perception and reality—faith in the system and the credibility of our leaders
—crashes into realignment, resetting the system, if you will.
To that end, one of the great misperceptions in the history of financial markets is that the crash caused the Great Depression when, in reality, the Great Depression caused the crash. Social mood and risk appetites shape financial markets, not the other way around. I will ask you to view the current social uprising through that lens.
History is littered with headlines proclaiming the worst was over
when, in reality, the work had only just begun. The Great Depression was an era, not an event, but it was also a time when franchises such as Disney
(DIS) flourished, 75% of the country was still gainfully employed and children went to college to forge a future for their families.
The pick-a-side or stand-aside mentality will have to shift; we’ve seen it manifest in everything from college football conferences to political posturing to burgeoning class warfare. We need to change the channel and find some middle ground before it’s too late; before something erupts
beyond our control, if it hasn’t already.
We’ll get through this, but more likely than not, it will get worse before it gets better.
Quite hopefully, we’ll remember the lessons learned from this mindful revolution, grow from our past rather than repeat it, and leave this world a better place than we found it.
The future is in our hands, and it starts today.