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Minyan Mailbag: The Demise of Bling


Bullish on America, Bearish on the market


Hi Kevin,

As insightful as
your market commentary is, I find, in many cases, your thoughts on society and its changing dynamics to be more intriguing. I truly believe you are spot on with your "Value Shift" thesis. However, I think it may be more a generational shift as opposed to a sweeping societal one.

That said, an argument can be made they are/will be one and the same. Now, to tie this in with the market, how would such a psychological shift in societal mores be actionable in terms of negotiated securities?

More specifically (and in a self serving manner...PERFECT for this time of year), how can we make some money off of this?

Minyan Deano

MD -

First, I want to be clear, while I am a believer in a coming deflationary environment, I am not a Doomsdayist. I do not own a fallout shelter and have not stockpiled canned goods... yet.

As you know, I believe we will ultimately experience deflation, risk aversion, and a decrease in time preferences. I believe the consequences of that are widespread re-adjustments in the valuations of all financial assets. In other words, there will be few hiding places in the long run, and only brief respites for those who are nimble enough and/or who have a disciplined methodology for identifying sector and asset class rotation.

From that standpoint, and please don't take this personally, but the question, "How can we make some money off this?" is itself symptomatic of the degree of excessive risk-taking behavior we are witnessing. People are simply unworried about any significant change in economic activity that makes speculative activity dangerous.

Making money requires risk. There is no free lunch. And at the bottom of the transition from risk-seeing behavior to risk aversion, that question, "How can I make money off this?" will be the farthest thing from anyone's mind. The question then will become, "How can I not lose any more of my assets?"

Of course, the value shift I envision does not require a total absence of all economic activity or a breakdown in the structure of society. The deflationary period in Japan is an example of how a society can continue to function despite the effects of a harsh unwind and transition away from risk seeking behavior. The Great Depression is another example of how society continues to function and move ahead despite economic conditions that are truly awful and widespread.

I lived in Washington D.C. in the mid-to-late 1980s. Although unimaginable today, that was one of the most dangerous cities in America at that time. The violence and the threat of crime was widespread. It affected how people lived their lives and greatly impacted the decisions they made. Once, in the early evening, I stopped downtown at a secure ATM location and inside found a man who had been stabbed in the throat. I witnessed shootings and riots in Adams Morgan.

New York City was also a different world in the 1980s. Living here now, versus frequent visits here then, the difference is stark and dramatic. The most interesting part of it all is that, at the time, none of it was particularly unusual. It was just the way things were. People can and do adjust to almost any circumstances. Oh, and those conditions were taking place at the beginning of the longest and largest bull market in U.S. financial history.

Citing those examples is not meant to minimize the effects of those conditions, but to instead illustrate that people truly are adaptive and quickly adjust to whatever circumstances they face.

That adaptability is both good and bad - people also very quickly adapt to tiny encroachments upon their freedoms and civil liberties, and throughout history frequently have failed to notice the subtle conditional shifts that pave the way for the rise of totalitarian regimes. Contrary to conventional wisdom, totalitarian regimes do not "seize" power, or "take over." They are instead "welcomed" by the majority and "encouraged" into power as a solution to a perceived problem.

I believe the single greatest danger facing us now is not a financial collapse, but a political collapse. Closed societies are bearish societies. Restrictions on freedoms necessarily, by definition, are restrictions on economic activity. You cannot have a capitalist society that continues to eat away at the freedoms that make entrepreneurship and economic activity possible in the first place.

As we have seen in Iraq, democracies are not built overnight. They are built over a long period of time, brick by brick. Similarly, democracies are not destroyed overnight. They are torn down over a long period of time, brick by brick. It has been said, often in jest, "Hey, if the Dow does go to 4,500, then that will be the least of our problems." I'm afraid that is correct. Therefore, the question, again, is not "How can we make money off of this," but "How can we not lose what we already have."

No positions in stocks mentioned.

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