The Second Side of the Financial Storm
Great opportunities are born from profound obstacles.
"Outside in the cold distance, a wildcat did growl. Two riders were approaching and the wind began to howl." --Bob Dylan
It's easy to finger the bears as a cabal of pessimistic pundits who root against the world, but following the worst decade in financial market history, they've earned the benefit of their own market doubt.
As negative headlines abound and social mood sours, some might view the mounting malaise as a contrary indicator. One could argue that the prolonged period of substandard performance is on the margin constructive; that a regression to the historical mean would suggest double-digit returns for the foreseeable future.
I would agree, if not for the fragility of the global market construct and the magnitude of the economic condition.
We often discuss the current crossroads: government drugs that mask the symptoms after years of societal largesse versus medicine that cures the disease in the form of asset class deflation and debt destruction and/or restructuring. We repeat this often for good reason -- it's true. (See: Economic Issues Remain in Wake of Debt Resolution)
I may be off base -- I've learned to stay humble or the market will do it for me -- but a single word continues to resonate in my mind's eye as we edge our way through this historic juncture. That word is "cumulative."
As offered at the Minyanville retreat in Ojai in 2005, "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." (See: Keynote Address From Ojai)
Therein lies the fatal flaw of our current conundrum. We've been pushing risk further out on the time continuum for such a long time that it's become an accepted -- dare I say normalized -- pattern that interconnects the world through a tangled web of derivatives.
Last year, I wrote that we were in the eye of the financial storm, a relative calm between the first phase of the crisis and a sovereign sequel that'll flush -- and perhaps reset -- the system. (See: The Eye of the Storm)
As we navigate that near-term reality, one thing is clear: this decade will require steadfast stamina and proactive patience. While the first half will be focused on preservation and perseverance, the back nine will be ripe with rewards.
Some may view the above-mentioned vibe as overtly negative but I'll offer a different take. I shared the following thoughts in September 2008 and they're equally apt today as the second side of the storm gains steam. (See: The Great Expression)
There are many ways to view this seismic shift: anger (as expressed by Main Street), sadness (as savings are destroyed), fear (as reality bites), and confusion (as folks try to understand how this could ever happen).
And there's anticipation, as we cast an eye forward and look for the phoenix that will eventually arise from the scorched earth.
The unfortunate capital market destruction is an inevitable comeuppance, the cumulative result of risk gone awry. It's been percolating under the seemingly calm surface for years, magnified by financial engineering and consumed by an immediate gratification society.
The socioeconomic consequences will be pervasive as Mother Nature unleashes her pent-up wrath and explores the other side of the business cycle that politicians and policymakers have tried so hard to avoid. It's certainly scary, as new beginnings typically are. Therein lies the opportunity.
The media portrays the Great Depression as one where everyone in America stood on street corners or waited in a bread line. A closer look shows that similar to our current situation, economic hardship for the middle class began well before 1929.
We've got a few lean years ahead but that's nothing to fear. In fact, it's a healthy and positive progression. To get through this, we need to go through this and as painful as the process is, it takes us one step closer to an eventual recovery.
I view the Great Depression as the framework for optimism. Most of society worked, great discoveries were made, and formidable franchises were established.
Disney (DIS) built a global franchise through that period.
Hewlett-Packard (HPQ) was born on the back-end.
Texas Instruments (TXN), Tyson Foods (TSN), and Continental Airlines (CAL) were birthed.
Indeed, if the greatest opportunities are bred from the most formidable obstacles, we're about to enter a most auspicious era.
This will be a bitter pill to swallow, particularly for the mainstream American who doesn't know a derivative from a dividend. We can point fingers and wallow in the "why" or take a deep breath and begin the process of recovery.
It's unfortunate that the structural foundation of capitalism had to shake before people -- and policymakers -- paid attention to the root causes of our current conundrum but we can't dwell on what was; we need to focus on what can and will be.
Surround yourself with people you trust. Practice risk management over reward chasing. Preserve capital, reduce debt, and become financially aware of your surroundings. It won't be an easy road but it won't be impossible either.
For as my grandfather Ruby used to tell me, "This too shall pass."
Fast-Forward to Today
Minyanville Editor-in-Chief Kevin "Pepe" Depew offered the following thought in 2008; and I quote:
"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."
As unconventional as that view was at the time, the events of the last few years have validated his perspective. Ironically, as that very same point of recognition manifests, we'll edge closer to a secular market bottom.
The causal factor for this modern stealth depression can be traced to the job market. While the Bureau of Labor Statistics maintains the unemployment rate is hovering around nine percent, they've missed the mark in more ways than one. I understand employment is a lagging indicator coming out of any recession, but I'll share the following fare:
The "underemployment" rate, which includes those who've taken a part-time job to make ends meet or stopped looking for work altogether, is 20% (one in five).
- The unemployment rate for 16-19 year olds is 25% (one in four).
- The unemployment rate for 20-24 year olds is 15% (one in six).
- And perhaps most eye-popping, 15% of Americans are on the food stamp program (one in six!).
The most important takeaway from the evolving dynamic in social mood is this: Identifying a personal balance isn't just about living within one's means. It's about redefining what those means are and adjusting your boundaries.
If our past was focused on wealth, accumulation, and consumption, the next few years will witness a migration toward something altogether more austere, if not more sensible.
My personal view is that the stock market could retest the March 2009 lows in 2013. That doesn't make it right, and the goal isn't just to position yourself to profit if you're correct, but persevere if you're not.
Debt reduction and the rejection of -- and guilt projection toward -- materialism will continue what began in 2008. It won't just be about doing more with less, but doing less… period, and finding happiness through avenues other than money.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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