Dear Friends,
This week, we forward you a letter recently written to our good friend, Credit Markets, someone who has been taking a beating of late and yet one who has made a tremendous difference in our lives. We hope you enjoyed your holidays and found much for which to be thankful.
Sincerely,
Syntrinsic
**********************************************************
Dear Credit Markets,
In the spirit of Thanksgiving, thank you for your friendship over the past many years. While this has been a hard time, know that there are still those among us who remain your fans. You have been maligned in the press, undermined by politicians and bankers, and bemoaned by overzealous borrowers. You have caused riots, enhanced losses, and brought down governments. Still, we appreciate you.
When I was young, my grandfather told me how you helped him out after the War. He had returned ready to put the violence of WWII behind him and determined to escape the poverty in which he had been raised during the Great Depression. Unwilling to spend his life working for others, he conceived of a new idea in a highly competitive market. All he needed was some capital to compliment his sweat, intelligence and hustle. In the beginning he was not a typical banking client so you came to him via established business people who were willing to take a leap of faith—not a cheap leap of faith, but a leap nonetheless. And as his business grew, you came to him through more conventional means, banks and other commercial lenders. Fittingly, as the years went on and he became an established business person himself, you and he partnered to help other early stage entrepreneurs, some of whom never would have found credit through more formal channels, but found success because of the work you did with my grandfather.
I remember, too, how our friendship grew back when I wanted that business degree. Here I was, a long-haired nonprofit leader striving to become a business person, and unlikely as my potential success was at the time, that didn’t bother you one bit. You gave me a chance to reinvent myself professionally. Wasn’t easy of course, working 80-90 hours per week and school on top—and I’m still paying you back every month. It’s an easy payment to make however, a gentle periodic reminder of how I could depend on you at a critical time.
The other day, I heard a university professor insulting you in front of thousands of students, calling for them to refuse to pay back their own student loans. Ironically, he wanted those students to disown you, abandon you, in effect destroy you. It did not seem to occur to him that to assault you would be to punish the students (and professors) to come, those who would need you to be able to attend school, to earn that first degree or one more advanced, to improve or change careers, to reinvent themselves. You may feel discouraged to hear the disparaging remarks, to see students refuse to pay you back while their teachers cheer them on, to feel maligned by the very people you have helped educate and employ; but perhaps that is the lesson to you dear friend. Let higher education in America function without reliable credit markets for a few years and see how well that goes. They’ll be back, Credit. You’re a better friend than they realize.
Now you and I have had our tough times, too, as all friends do. Remember back in 2005 when you were daring me to get me to take out that huge residential loan? Don’t dodge it—you know the one. Sure, you weren’t the only one applying the screws, but that was certainly a low point in our relationship. Fortunately, I was able to tune you out and make a more reasonable decision. Had I gone along with you to that party, I would be in heap of trouble. I learned not to trust you as much as I thought I could. To your credit old friend (no pun intended!) you did give me some warnings, some clues along the way. A little wink wink nod nod as you proposed lending me so much that I’d for certain be in foreclosure now if I had accepted. Maybe you were just testing me, building a little character…I hope that’s the case. One thing that I have learned about our friendship is that I have to pay attention. Just because you’re in a crazy mood doesn’t mean I have to get crazy too. Not a bad lesson.
And we’ve had a few close calls along the way. Remember back in 2008? When I was starting a company and you were really sick, nearly out of commission? I thought that I had done all the right things, built a decent reputation, a proven track record, a solid business plan. Naïve I was to say the least! I had thought all those things pretty much guaranteed the relatively modest sum I needed to launch the company. Then you got sick and when you got sick everyone got nervous. I went to your friends at the banks but they were just fretting over your illness, talking about it incessantly, clearly nervous that they were sick too. I went to the private markets but they were so afraid of your condition being contagious that they shut themselves up and hid. Still, we eked it out just by a hairsbreadth and here we are today, thriving, growing, and making even more investment. Sometimes I wonder what would have happened if we had started just a month later…
It’s funny, sitting here late at night, reflecting on Thanksgiving and all the ways you have impacted me, my colleagues, my friends, my clients. You built our neighborhood, our kids’ school, our home. You helped educate me, finance my surgery, even pay for our wedding. You have enabled me to hire people, serve clients, innovate, invest, and change our little corner of the world. Sometimes I have taken you for granted, but recent events have underscored how precious you are; I truly appreciate your presence in my life.
That said, I promise to be worthy of your friendship. At a time when you are unpopular, unloved, and discredited, I will stand by your side. I will honor my commitments to you and encourage others to do the same. I will continue to trust you, to reach out, to give you opportunities to prove yourself. And I will share in the risk-taking inherent in a meaningful relationship with you.
I realize that you, dear Credit Markets, do not receive much fan mail during the holidays, but this is a funny year. As we witness the crowds of Tahrir Square and the lines at job fairs in Manhattan, help Japan and Haiti rebuild, and strive to keep our cities afloat, your friendship and good health are as important as ever. I give you thanks and look forward to many years of friendship.
Monday, November 28, 2011
Saturday, September 24, 2011
The Hero
Imagine the Lone Ranger galloping over the horizon, confident that he and his sidekick Tonto will face down any evil before them with nothing more than a white stallion, silver bullets, and a healthy dose of moxy. If the villain is our stagnant economy, then who are our heroes? Obama and Biden? Bernanke and Geithner? Boehner and Ryan? Romney and Perry? Oh, hero! Wherefore art thou? The American people await a politician to save the day!
Alas, America, our wait continues. A quick check of the United States Constitution (©Copyright, 1789, Philadelphia, Founders Press) confirms that it does not empower Congress, the President, or their appointees to stimulate the economy. Repeat: It is not in the federal government’s job description to stimulate the economy. Indeed, using the word “stimulate” in political discourse in early America could have earned one a bucket of tar and bag of feathers. The notion that federal officials are responsible for being the SOURCE of economic growth rather than its regulator and partial enabler has evolved under the 20th and 21st century leadership of both parties. It is not an original notion.
There are several limitations on federal economic stimulation, including:
Limitation One: No Carlyle for Congress
While private equity partners make hefty contributions to Congress to ensure their tax advantaged status (another Commentary for another day), Congress cannot legally become a private equity partner. Congress as a body cannot launch a for-profit venture, cannot issue stock, or buy into corporations. When Congress has blurred that boundary (think Fannie Mae and Freddy Mac), it has not gone well; the resulting organizations have functioned much more like conflicted bureaucracies than thriving businesses. Their net economic impact (Additional Economic Good minus the cost to manage, sustain, and rescue said entities) reflects a poor rate of return for America the investor.
By extension, “economic stimulus” programs sponsored by government agencies acting on behalf of government officials are prone to corruption, mismanagement and ultimately, misallocation of resources. Quite simply, the federal government is not intended to be in the business of business. Government and business are the same in Russia, China, Iran, Singapore, Syria, Myanmar, and many others; however, these countries are not representative democracies. We are.
Limitation Two: You Can’t Make the Horse Drink
The Federal government can bail out General Motors or Bank of America, but cannot force consumers to buy their products. Contrary to state-controlled economies in other countries, in the American market economy even government backed companies such as banks and auto manufacturers must eventually compete in the marketplace. The government can’t—and shouldn’t—force a consumer to spend money on the products or services of the companies that the government thinks should be in business despite themselves.
Congress can manipulate that marketplace through instituting tariffs or abolishing free trade agreements, bowing to the demands of specific special interests while creating a net negative impact on consumers by artificially increasing prices and/or reducing the quality of goods and services. Such manipulation hurts the consumer and thus the economy.
Limitation Three: The Government Does Not Create Jobs
Okay, let’s acknowledge that the government creates government jobs, but those are 100% paid for by current government revenues (formerly known as “taxes”) and future government liabilities (still known as “debt,” but likely to have a new name once the PR folks get on it). Since every penny paying for a public sector job is a penny taken from the private sector, it is hard to argue effectively that such a fund transfer is enhances the long-term sustainability of the economy.
A president, for example, can initiate job training programs or marginal incentives such as a reduction in employment taxes; however, nothing the president does can compel a company to hire people. The U.S. President, regardless of party affiliation, can seek to influence job creation, ask for it, scream and pound the table for it, promise it, pray for it, and otherwise strive for it. The government can make it harder to hire people, more expensive, scarier, and riskier; however, the government will not reduce unemployment in a sustainable or cost effective manner. It’s not in their job description.
Actual job creation will only occur when businesses decide they need to hire people and can afford to do so.
Limitation Four: It’s Not Their Money
The Federal Reserve has one primary tool—the ability to set target lending rates between banks and the Federal Reserve. They have used that tool to keep interest rates low. This certainly helps keep low the US debt service cost (whew!), but also is intended to stimulate credit markets (borrowing and lending). This has not worked effectively and will not have the impact implied in press releases. The Federal Reserve cannot make banks or private investors lend money, nor can they compel consumers or businesses to borrow money. Credit is a function of confidence and desire, not just interest rates. People and businesses borrowed heavily prior to 2008 when rates were in the 5-15% range; they are not borrowing now when rates are half as much. It doesn’t matter if your last name is Bernanke or Greenspan or Volker—no Fed Chief can make people lend or borrow.
Limitation Five: Market Manipulation is Not a Long Term Strategy
The Fed has more recently evolved to become the world’s largest de facto bond manager with a $2.9 trillion fixed income portfolio. By comparison, the largest true money manager, PIMCO’s Total Return Fund, has “only” $200 billion AUM. Bernanke beats Gross by a factor of 15. The Fed has used that position and its accompanying bully pulpit to manipulate interest rates and bond valuations across sectors, currencies, and regions. While some argue that it is perfectly appropriate for the Fed to become the primary driver of bond market valuations, it was not originally imbued with that power and it is not clear that such activity can or will materially benefit the long-term economy.
Limitation Six: It’s All About (Un)productivity
When federal officials strive to stimulate economic activity by borrowing heavily to finance infrastructure (i.e. FDR) or defense build outs (i.e. Reagan), they may foster near-term gains for some including the elected official, but rarely contribute to a more sustainable economy. For example, while Reagan’s defense spending put the pincers on the USSR and helped revitalize aspects of the American economy, it also relied heavily on federal debt that we still pay for today. In hindsight, those efforts launched a thirty-plus year gorging on debt-financed government intervention that has shown no sign of abating.
If local taxpayers and businesses believe in investing in their infrastructure after doing a careful cost-benefit analysis, they will do so. A jobs program should not cost $150,000 per $50,000 job. A defense department should defend, not be used to keep people inefficiently and thus unproductively employed. It never works long-term. The federal government was shaped to provide basic protections and to NOT interfere with basic freedoms. When it steps outside of that narrow mandate, it is not productive.
“We have met the hero…”
There are schools of economic thought that would attack every assertion made herein, and we recognize that some earnestly believe that the role of the federal government should be to save us from economic uncertainty, though such powers were not granted in the Constitution or implied in either the Federalists or Anti-Federalist papers. One has to turn to Marxist and Fascist state planners to find justification for such a path.
But this discussion is not about Constitutional interpretation of governance; rather, it is a discussion about what kind of society we want to have. Do we want a society where people await rescue by others or one in which people take responsibility for moving themselves and each other forward? Do we believe that elected officials and bureaucrats can “control” or “plan” the economy better than business leaders and consumers? Pogo once remarked that “We have met the enemy and it is us.” We would argue the contrary—that “We have met the hero and it is us.”
Political leaders cannot turn around the American economy. Citizen leaders can. Political leaders will not rescue the American economy; citizen leaders will do so, as they have done since this country was born.
How?
Entrepreneurial Leadership
As in times past, this economy will be healed by those entrepreneurs who invest in their businesses by hiring talented people, creating new or better products and services, and acquiring or developing next generation technology and machinery. In every era of slow growth, there are those who are committed to an idea and possess the leadership qualities to make it into reality. Some may feel that America has lost that hunger, that edge, that desire, but such fear has been afoot since the late 18th century. Every generation thinks it was better before, and yet every generation has gone on to create new growth and discover new possibilities. In free societies people with entrepreneurial drive can thrive, and in their effort and success inspire and enhance others.
Personal Development
People who further their education and ability will stimulate the economy by becoming more valuable to businesses or creating their own. Complacent job-seekers will not do well, but that is to be expected and indeed is well-deserved. Our founding documents did not guarantee a job to anyone; they framed America as a land of in which one was free to work in any state at any job for any company one wished or to create one’s own. This revolutionary concept remains shockingly rare in a global economy in which millions are locked into grinding economic prisons.
The competitive landscape will not get easier, educational requirements will increase, the need for thoughtful employees will grow, and the global employment marketplace will become more competitive. Those who see this as a problem have a problem; those who see this as an opportunity will have better opportunity.
Responsible and Opportunistic Lenders
Banks may be reluctant to lend because of the regulatory environment, poor balance sheets, or their risk-averse business models; however, there remain financial intermediaries who recognize both their responsibility to serve their community and the opportunity to be a part of creating new wealth. Banks that simply nurse their wounds for the next decade are on the way out anyway and quickly will be supplanted by those institutions that participate in enabling new ideas.
If formal banking institutions fail to step in, there will be private investors who would rather put their capital to work than have it earn less than 1%. Why will these people still want to finance business ventures? Because we are a culture that has attracted people from all over the world who are drawn to the possibility of creating new wealth and opportunity for themselves, their families, their employees, and their communities.
Citizen Statesmanship
Polls indicate that Americans are frustrated by the lack of statesmanship in Congress and among those—vying to be elected president in 2012. This challenge has plagued American life since our inception. No recent campaign has been as ugly as that waged between Thomas Jefferson and John Adams in the first contested election in 1800, yet America went on to greatness. Study the details of any election, any Congress, and you will find gridlock, animosity, maliciousness, and embarrassingly poor governance. And yet we never have had a dictatorship, never have swung into full blown socialism or fascism, and have gone from strength to strength. While we may lack it in the District of Columbia, statesmanship has been abundant in the local communities that define American life, among business and civic leaders and ordinary citizens doing their part.
Next Steps
It is high time for citizens to stop playing into the media-driven frenzy of fear, anger, hopelessness, and despair. Unplug the TV, turn off talk radio, stop reading blogs (except this one), and get to work.
Never have ordinary citizens had such an opportunity to help heal and grow a country, not just by electing one person or another, but by using our collective ingenuity and diligence to create goods and services that are worthy of our friends and neighbors at home and around the globe. Enough of the whining. There is no Lone Ranger coming to the rescue on the back of a white donkey or white elephant. There are no silver bullets. And there is little the government can or should do unless the people of this nation are ready and willing to lead rather than follow.
It may seem crazy, but I am hopeful and appreciative of the opportunity we all have to serve each other, our country, the broader global community, and the generations to come.
Alas, America, our wait continues. A quick check of the United States Constitution (©Copyright, 1789, Philadelphia, Founders Press) confirms that it does not empower Congress, the President, or their appointees to stimulate the economy. Repeat: It is not in the federal government’s job description to stimulate the economy. Indeed, using the word “stimulate” in political discourse in early America could have earned one a bucket of tar and bag of feathers. The notion that federal officials are responsible for being the SOURCE of economic growth rather than its regulator and partial enabler has evolved under the 20th and 21st century leadership of both parties. It is not an original notion.
There are several limitations on federal economic stimulation, including:
Limitation One: No Carlyle for Congress
While private equity partners make hefty contributions to Congress to ensure their tax advantaged status (another Commentary for another day), Congress cannot legally become a private equity partner. Congress as a body cannot launch a for-profit venture, cannot issue stock, or buy into corporations. When Congress has blurred that boundary (think Fannie Mae and Freddy Mac), it has not gone well; the resulting organizations have functioned much more like conflicted bureaucracies than thriving businesses. Their net economic impact (Additional Economic Good minus the cost to manage, sustain, and rescue said entities) reflects a poor rate of return for America the investor.
By extension, “economic stimulus” programs sponsored by government agencies acting on behalf of government officials are prone to corruption, mismanagement and ultimately, misallocation of resources. Quite simply, the federal government is not intended to be in the business of business. Government and business are the same in Russia, China, Iran, Singapore, Syria, Myanmar, and many others; however, these countries are not representative democracies. We are.
Limitation Two: You Can’t Make the Horse Drink
The Federal government can bail out General Motors or Bank of America, but cannot force consumers to buy their products. Contrary to state-controlled economies in other countries, in the American market economy even government backed companies such as banks and auto manufacturers must eventually compete in the marketplace. The government can’t—and shouldn’t—force a consumer to spend money on the products or services of the companies that the government thinks should be in business despite themselves.
Congress can manipulate that marketplace through instituting tariffs or abolishing free trade agreements, bowing to the demands of specific special interests while creating a net negative impact on consumers by artificially increasing prices and/or reducing the quality of goods and services. Such manipulation hurts the consumer and thus the economy.
Limitation Three: The Government Does Not Create Jobs
Okay, let’s acknowledge that the government creates government jobs, but those are 100% paid for by current government revenues (formerly known as “taxes”) and future government liabilities (still known as “debt,” but likely to have a new name once the PR folks get on it). Since every penny paying for a public sector job is a penny taken from the private sector, it is hard to argue effectively that such a fund transfer is enhances the long-term sustainability of the economy.
A president, for example, can initiate job training programs or marginal incentives such as a reduction in employment taxes; however, nothing the president does can compel a company to hire people. The U.S. President, regardless of party affiliation, can seek to influence job creation, ask for it, scream and pound the table for it, promise it, pray for it, and otherwise strive for it. The government can make it harder to hire people, more expensive, scarier, and riskier; however, the government will not reduce unemployment in a sustainable or cost effective manner. It’s not in their job description.
Actual job creation will only occur when businesses decide they need to hire people and can afford to do so.
Limitation Four: It’s Not Their Money
The Federal Reserve has one primary tool—the ability to set target lending rates between banks and the Federal Reserve. They have used that tool to keep interest rates low. This certainly helps keep low the US debt service cost (whew!), but also is intended to stimulate credit markets (borrowing and lending). This has not worked effectively and will not have the impact implied in press releases. The Federal Reserve cannot make banks or private investors lend money, nor can they compel consumers or businesses to borrow money. Credit is a function of confidence and desire, not just interest rates. People and businesses borrowed heavily prior to 2008 when rates were in the 5-15% range; they are not borrowing now when rates are half as much. It doesn’t matter if your last name is Bernanke or Greenspan or Volker—no Fed Chief can make people lend or borrow.
Limitation Five: Market Manipulation is Not a Long Term Strategy
The Fed has more recently evolved to become the world’s largest de facto bond manager with a $2.9 trillion fixed income portfolio. By comparison, the largest true money manager, PIMCO’s Total Return Fund, has “only” $200 billion AUM. Bernanke beats Gross by a factor of 15. The Fed has used that position and its accompanying bully pulpit to manipulate interest rates and bond valuations across sectors, currencies, and regions. While some argue that it is perfectly appropriate for the Fed to become the primary driver of bond market valuations, it was not originally imbued with that power and it is not clear that such activity can or will materially benefit the long-term economy.
Limitation Six: It’s All About (Un)productivity
When federal officials strive to stimulate economic activity by borrowing heavily to finance infrastructure (i.e. FDR) or defense build outs (i.e. Reagan), they may foster near-term gains for some including the elected official, but rarely contribute to a more sustainable economy. For example, while Reagan’s defense spending put the pincers on the USSR and helped revitalize aspects of the American economy, it also relied heavily on federal debt that we still pay for today. In hindsight, those efforts launched a thirty-plus year gorging on debt-financed government intervention that has shown no sign of abating.
If local taxpayers and businesses believe in investing in their infrastructure after doing a careful cost-benefit analysis, they will do so. A jobs program should not cost $150,000 per $50,000 job. A defense department should defend, not be used to keep people inefficiently and thus unproductively employed. It never works long-term. The federal government was shaped to provide basic protections and to NOT interfere with basic freedoms. When it steps outside of that narrow mandate, it is not productive.
“We have met the hero…”
There are schools of economic thought that would attack every assertion made herein, and we recognize that some earnestly believe that the role of the federal government should be to save us from economic uncertainty, though such powers were not granted in the Constitution or implied in either the Federalists or Anti-Federalist papers. One has to turn to Marxist and Fascist state planners to find justification for such a path.
But this discussion is not about Constitutional interpretation of governance; rather, it is a discussion about what kind of society we want to have. Do we want a society where people await rescue by others or one in which people take responsibility for moving themselves and each other forward? Do we believe that elected officials and bureaucrats can “control” or “plan” the economy better than business leaders and consumers? Pogo once remarked that “We have met the enemy and it is us.” We would argue the contrary—that “We have met the hero and it is us.”
Political leaders cannot turn around the American economy. Citizen leaders can. Political leaders will not rescue the American economy; citizen leaders will do so, as they have done since this country was born.
How?
Entrepreneurial Leadership
As in times past, this economy will be healed by those entrepreneurs who invest in their businesses by hiring talented people, creating new or better products and services, and acquiring or developing next generation technology and machinery. In every era of slow growth, there are those who are committed to an idea and possess the leadership qualities to make it into reality. Some may feel that America has lost that hunger, that edge, that desire, but such fear has been afoot since the late 18th century. Every generation thinks it was better before, and yet every generation has gone on to create new growth and discover new possibilities. In free societies people with entrepreneurial drive can thrive, and in their effort and success inspire and enhance others.
Personal Development
People who further their education and ability will stimulate the economy by becoming more valuable to businesses or creating their own. Complacent job-seekers will not do well, but that is to be expected and indeed is well-deserved. Our founding documents did not guarantee a job to anyone; they framed America as a land of in which one was free to work in any state at any job for any company one wished or to create one’s own. This revolutionary concept remains shockingly rare in a global economy in which millions are locked into grinding economic prisons.
The competitive landscape will not get easier, educational requirements will increase, the need for thoughtful employees will grow, and the global employment marketplace will become more competitive. Those who see this as a problem have a problem; those who see this as an opportunity will have better opportunity.
Responsible and Opportunistic Lenders
Banks may be reluctant to lend because of the regulatory environment, poor balance sheets, or their risk-averse business models; however, there remain financial intermediaries who recognize both their responsibility to serve their community and the opportunity to be a part of creating new wealth. Banks that simply nurse their wounds for the next decade are on the way out anyway and quickly will be supplanted by those institutions that participate in enabling new ideas.
If formal banking institutions fail to step in, there will be private investors who would rather put their capital to work than have it earn less than 1%. Why will these people still want to finance business ventures? Because we are a culture that has attracted people from all over the world who are drawn to the possibility of creating new wealth and opportunity for themselves, their families, their employees, and their communities.
Citizen Statesmanship
Polls indicate that Americans are frustrated by the lack of statesmanship in Congress and among those—vying to be elected president in 2012. This challenge has plagued American life since our inception. No recent campaign has been as ugly as that waged between Thomas Jefferson and John Adams in the first contested election in 1800, yet America went on to greatness. Study the details of any election, any Congress, and you will find gridlock, animosity, maliciousness, and embarrassingly poor governance. And yet we never have had a dictatorship, never have swung into full blown socialism or fascism, and have gone from strength to strength. While we may lack it in the District of Columbia, statesmanship has been abundant in the local communities that define American life, among business and civic leaders and ordinary citizens doing their part.
Next Steps
It is high time for citizens to stop playing into the media-driven frenzy of fear, anger, hopelessness, and despair. Unplug the TV, turn off talk radio, stop reading blogs (except this one), and get to work.
Never have ordinary citizens had such an opportunity to help heal and grow a country, not just by electing one person or another, but by using our collective ingenuity and diligence to create goods and services that are worthy of our friends and neighbors at home and around the globe. Enough of the whining. There is no Lone Ranger coming to the rescue on the back of a white donkey or white elephant. There are no silver bullets. And there is little the government can or should do unless the people of this nation are ready and willing to lead rather than follow.
It may seem crazy, but I am hopeful and appreciative of the opportunity we all have to serve each other, our country, the broader global community, and the generations to come.
Saturday, August 6, 2011
Sub-Standard & Poorly
Yesterday’s Syntrinsic Commentary spoke to the larger implications of an unsustainable approach to capitalism, specifically, capitalism that requires inexhaustible credit to function.
Today, as you may know, Standard & Poor downgraded the United States debt rating from AAA to AA+ with a “negative outlook,” meaning that they expect future downgrades. Let us share a few thoughts on this action, what it means and doesn’t mean, and at least some the implications.
Who is Standard & Poor?
S&P is one of the three major rating agencies charged with providing credit ratings to companies and governments. It is a for-profit entity, like the others. It is hired and paid by the issuers it rates. The other two major rating agencies are Moody’s and Fitch.
Was this downgrade predictable?
Yes. But first, we think it bizarre that so much credence continues to be assigned to credit rating agencies that very recently assigned AAA ratings to subprime and Alt-A mortgage backed securities, auction rate securities, and other asset back issues that they did not understand and did not act particularly interested in understanding. The credit rating agencies have not yet meaningfully changed their outlook on the municipal bond market, a market that is just screaming to have its risk profile reassessed. Clearly, when one is in a “pay-to-play” relationship with issuers, one’s judgment gets cloudy.
Given that lack of rating-agency creditability, we think it is far more important to look to the markets as a barometer of the risk of a security. As far back as March 2010, corporations such as Proctor & Gamble (AA- at the time), Berkshire Hathaway (AA+), Johnson & Johnson, and even Lowes were paying lenders less than the US Treasury, implying that they were perceived by the markets as less risky than loaning to the US government. At that time, Moody’s reported that the US was at risk of losing its AAA rating, and that was well before health care reform was adopted, 8-9% unemployment proved unexpectedly persistent, and the debt ceiling required a $2.1 Trillion or 15% increase. (See: “Obama Pays More than Buffett as US Risks AAA Rating,” Bloomberg, March 22, 2010).
In short, this downgrade has been coming for a very long time, was well telegraphed, is well-deserved, and we think, probably insufficient. If a credit rating communicates the likelihood that a lender will be able to get its money back and its interest paid, then it is completely reasonable to downgrade the US still further. The only way the US can pay back lenders is by finding more/new lenders; our lenders are getting skittish and our government buys too much of our debt in its effort to force interest rates lower than the market would otherwise determine. Since the US borrows without the intent of paying down the debt, it has become a risky borrower. If anything, the credit rating agencies have been exceedingly lax in acknowledging this.
Then why have investors been BUYING Treasuries and driving yields down? Doesn’t that imply Treasuries are even less risky than before?
Ah, if only markets were truly efficient. Scared investors do scary things. We do not think that it makes sense to dump the stocks and bonds of profitable companies in order to buy the debt of a government that is being downgraded, but that is precisely what has happened over the past few weeks. Why would you sell the stock of a profitable company with excellent prospects that is paying a 2.5% dividend in order to loan money to a government that is finally being called into account for its poor fiscal management and charge them only 2.5% interest per year for 10 years? It’s a completely counterintuitive response.
For several years, we have advised that clients avoid US Treasuries and Agencies (other than Treasury Inflation Protected Securities after January 2009). That call hurt in October-November 2008 when Treasuries became a safe haven from riskier equity and commodity markets, but at that time, Treasury debt itself was not the cause of the crisis. Now it is.
But aren’t Treasuries the safest investment option during a scary time, even if the Treasuries themselves are causing the crisis?
US Treasuries are safe so long as the markets determine that they are safe. But consider some of the very tangible risks to the US Treasury market:
Imagine the impact if China, Russia, Korea, Brazil and other foreign owners of US Treasuries decide to sell into this rally and reduce their Treasury exposure and diversify across other issuers and currencies. They curtail or even cease new Treasury purchases. They announce their decision and scare other investors who also sell or reduce their purchases. Yields rise.
As yields rise, the value of Treasury bonds drops. If values drop enough, many investors may sell, particularly if they have total return objectives and are holding bonds that mature over longer periods of time.
If the duration of your bond is 4 years, then the principal value may drop 4% for every 1% rise in interest rates; if the duration is 8 years, then the value would drop 8% for every 1% rise. How much of a decline in bond values will investors accept if interest rates rise 1%? 2%? 4%? Will they really feel confident to hold to maturity? Some might, but that will not be the uniform response.
If sentiment grows that US Treasuries are not reliable and that the US dollar will continue to weaken against global currencies, then we can’t simply print our way out of this by issuing debt that our own government buys. Those who still think that the US Dollar is omnipotent and beyond reproach for all time and across the globe are ignorant of history and the other great civilizations that failed—as we have been doing—to take care of their day-to-day business like responsible adults.
Well, if Treasuries are not risk free, shouldn’t we just put everything into gold?
Gold is certainly an appropriate part of a portfolio, though far from the risk-free asset that some think it may be. Were it as risk-free as some wish, then we would not have seen gold stocks crashing this past week, nor would so many commodities have outperformed gold over the past two years as this crisis has been unfolding. Gold can whipsaw. It’s notable that while gold has appreciated significantly against the US dollar, it has not changed nearly as much versus stronger currencies. Ultimately, the world will settle on a price for gold and the rate of appreciation versus US dollars will slow.
Gold—whether bullion, futures, or related stocks—certainly has a place in a portfolio concerned about hedging currency risk.
Well then, what else should I be doing to manage my investments? Should I go to cash?
While it sounds cliché, every investor needs a portfolio that reflects their investment and/or business objectives, liquidity needs, tolerance for uncertainty, and long-term spending requirements. There are some investors who should be in cash, but then, they probably should have been in cash three weeks ago or three months ago when risky assets were far more highly priced and thus communicating more even more risk than they are today when 10-20% cheaper. There is no news this week that we did not know several months ago; the market is simply digesting a recent and high-profile policy-level failure to effectively address financial concerns about which many have known for some time.
There is no one answer to the question about the ideal portfolio for current events. That said, there are a few fundamentals that remain true:
1. High quality companies with strong balance sheets, compelling businesses, and strong management should over time provide shareholders a reasonable return on their equity.
2. When making loans to companies and governments (i.e. buying bonds), select those that are fiscally sound, likely to payback the principal and to make interest payments in a timely manner. Weak corporations, municipalities, or sovereign nations should be avoided unless you are being paid a substantial risk premium.
3. Commodity prices (energy, agriculture, metals) should appreciate over time if demand—or anticipated demand—for those resources increases. Depending on the commodity markets you are considering, look at the likelihood of increased demand and invest (or not) accordingly.
4. Real estate prices are impacted by two key factors. The first, is Location, Location, Location. You may not want to invest in office buildings in certain US downtowns or suburbs, but may find a shopping mall in the Czech Republic represents an excellent opportunity. The second is pricing and its doppelganger, liquidity. People need to live and work and play. That will not change. Real estate at a fair price makes sense.
In short, we do not see the Standard & Poor downgrade to be a reason to materially alter investment strategy unless your investment objectives have changed or you were not prepared for this environment in the first place. If your portfolio is overweight the US dollar and betting on low-quality companies, then this will be a rocky road.
As American citizens, we recognize that our country needs to do something dramatic about our revenues, expenses, balance sheet and financial decision making process. But we have been saying that for years now and investing accordingly. Perhaps S&P’s action gets the attention of a few more people who are willing and able to make a difference. If so, then we welcome the downgrade. Going forward, we hope that we can play our part in helping the United States earn back the financial credibility we once possessed.
Today, as you may know, Standard & Poor downgraded the United States debt rating from AAA to AA+ with a “negative outlook,” meaning that they expect future downgrades. Let us share a few thoughts on this action, what it means and doesn’t mean, and at least some the implications.
Who is Standard & Poor?
S&P is one of the three major rating agencies charged with providing credit ratings to companies and governments. It is a for-profit entity, like the others. It is hired and paid by the issuers it rates. The other two major rating agencies are Moody’s and Fitch.
Was this downgrade predictable?
Yes. But first, we think it bizarre that so much credence continues to be assigned to credit rating agencies that very recently assigned AAA ratings to subprime and Alt-A mortgage backed securities, auction rate securities, and other asset back issues that they did not understand and did not act particularly interested in understanding. The credit rating agencies have not yet meaningfully changed their outlook on the municipal bond market, a market that is just screaming to have its risk profile reassessed. Clearly, when one is in a “pay-to-play” relationship with issuers, one’s judgment gets cloudy.
Given that lack of rating-agency creditability, we think it is far more important to look to the markets as a barometer of the risk of a security. As far back as March 2010, corporations such as Proctor & Gamble (AA- at the time), Berkshire Hathaway (AA+), Johnson & Johnson, and even Lowes were paying lenders less than the US Treasury, implying that they were perceived by the markets as less risky than loaning to the US government. At that time, Moody’s reported that the US was at risk of losing its AAA rating, and that was well before health care reform was adopted, 8-9% unemployment proved unexpectedly persistent, and the debt ceiling required a $2.1 Trillion or 15% increase. (See: “Obama Pays More than Buffett as US Risks AAA Rating,” Bloomberg, March 22, 2010).
In short, this downgrade has been coming for a very long time, was well telegraphed, is well-deserved, and we think, probably insufficient. If a credit rating communicates the likelihood that a lender will be able to get its money back and its interest paid, then it is completely reasonable to downgrade the US still further. The only way the US can pay back lenders is by finding more/new lenders; our lenders are getting skittish and our government buys too much of our debt in its effort to force interest rates lower than the market would otherwise determine. Since the US borrows without the intent of paying down the debt, it has become a risky borrower. If anything, the credit rating agencies have been exceedingly lax in acknowledging this.
Then why have investors been BUYING Treasuries and driving yields down? Doesn’t that imply Treasuries are even less risky than before?
Ah, if only markets were truly efficient. Scared investors do scary things. We do not think that it makes sense to dump the stocks and bonds of profitable companies in order to buy the debt of a government that is being downgraded, but that is precisely what has happened over the past few weeks. Why would you sell the stock of a profitable company with excellent prospects that is paying a 2.5% dividend in order to loan money to a government that is finally being called into account for its poor fiscal management and charge them only 2.5% interest per year for 10 years? It’s a completely counterintuitive response.
For several years, we have advised that clients avoid US Treasuries and Agencies (other than Treasury Inflation Protected Securities after January 2009). That call hurt in October-November 2008 when Treasuries became a safe haven from riskier equity and commodity markets, but at that time, Treasury debt itself was not the cause of the crisis. Now it is.
But aren’t Treasuries the safest investment option during a scary time, even if the Treasuries themselves are causing the crisis?
US Treasuries are safe so long as the markets determine that they are safe. But consider some of the very tangible risks to the US Treasury market:
Imagine the impact if China, Russia, Korea, Brazil and other foreign owners of US Treasuries decide to sell into this rally and reduce their Treasury exposure and diversify across other issuers and currencies. They curtail or even cease new Treasury purchases. They announce their decision and scare other investors who also sell or reduce their purchases. Yields rise.
As yields rise, the value of Treasury bonds drops. If values drop enough, many investors may sell, particularly if they have total return objectives and are holding bonds that mature over longer periods of time.
If the duration of your bond is 4 years, then the principal value may drop 4% for every 1% rise in interest rates; if the duration is 8 years, then the value would drop 8% for every 1% rise. How much of a decline in bond values will investors accept if interest rates rise 1%? 2%? 4%? Will they really feel confident to hold to maturity? Some might, but that will not be the uniform response.
If sentiment grows that US Treasuries are not reliable and that the US dollar will continue to weaken against global currencies, then we can’t simply print our way out of this by issuing debt that our own government buys. Those who still think that the US Dollar is omnipotent and beyond reproach for all time and across the globe are ignorant of history and the other great civilizations that failed—as we have been doing—to take care of their day-to-day business like responsible adults.
Well, if Treasuries are not risk free, shouldn’t we just put everything into gold?
Gold is certainly an appropriate part of a portfolio, though far from the risk-free asset that some think it may be. Were it as risk-free as some wish, then we would not have seen gold stocks crashing this past week, nor would so many commodities have outperformed gold over the past two years as this crisis has been unfolding. Gold can whipsaw. It’s notable that while gold has appreciated significantly against the US dollar, it has not changed nearly as much versus stronger currencies. Ultimately, the world will settle on a price for gold and the rate of appreciation versus US dollars will slow.
Gold—whether bullion, futures, or related stocks—certainly has a place in a portfolio concerned about hedging currency risk.
Well then, what else should I be doing to manage my investments? Should I go to cash?
While it sounds cliché, every investor needs a portfolio that reflects their investment and/or business objectives, liquidity needs, tolerance for uncertainty, and long-term spending requirements. There are some investors who should be in cash, but then, they probably should have been in cash three weeks ago or three months ago when risky assets were far more highly priced and thus communicating more even more risk than they are today when 10-20% cheaper. There is no news this week that we did not know several months ago; the market is simply digesting a recent and high-profile policy-level failure to effectively address financial concerns about which many have known for some time.
There is no one answer to the question about the ideal portfolio for current events. That said, there are a few fundamentals that remain true:
1. High quality companies with strong balance sheets, compelling businesses, and strong management should over time provide shareholders a reasonable return on their equity.
2. When making loans to companies and governments (i.e. buying bonds), select those that are fiscally sound, likely to payback the principal and to make interest payments in a timely manner. Weak corporations, municipalities, or sovereign nations should be avoided unless you are being paid a substantial risk premium.
3. Commodity prices (energy, agriculture, metals) should appreciate over time if demand—or anticipated demand—for those resources increases. Depending on the commodity markets you are considering, look at the likelihood of increased demand and invest (or not) accordingly.
4. Real estate prices are impacted by two key factors. The first, is Location, Location, Location. You may not want to invest in office buildings in certain US downtowns or suburbs, but may find a shopping mall in the Czech Republic represents an excellent opportunity. The second is pricing and its doppelganger, liquidity. People need to live and work and play. That will not change. Real estate at a fair price makes sense.
In short, we do not see the Standard & Poor downgrade to be a reason to materially alter investment strategy unless your investment objectives have changed or you were not prepared for this environment in the first place. If your portfolio is overweight the US dollar and betting on low-quality companies, then this will be a rocky road.
As American citizens, we recognize that our country needs to do something dramatic about our revenues, expenses, balance sheet and financial decision making process. But we have been saying that for years now and investing accordingly. Perhaps S&P’s action gets the attention of a few more people who are willing and able to make a difference. If so, then we welcome the downgrade. Going forward, we hope that we can play our part in helping the United States earn back the financial credibility we once possessed.
Friday, August 5, 2011
Bad Capitalists?
Are Americans bad capitalists? As we confront the consequences of an unsustainable economic model, it’s a question we must consider.
Bad capitalists:
· misallocate assets
· lock themselves into a cycle of perpetual borrowing to finance operations
· lack a plan to meet debt obligations (other than refinancing it)
· maintain insufficient cash reserves
· lose the confidence of their stakeholders
· manipulate lenders and investors to keep them engaged
· do not acknowledge that their strategy is fundamentally flawed
· argue that time will solve their problems, or minor adjustments on the margins, or one more chance, or more of the same
Worst of all, bad capitalists undermine capitalism. They say to the world, “Human beings are too greedy, selfish, careless, and irresponsible to be entrusted with an economic system that requires discipline, self-sacrifice, hard work, and a long view.” An already skeptical world is often quick to buy that argument, ignoring its inaccuracy.
At the business level, a bad capitalist eventually looses wealth or goes out of business as it competes with good capitalists who invest more intelligently, adapt better to changing market conditions, attract and retain more talented employees, and otherwise strive for financial sustainability. But what if a nation’s economy is based upon and rewards poor capitalistic practices? We all recognize that the capitalist business cycle includes periodic failures at the business level; but, have we adequately considered the implications of failing as capitalists at the macro-economic level?
In some quarters, posing such a question would amount to heresy, for critiques of our economic model are too often viewed as criticism of capitalism rather than as a desire to improve our practice of it. The distinction is everything. And when society is rapidly losing the confidence of its neighbors and its own citizenry, a little heresy is necessary.
So where does one turn to critically examine at least some of the practices of bad capitalists? To the Marxists, of course. Countless theoretical discourses have been written since Karl Marx and Friedrich Engels published “The Communist Manifesto,” in 1848. Most critiques of capitalism have focused on how owners (a.k.a. capitalists) allegedly “exploit” employees (a.k.a. labor). But there have been economic philosophers who have focused on matters outside of capitalist-labor tension, issues that are relevant today.
In 1923, Hungarian economist and political theorist, György Lukács published his treatise, History and Class Consciousness. As a founder of what is known as “Western Marxism,” Lukács’ concluded that capitalism is inherently flawed, a conclusion with which we disagree. That said, elements of his critique are timely for those concerned with enhancing the sustainability of our economic system.
Lukács explores the concept of “reification,” which implies that capitalism is an abusive fiction that unperceptive—and unaware—participants have bought into without recognizing its true ugliness. The concept is reminiscent of the illusory world in the Hollywood trilogy, The Matrix, a fictionalized world in which citizens have been fooled into believing the visual reality around them without realizing that they are just oblivious players in a massive computer simulation.
Lukács presents capitalism as an artifice constructed by those most able to profit from moving funds around without adding genuine value. In his construct, capitalism constantly requires new participants and new monies which can feed those already in the system, seeming to create wealth but really just moving it from one unwitting owner to a more powerful one. Lukács presents capitalism as similar to a Ponzi scheme (though he does not use that term); in his worldview, people with the greatest power and influence profit from the wealth (i.e. labor, resources, monies) of those who possess less influence or control.
Defenders of capitalism might counter that capitalism creates new wealth by using public and private credit markets to facilitate the launching of new endeavors that otherwise could not happen. In effect, they argue, capitalism sets up a series of arbitrage opportunities through which someone can borrow from others at a lower rate than they expect to make by investing the borrowed funds in a venture. Much of the difference represents “new wealth” created, wealth that circulates through the economy through profits and wages that are converted into consumer spending, tax revenue, and ultimately, further opportunities to invest.
Defenders of capitalism also could look to public and private equity markets as opportunities to create new wealth by enabling owners to sell their stakes to others. The buyers expect their ownership will be rewarded through gains and income or by selling their ownership stake in the future for a premium over the purchase price. Buying and selling ownership (or expanding the ownership base through diluting current owners) can be generative if it enables new investment that adds value to the venture and its stakeholders.
So, why should capitalism’s defenders feel defensive? Don’t they adequately address Lukács’ accusation that the capitalist economy is an artifice? Aren’t credit and equity markets excellent examples of how capital can create more capital and thus generate new wealth throughout the system?
In theory, the capitalists have a sound argument; in practice, however, practice gets in the way. What happens, a Lukács advocate might ask, when one uses credit without any intention of repayment? Is a society creating new wealth when it rolls its debt over again and again with no intention of paying it back? If there is no intent to settle the debt, then can one really recognize the scenario as constructive arbitrage? If society’s functioning requires borrowing it will not repay in order to “stimulate” spending that makes it appear the economy is expanding, then hasn’t that society affirmed its members are willing participants in a Ponzi scheme?
Or look at the equity side. What happens if changing ownership is not a generative process but simply represents a transfer of wealth between parties? What if one party buys ownership, leverages up the company by borrowing beyond what is reasonable for the company to pay back, then sells it off to other public or private owners at a value inflated by the leverage it now carries but cannot repay? In this instance, there is not wealth creation for the broader economy, merely a profit for the seller that is paid for dollar for dollar by the other parties (and then some if debt financed). In this scenario, there is simply the appearance of appreciated value and wealth creation. Ideally, no one would engage in such a transaction, but if a society such as ours richly rewards buyers to perpetuate the cycle of artificial economic value generation, then the game will be played until, like any Ponzi, the jig is up and someone gets caught holding the rather expensive bag.
These observations deserve more thoughtful consideration than these few lines allow, and yet raise essential questions for us today. What action is society taking to ensure that we are not willing (or unwilling) participants in a Ponzi scheme? What sacrifices are we making so that we borrow only when we intend to pay it back with near-term assets? How do we mitigate the risk of being a society of bad capitalists? What systems or cultural shifts are necessary to increase the likelihood that we practice good capitalism?
When companies that have been “bad capitalists” fail, society absorbs those losses and enables the people impacted to try again as owners and/or employees of other ventures. However, whole societies that have been “bad capitalists” have no such safety net. If a society becomes economically unsound, it simply fails. Such failures hastened the ends of Ancient Rome, the British Raj, and the Soviet Republic. Societies that practice bad capitalism create fear and economic uncertainty amongst their citizens, causing people to distrust individual initiative, risk-taking, and the free flow of capital just when such behavior is most needed to stimulate the economy and make investments that can generate new wealth.
Lukács is wrong. We are not ignorant dupes participating in a massive Ponzi scheme; and yet, we must not willingly propagate a system that confuses perpetual leverage with sustainable growth. We stand together at a critical decision point. Generations from now, will we be remembered as bad capitalists? Or will we be honored as those who did what was necessary to preserve and improve the world’s most effective system for fostering personal freedom and opportunity?
Bad capitalists:
· misallocate assets
· lock themselves into a cycle of perpetual borrowing to finance operations
· lack a plan to meet debt obligations (other than refinancing it)
· maintain insufficient cash reserves
· lose the confidence of their stakeholders
· manipulate lenders and investors to keep them engaged
· do not acknowledge that their strategy is fundamentally flawed
· argue that time will solve their problems, or minor adjustments on the margins, or one more chance, or more of the same
Worst of all, bad capitalists undermine capitalism. They say to the world, “Human beings are too greedy, selfish, careless, and irresponsible to be entrusted with an economic system that requires discipline, self-sacrifice, hard work, and a long view.” An already skeptical world is often quick to buy that argument, ignoring its inaccuracy.
At the business level, a bad capitalist eventually looses wealth or goes out of business as it competes with good capitalists who invest more intelligently, adapt better to changing market conditions, attract and retain more talented employees, and otherwise strive for financial sustainability. But what if a nation’s economy is based upon and rewards poor capitalistic practices? We all recognize that the capitalist business cycle includes periodic failures at the business level; but, have we adequately considered the implications of failing as capitalists at the macro-economic level?
In some quarters, posing such a question would amount to heresy, for critiques of our economic model are too often viewed as criticism of capitalism rather than as a desire to improve our practice of it. The distinction is everything. And when society is rapidly losing the confidence of its neighbors and its own citizenry, a little heresy is necessary.
So where does one turn to critically examine at least some of the practices of bad capitalists? To the Marxists, of course. Countless theoretical discourses have been written since Karl Marx and Friedrich Engels published “The Communist Manifesto,” in 1848. Most critiques of capitalism have focused on how owners (a.k.a. capitalists) allegedly “exploit” employees (a.k.a. labor). But there have been economic philosophers who have focused on matters outside of capitalist-labor tension, issues that are relevant today.
In 1923, Hungarian economist and political theorist, György Lukács published his treatise, History and Class Consciousness. As a founder of what is known as “Western Marxism,” Lukács’ concluded that capitalism is inherently flawed, a conclusion with which we disagree. That said, elements of his critique are timely for those concerned with enhancing the sustainability of our economic system.
Lukács explores the concept of “reification,” which implies that capitalism is an abusive fiction that unperceptive—and unaware—participants have bought into without recognizing its true ugliness. The concept is reminiscent of the illusory world in the Hollywood trilogy, The Matrix, a fictionalized world in which citizens have been fooled into believing the visual reality around them without realizing that they are just oblivious players in a massive computer simulation.
Lukács presents capitalism as an artifice constructed by those most able to profit from moving funds around without adding genuine value. In his construct, capitalism constantly requires new participants and new monies which can feed those already in the system, seeming to create wealth but really just moving it from one unwitting owner to a more powerful one. Lukács presents capitalism as similar to a Ponzi scheme (though he does not use that term); in his worldview, people with the greatest power and influence profit from the wealth (i.e. labor, resources, monies) of those who possess less influence or control.
Defenders of capitalism might counter that capitalism creates new wealth by using public and private credit markets to facilitate the launching of new endeavors that otherwise could not happen. In effect, they argue, capitalism sets up a series of arbitrage opportunities through which someone can borrow from others at a lower rate than they expect to make by investing the borrowed funds in a venture. Much of the difference represents “new wealth” created, wealth that circulates through the economy through profits and wages that are converted into consumer spending, tax revenue, and ultimately, further opportunities to invest.
Defenders of capitalism also could look to public and private equity markets as opportunities to create new wealth by enabling owners to sell their stakes to others. The buyers expect their ownership will be rewarded through gains and income or by selling their ownership stake in the future for a premium over the purchase price. Buying and selling ownership (or expanding the ownership base through diluting current owners) can be generative if it enables new investment that adds value to the venture and its stakeholders.
So, why should capitalism’s defenders feel defensive? Don’t they adequately address Lukács’ accusation that the capitalist economy is an artifice? Aren’t credit and equity markets excellent examples of how capital can create more capital and thus generate new wealth throughout the system?
In theory, the capitalists have a sound argument; in practice, however, practice gets in the way. What happens, a Lukács advocate might ask, when one uses credit without any intention of repayment? Is a society creating new wealth when it rolls its debt over again and again with no intention of paying it back? If there is no intent to settle the debt, then can one really recognize the scenario as constructive arbitrage? If society’s functioning requires borrowing it will not repay in order to “stimulate” spending that makes it appear the economy is expanding, then hasn’t that society affirmed its members are willing participants in a Ponzi scheme?
Or look at the equity side. What happens if changing ownership is not a generative process but simply represents a transfer of wealth between parties? What if one party buys ownership, leverages up the company by borrowing beyond what is reasonable for the company to pay back, then sells it off to other public or private owners at a value inflated by the leverage it now carries but cannot repay? In this instance, there is not wealth creation for the broader economy, merely a profit for the seller that is paid for dollar for dollar by the other parties (and then some if debt financed). In this scenario, there is simply the appearance of appreciated value and wealth creation. Ideally, no one would engage in such a transaction, but if a society such as ours richly rewards buyers to perpetuate the cycle of artificial economic value generation, then the game will be played until, like any Ponzi, the jig is up and someone gets caught holding the rather expensive bag.
These observations deserve more thoughtful consideration than these few lines allow, and yet raise essential questions for us today. What action is society taking to ensure that we are not willing (or unwilling) participants in a Ponzi scheme? What sacrifices are we making so that we borrow only when we intend to pay it back with near-term assets? How do we mitigate the risk of being a society of bad capitalists? What systems or cultural shifts are necessary to increase the likelihood that we practice good capitalism?
When companies that have been “bad capitalists” fail, society absorbs those losses and enables the people impacted to try again as owners and/or employees of other ventures. However, whole societies that have been “bad capitalists” have no such safety net. If a society becomes economically unsound, it simply fails. Such failures hastened the ends of Ancient Rome, the British Raj, and the Soviet Republic. Societies that practice bad capitalism create fear and economic uncertainty amongst their citizens, causing people to distrust individual initiative, risk-taking, and the free flow of capital just when such behavior is most needed to stimulate the economy and make investments that can generate new wealth.
Lukács is wrong. We are not ignorant dupes participating in a massive Ponzi scheme; and yet, we must not willingly propagate a system that confuses perpetual leverage with sustainable growth. We stand together at a critical decision point. Generations from now, will we be remembered as bad capitalists? Or will we be honored as those who did what was necessary to preserve and improve the world’s most effective system for fostering personal freedom and opportunity?
Monday, June 27, 2011
Once Upon a Balance Sheet
Once upon a time, there was a balance sheet. It belonged to a mighty nation in the Western Hemisphere that had grown wealthy and powerful. Its people traversed the globe with confidence and bold plans.
But the balance sheet was sad. It did not feel joy or excitement commensurate with representing a great nation; indeed, the balance sheet had begun to wonder if it mattered at all anymore.
“I don’t understand,” lamented the balance sheet, “why so many people ignore me now. It used to be that people cared what I had to say, sought my wisdom and foresight. Ordinary citizens would read me and ask me questions, nod, and make important decisions. Some even claimed that having our own balance sheet was one of the reasons to form our own country in the first place. Alas, no more. Now people ignore me or worse, they even get angry at me!”
The balance sheet signed and heaved his bulk to a nearby coffee shop. He didn’t have money for a drink, but liked to hear the perspectives of the regulars. As if to confirm his fears, the regulars at the table nearby turned their backs on him. They continued their conversation but increased their volume, the way that people do when bullying a peer.
One of the regulars loudly explained the difficulties of choosing between starting social security at age 62 or age 65, noting he expected to receive benefits through his 90s. Another described the many medicines she used to manage her ailments and complained about being asked to cover a co-pay. The third rationalized the importance of extending our military might to protect democracies and aspiring democracies worldwide. Still another pointed out that no price was too high for honoring commitments to government employees.
The balance sheet winced, then sighed to signal that he was present and could hear their every word. But instead of inviting their discretion, his sigh only intensified their efforts. Backs firmly turned, the regulars proceeded to loudly expound on absorbing state obligations, rebuilding countries, bailing out banks, limiting trade, taxing economic development, and other sensitive topics designed to inflict pain on their former friend.
It worked. The balance sheet could take it no longer. He pulled out his iPad and logged into his Facebook page. He was shocked. His few Facebook friends had defriended him, and they had done so harshly. Rather than turning their backs as had the coffee shop regulars, his virtual community had made it clear that they were downright angry with him.
One former friend wrote, “Enough! Your very existence implies that we are lazy. You are a mean, vindictive balance sheet.” Another scrawled in haste, “Some friend u r. U think u r so important but I know better. U r not real.” A friend of a friend from China with strong nationalist views wrote merely, “Xie xie ni” or “Thank you very much.”
The messages were hard to read, but the balance sheet could not stop. The next was particularly cruel. “You used to be so handsome and trim, but you’ve really fallen apart. You’re a slob and don’t take care of yourself. You embarrass me. You need help. Hope you get it.”
That was enough. The balance sheet logged off and went outside to clear his head. As he walked down the street, loneliness and rejection weighed heavily on him. What could he do? He was just a balance sheet. He didn’t control the inputs. It was the regulars at the coffee shop and his former online friends who made him what he had become. He wasn’t proud to be out of shape. He knew he had lost his edge. Deep down he understood that this was the classic midlife crisis: his best years were behind him—the opportunities, the work ethic, the passion. What possible joy could there be in the future? He’d passed his prime and how those who had relied on him had rejected him.
Something had to change. But how?
“Hello!” cried a young voice. The balance sheet looked up to see a young girl. “You’re a mess,” she announced. The balance sheet nodded.
“Who did that to you?” she asked. How to explain the state of affairs to a child? Balance sheets are complex financial reporting tools capturing liabilities and assets—how could a child possibly understand?
“I bet my mom and dad did this to you. My grandparents, too. And my neighbors and teachers and coaches and my minister…” The balance sheet interrupted her. “It’s true. But how could you possibly know all of that?” he asked.
She explained that he was not the first balance sheet she had seen in a similar mess. Apparently the balance sheets for her state and her city had been moping about recently and appeared equally forlorn. The balance sheet started to explain the complexity of the situation, the off balance sheet liabilities, uncertain accounts payable, and receivables highly dependent on tax policy and the economy and…
She cut him off. “Actually,” she said, “it’s all rather easy. I’m in third grade and we’ve got addition and subtraction down pat. Our country spends more than it makes. We keep increasing that gap. In the end, you look worse and worse. Simple. Right?”
The balance sheet was moved. This girl did not ignore him or curse him as had the adults. She didn’t even blame him for having become so bloated.
As if reading his mind, the girl told him that growing up, she had learned about the balance sheet by overhearing her parents anxious late night whisperings, and in her mind she had pictured him as a monster or nightmare.
“But then,” she said, “I realized that you are not good or bad, you’re just a reflection of who we are as a society. And since my folks and their friends aren’t helping you, my friends, siblings, and I are going to have to take over. Yes, my new friend, it looks like we’re going to be together for a long time.”
The balance sheet felt a faint fluttering of hope. “It’s not going to be easy to help me change,” he cautioned her.
“I know,” she remarked with a wise, knowing look. “But this is America. We can do anything, right?”
But the balance sheet was sad. It did not feel joy or excitement commensurate with representing a great nation; indeed, the balance sheet had begun to wonder if it mattered at all anymore.
“I don’t understand,” lamented the balance sheet, “why so many people ignore me now. It used to be that people cared what I had to say, sought my wisdom and foresight. Ordinary citizens would read me and ask me questions, nod, and make important decisions. Some even claimed that having our own balance sheet was one of the reasons to form our own country in the first place. Alas, no more. Now people ignore me or worse, they even get angry at me!”
The balance sheet signed and heaved his bulk to a nearby coffee shop. He didn’t have money for a drink, but liked to hear the perspectives of the regulars. As if to confirm his fears, the regulars at the table nearby turned their backs on him. They continued their conversation but increased their volume, the way that people do when bullying a peer.
One of the regulars loudly explained the difficulties of choosing between starting social security at age 62 or age 65, noting he expected to receive benefits through his 90s. Another described the many medicines she used to manage her ailments and complained about being asked to cover a co-pay. The third rationalized the importance of extending our military might to protect democracies and aspiring democracies worldwide. Still another pointed out that no price was too high for honoring commitments to government employees.
The balance sheet winced, then sighed to signal that he was present and could hear their every word. But instead of inviting their discretion, his sigh only intensified their efforts. Backs firmly turned, the regulars proceeded to loudly expound on absorbing state obligations, rebuilding countries, bailing out banks, limiting trade, taxing economic development, and other sensitive topics designed to inflict pain on their former friend.
It worked. The balance sheet could take it no longer. He pulled out his iPad and logged into his Facebook page. He was shocked. His few Facebook friends had defriended him, and they had done so harshly. Rather than turning their backs as had the coffee shop regulars, his virtual community had made it clear that they were downright angry with him.
One former friend wrote, “Enough! Your very existence implies that we are lazy. You are a mean, vindictive balance sheet.” Another scrawled in haste, “Some friend u r. U think u r so important but I know better. U r not real.” A friend of a friend from China with strong nationalist views wrote merely, “Xie xie ni” or “Thank you very much.”
The messages were hard to read, but the balance sheet could not stop. The next was particularly cruel. “You used to be so handsome and trim, but you’ve really fallen apart. You’re a slob and don’t take care of yourself. You embarrass me. You need help. Hope you get it.”
That was enough. The balance sheet logged off and went outside to clear his head. As he walked down the street, loneliness and rejection weighed heavily on him. What could he do? He was just a balance sheet. He didn’t control the inputs. It was the regulars at the coffee shop and his former online friends who made him what he had become. He wasn’t proud to be out of shape. He knew he had lost his edge. Deep down he understood that this was the classic midlife crisis: his best years were behind him—the opportunities, the work ethic, the passion. What possible joy could there be in the future? He’d passed his prime and how those who had relied on him had rejected him.
Something had to change. But how?
“Hello!” cried a young voice. The balance sheet looked up to see a young girl. “You’re a mess,” she announced. The balance sheet nodded.
“Who did that to you?” she asked. How to explain the state of affairs to a child? Balance sheets are complex financial reporting tools capturing liabilities and assets—how could a child possibly understand?
“I bet my mom and dad did this to you. My grandparents, too. And my neighbors and teachers and coaches and my minister…” The balance sheet interrupted her. “It’s true. But how could you possibly know all of that?” he asked.
She explained that he was not the first balance sheet she had seen in a similar mess. Apparently the balance sheets for her state and her city had been moping about recently and appeared equally forlorn. The balance sheet started to explain the complexity of the situation, the off balance sheet liabilities, uncertain accounts payable, and receivables highly dependent on tax policy and the economy and…
She cut him off. “Actually,” she said, “it’s all rather easy. I’m in third grade and we’ve got addition and subtraction down pat. Our country spends more than it makes. We keep increasing that gap. In the end, you look worse and worse. Simple. Right?”
The balance sheet was moved. This girl did not ignore him or curse him as had the adults. She didn’t even blame him for having become so bloated.
As if reading his mind, the girl told him that growing up, she had learned about the balance sheet by overhearing her parents anxious late night whisperings, and in her mind she had pictured him as a monster or nightmare.
“But then,” she said, “I realized that you are not good or bad, you’re just a reflection of who we are as a society. And since my folks and their friends aren’t helping you, my friends, siblings, and I are going to have to take over. Yes, my new friend, it looks like we’re going to be together for a long time.”
The balance sheet felt a faint fluttering of hope. “It’s not going to be easy to help me change,” he cautioned her.
“I know,” she remarked with a wise, knowing look. “But this is America. We can do anything, right?”
Monday, April 18, 2011
The Businessman
I had a most unusual conversation the other day. In the wee hours of morning, in a darkened coffee shop, a man sat off in the corner, no coffee, no scones, just an intense visage and furrowed brow. He appeared deep in thought. Occasionally he grasped his pen and jotted something on a well-worn legal pad. A struggling writer? A mid-life crisis? I had to find out.
I sidled up to the worn looking man and like a good American asked him about his profession. Poet? Journalist? Speechwriter? His answer surprised me. “Businessman, actually.” Now I was truly curious. I hadn’t thought businessmen frequented edgy coffee shops. Something must be amiss. Our conversation went something like this:
Me: What brings a businessman to a coffee shop like this?
Businessman: I needed a place to think without distractions.
Me: What distractions could a businessman have? I thought everything was pretty easy for you guys.
Businessman: Easy?! Why would you say that?
Me: Well, you are a billionaire, right?
Businessman: Not hardly. Not really a goal of mine anyway.
Me: A millionaire then?
Businessman: Well, I guess if I sold my business I would be a millionaire.
Me: Well there you are then. You’re set.
Businessman: But I don’t want to sell my business.
Me: Why not?
Businessman: Lots of reasons. I like what I do. I’ve worked hard to build a good reputation. I have customers, colleagues and employees that I care about and I feel an obligation to. Sell the business and who knows what the buyer does. Gut it. Sell off the parts. Lay people off. No, not really something I am willing to risk. I’d rather leave it as a legacy for someone willing to take care of the employees and customers the way I have.
Me: But I thought the primary goal of business people was to make money?
Businessman: That’s a nice benefit of working hard and doing a good job, but it’s not what gets me up in the morning or keeps me up late at night.
Me: But you are one of the richest 1% that I hear so much about, yes?
Businessman: I guess so, technically. Of course, I have taken out loans and taken a great deal at risk to get this business off the ground and keep it thriving. I don’t think they take that into account when calculating the 1%. A substantial portion of what I make I use to pay back debt or reinvest in the company, yet I pay taxes on the revenue as if it were income landing in my wallet.
Me: I hadn’t thought about that. I thought if you were in the top 1% you were living without a care.
Businessman: Some might. Most business owners have a great deal to care about.
Me: Really? So what are you here working on? How to make more money? A new jingle for a product?
Businessman: Actually, it’s more challenging than that. See, we expect to have a decent year and have built up more cash than usual.
Me: That’s a good problem.
Businessman: It is, except I’m wrestling with what to do next. Cash doesn’t earn any interest now.
Me: What are your options?
Businessman: I could hire another employee or two.
Me: Excellent. There are a lot of talented people out there.
Businessman: True, true, and we could certainly expand our services and products; however, I don’t know how much an employee will cost or how other expenses might take priority.
Me: Don’t you set their salary?
Businessman: The salary part is fairly easy; it’s the benefits and taxes that are the tough part. And benefits and taxes at my company represent about 30-40% of the compensation package.
Me: Are you kidding? I thought that successful businessmen didn’t pay much in benefits.
Businessman: Not true. Good business owners want to retain their employees and help them be more productive. We help out with health care, retirement benefits, flexible schedules, those kinds of things.
Me: So what’s the problem?
Businessman: I don’t know how much those things will cost. Health care costs had been increasing dramatically for the last decade, and then last year they went up 40% for many small businesses like ours. I can’t dump all of that on my employees and I can’t afford to absorb it all. Who knows how it will increase next year or the year after that? And there are so many other expenses to consider.
Me: Like what?
Businessman: Well, our regulatory expenses went up significantly last year, you know, costs to comply with the agencies that monitor our industry. I expect those costs to keep increasing for the foreseeable future.
Me: You don’t believe in regulation?
Businessman: I have no problem with good regulation and knowledgeable regulators. But at least in our field, it’s our integrity, not government regulation, that protects our customers and employees. The regulatory hoops don’t stop their real malefactors.
Me: That’s discouraging.
Businessman: I don’t mean to sound cynical, but the costs of increased regulation falls on those like us who are doing our jobs appropriately, not those who are taking advantage of people. Still, the regulatory cost is insignificant relative to uncertainty about taxes.
Me: How do you mean?
Businessman: We all know that taxes will be increasing—local, state, and federal. It’s simple math. So when I’m considering hiring new employees or investing in capital equipment or technology, I also have to think about keeping cash on hand to pay for what likely will be significantly higher taxes.
Me: Are you saying you don’t want to pay taxes? I’ve heard that business owners don’t think that they should pay taxes.
Businessman: Of course I expect to pay taxes! That’s part of being a member of society; everyone should pay taxes. We have to finance our defense and education systems, our social safety net, foreign policy, infrastructure, the whole works. I get that. Indeed, a large proportion of our net income goes back out in taxes, let alone property taxes, employment taxes, unemployment insurance, licensing fees and other government-related expenses. We pay taxes, and I’m okay with that. However, it seems that some people forget that every dollar our firm pays in taxes is another dollar we can’t use to hire someone or otherwise invest in the firm.
Me: But I was under the impression that business owners didn’t care about society.
Businessman: What gave you that impression?
Me: I keep hearing that the wealthiest Americans don’t support charities and education and things like that. And that if they do, it’s just a tax dodge. Is that true?
Businessman: No! We don’t make a big deal about it but we support organizations that are doing good work throughout the community and around the world. Like many companies, we encourage our employees to use paid time to volunteer as well. Still, the more we pay in taxes or regulatory fees or health care costs, the less we have available to support these worthy organizations.
Me: Are you sure you are a businessman?
Businessman: What do you mean?
Me: You seem rather sensible, not quite the troll that I would have expected. Perhaps you’re an exception.
Businessman: Hardly. I’m just a regular person who runs a business and tries to make a difference. There are tens of thousands of us. Indeed, many of the most generous people I have known have been in business. They are great role models of leading by example.
Me: But you don’t see many business people out there protesting and calling for the government to meet people’s needs.
Businessman: It’s one thing to be generous with other people’s money; it’s another to be generous with your own.
Me: I never thought about it like that.
Businessman: Listen, I’ve enjoyed our conversation here, but I need to get back to work. We have some big decisions to make and I want to do it right. A lot of people are counting on me.
I thanked the businessman for his time and stepped away from the table. How curious! It was hard to believe that he represented that much maligned business class. He had to be an oddity.
Later, while writing about the conversation in my notebook, it dawned on me that the businessman really was an outlier, though not in the manner I had thought during our conversation. What kind of crazy person would work so hard to build something that would benefit society knowing that if it failed, almost the entire cost of that failure landed in his lap, impacting his pocket book and his reputation? And what if he succeeded? All of society would benefit—people would have jobs, customers would have products and services they need, and the government would have the revenues generated by taxes and fees, monies then spent to benefit everyone. Shoulder the burden; share the success.
Most people would never agree to such an odd bargain. Indeed, my new friend in the coffee shop was a bit unusual, but perhaps there was something to his kind of life, something about working in the wee hours of morning to create something, protect it, to grow it.
Perhaps those who think that business owners are such a drag on society should spend a few minutes with one in a coffee shop, in those wee hours while they scribble on a notepad trying to make it work for all of us.
I sidled up to the worn looking man and like a good American asked him about his profession. Poet? Journalist? Speechwriter? His answer surprised me. “Businessman, actually.” Now I was truly curious. I hadn’t thought businessmen frequented edgy coffee shops. Something must be amiss. Our conversation went something like this:
Me: What brings a businessman to a coffee shop like this?
Businessman: I needed a place to think without distractions.
Me: What distractions could a businessman have? I thought everything was pretty easy for you guys.
Businessman: Easy?! Why would you say that?
Me: Well, you are a billionaire, right?
Businessman: Not hardly. Not really a goal of mine anyway.
Me: A millionaire then?
Businessman: Well, I guess if I sold my business I would be a millionaire.
Me: Well there you are then. You’re set.
Businessman: But I don’t want to sell my business.
Me: Why not?
Businessman: Lots of reasons. I like what I do. I’ve worked hard to build a good reputation. I have customers, colleagues and employees that I care about and I feel an obligation to. Sell the business and who knows what the buyer does. Gut it. Sell off the parts. Lay people off. No, not really something I am willing to risk. I’d rather leave it as a legacy for someone willing to take care of the employees and customers the way I have.
Me: But I thought the primary goal of business people was to make money?
Businessman: That’s a nice benefit of working hard and doing a good job, but it’s not what gets me up in the morning or keeps me up late at night.
Me: But you are one of the richest 1% that I hear so much about, yes?
Businessman: I guess so, technically. Of course, I have taken out loans and taken a great deal at risk to get this business off the ground and keep it thriving. I don’t think they take that into account when calculating the 1%. A substantial portion of what I make I use to pay back debt or reinvest in the company, yet I pay taxes on the revenue as if it were income landing in my wallet.
Me: I hadn’t thought about that. I thought if you were in the top 1% you were living without a care.
Businessman: Some might. Most business owners have a great deal to care about.
Me: Really? So what are you here working on? How to make more money? A new jingle for a product?
Businessman: Actually, it’s more challenging than that. See, we expect to have a decent year and have built up more cash than usual.
Me: That’s a good problem.
Businessman: It is, except I’m wrestling with what to do next. Cash doesn’t earn any interest now.
Me: What are your options?
Businessman: I could hire another employee or two.
Me: Excellent. There are a lot of talented people out there.
Businessman: True, true, and we could certainly expand our services and products; however, I don’t know how much an employee will cost or how other expenses might take priority.
Me: Don’t you set their salary?
Businessman: The salary part is fairly easy; it’s the benefits and taxes that are the tough part. And benefits and taxes at my company represent about 30-40% of the compensation package.
Me: Are you kidding? I thought that successful businessmen didn’t pay much in benefits.
Businessman: Not true. Good business owners want to retain their employees and help them be more productive. We help out with health care, retirement benefits, flexible schedules, those kinds of things.
Me: So what’s the problem?
Businessman: I don’t know how much those things will cost. Health care costs had been increasing dramatically for the last decade, and then last year they went up 40% for many small businesses like ours. I can’t dump all of that on my employees and I can’t afford to absorb it all. Who knows how it will increase next year or the year after that? And there are so many other expenses to consider.
Me: Like what?
Businessman: Well, our regulatory expenses went up significantly last year, you know, costs to comply with the agencies that monitor our industry. I expect those costs to keep increasing for the foreseeable future.
Me: You don’t believe in regulation?
Businessman: I have no problem with good regulation and knowledgeable regulators. But at least in our field, it’s our integrity, not government regulation, that protects our customers and employees. The regulatory hoops don’t stop their real malefactors.
Me: That’s discouraging.
Businessman: I don’t mean to sound cynical, but the costs of increased regulation falls on those like us who are doing our jobs appropriately, not those who are taking advantage of people. Still, the regulatory cost is insignificant relative to uncertainty about taxes.
Me: How do you mean?
Businessman: We all know that taxes will be increasing—local, state, and federal. It’s simple math. So when I’m considering hiring new employees or investing in capital equipment or technology, I also have to think about keeping cash on hand to pay for what likely will be significantly higher taxes.
Me: Are you saying you don’t want to pay taxes? I’ve heard that business owners don’t think that they should pay taxes.
Businessman: Of course I expect to pay taxes! That’s part of being a member of society; everyone should pay taxes. We have to finance our defense and education systems, our social safety net, foreign policy, infrastructure, the whole works. I get that. Indeed, a large proportion of our net income goes back out in taxes, let alone property taxes, employment taxes, unemployment insurance, licensing fees and other government-related expenses. We pay taxes, and I’m okay with that. However, it seems that some people forget that every dollar our firm pays in taxes is another dollar we can’t use to hire someone or otherwise invest in the firm.
Me: But I was under the impression that business owners didn’t care about society.
Businessman: What gave you that impression?
Me: I keep hearing that the wealthiest Americans don’t support charities and education and things like that. And that if they do, it’s just a tax dodge. Is that true?
Businessman: No! We don’t make a big deal about it but we support organizations that are doing good work throughout the community and around the world. Like many companies, we encourage our employees to use paid time to volunteer as well. Still, the more we pay in taxes or regulatory fees or health care costs, the less we have available to support these worthy organizations.
Me: Are you sure you are a businessman?
Businessman: What do you mean?
Me: You seem rather sensible, not quite the troll that I would have expected. Perhaps you’re an exception.
Businessman: Hardly. I’m just a regular person who runs a business and tries to make a difference. There are tens of thousands of us. Indeed, many of the most generous people I have known have been in business. They are great role models of leading by example.
Me: But you don’t see many business people out there protesting and calling for the government to meet people’s needs.
Businessman: It’s one thing to be generous with other people’s money; it’s another to be generous with your own.
Me: I never thought about it like that.
Businessman: Listen, I’ve enjoyed our conversation here, but I need to get back to work. We have some big decisions to make and I want to do it right. A lot of people are counting on me.
I thanked the businessman for his time and stepped away from the table. How curious! It was hard to believe that he represented that much maligned business class. He had to be an oddity.
Later, while writing about the conversation in my notebook, it dawned on me that the businessman really was an outlier, though not in the manner I had thought during our conversation. What kind of crazy person would work so hard to build something that would benefit society knowing that if it failed, almost the entire cost of that failure landed in his lap, impacting his pocket book and his reputation? And what if he succeeded? All of society would benefit—people would have jobs, customers would have products and services they need, and the government would have the revenues generated by taxes and fees, monies then spent to benefit everyone. Shoulder the burden; share the success.
Most people would never agree to such an odd bargain. Indeed, my new friend in the coffee shop was a bit unusual, but perhaps there was something to his kind of life, something about working in the wee hours of morning to create something, protect it, to grow it.
Perhaps those who think that business owners are such a drag on society should spend a few minutes with one in a coffee shop, in those wee hours while they scribble on a notepad trying to make it work for all of us.
Wednesday, April 6, 2011
(Good) Governance
If one were to pick a single word to capture the essence of the 1960’s, it might be “ferment,” or “struggle.” The 1970’s could be embodied by “malaise” or “despair”. For the 1980’s both “patriotism” and “greed” resonate, while “party” and “technology” define the 1990’s. The 2000’s are still being digested, but the word “fear” (of terrorism, of economic collapse, etc.) would be a leading contender.
As we launch into the early stages of the 2010’s, the leading contenders for Word of the Decade look to be “democracy,” “globalization,” or perhaps “social media.” And while we can expect to see these words continue to play a role in the predictable predictions of the decade, we do not think that they will prove as impactful as our nominee. Being a bit contrarian, we at Syntrinsic propose that this decade will be defined by a word with little sex-appeal, one rarely used by even the most well-informed pundits, and one rarely used in regular conversation. It has its stalwart fans and even a handful of junkies (some of whom happen to be clients), but this word is not top of mind for even a modest percentage of the population. The word? Ready? Take a deep breath…
“Governance.”
Yeah. We thought you’d feel that way. We do too! The sobriety, the gravitas. Say it out loud (in private of course) and you can feel the inner statesman start to stir. For those of you who wondered if we were geeks, you need wonder no more. Case settled. Syntrinsic has a thing for “Governance” and our readers want to know why.
We believe that “Governance” will define this decade—must define this decade—because no other word will have a greater impact on the ability of our society to right what’s wrong and make meaningful progress toward crafting a sustainable and civil society.
What does it mean? Webster’s defines Governance as “the exercise of authority; control” as well as “a method or system of government or management.” Like other somber words such as fiduciary and stewardship, one generally assumes that to discuss governance is to assume one means good governance; thus, how one exercises authority well, or a constructive, responsible system of management.
Why does governance matter? Consider this year’s top stories:
Foreign Policy
Brutal dictators long financed, armed, and otherwise supported by the United States are under fire from their own people, many of whom also are angry with America for supporting their oppressors. How should we respond? To what extent should America condone and actively support bad governance elsewhere in order to serve the near-term interests of our citizens? In short, when if ever is it good governance to support bad governance?
State of the States
Over the decades, elected officials throughout the country have made compensation and benefit commitments to government employees that attracted votes but are not financially tenable. Simple tax increase or a few layoffs will not address financial agreements that are fundamentally unsound. What is a Governor, Mayor, Superintendent, or Chief to do? How do officials elected by a majority of their constituents make the necessary financial and policy decisions that by definition must negatively impact a majority of their constituents? How can a governor govern people that want, nay demand, financially irresponsible governance?
Corporate Governance
US papers are full of pictures of the directors of Japan’s Tokyo Electric Power Company bowing apologies to civilians made homeless by fears over nuclear meltdowns at some of the firm’s reactors. Meanwhile, in America, few if any directors of AIG, Goldman Sachs, Citigroup, Merrill Lynch, Bank of America, Wachovia, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, General Motors have even been publicly named, let alone held accountable by regulators, press, or the public for decisions made by the companies they supposedly governed into crisis. So what do we expect from corporate governors? Are there meaningful consequences for serving poorly as a corporate director? And if we cannot feel confident about corporate governance, then how does that impact confidence in the investment markets, let alone faith in the country’s economic underpinnings?
Nonprofit Governance
Okay, so we will concede that as usual, there are few headlines about nonprofit governance. Yet if one looks closely at the pressures faced by the generally volunteer directors of nonprofit organizations, there have been few times as difficult as this. Pressures to provide services have risen in the face of economic crisis, joblessness, and government cuts,; the financial models of many nonprofits—particularly those that rely on fund raising—are under great strain; and, few nonprofit boards operate with the resources, time, or expertise available to corporate boards and government agencies. To complicate matters further, members of both parties and the current White House keep questioning aspects of the tax code vital to nonprofit viability. Given these pressures, what does good nonprofit governance look like? Are we as a society willing to accept the cost of lazy, self-serving, or simply poor nonprofit governance? Can we even comprehend what that cost would be?
We believe that there are principles of good governance that can guide foreign and domestic decision makers, as well as the officers of for profit and nonprofit entities. And we believe that some version of these principles must become a more common part of the rhetoric of those who govern AND those who are governed so that there is greater alignment of intent in this free market representative democracy.
Principles of Good Governance
Take a long view.
Strategic decisions must be made so that people 30 years from now—and likely much longer—will be highly likely to thank us rather than regret our time in charge.
Make sustainable decisions.
We cannot afford to make short term decisions that will need to be undone later. Short terms for elected officials and quarterly earnings announcements punish those focused on sustainability—but only in the short-term.
Consistently apply values.
Good governors have clear values and apply them consistently. Inconsistent values foster uncertainty, uncertainty creates fear, and fear undermines good governance.
Be financially sound.
One can ignore financial reality when one is running a Ponzi scheme or other short-term hustle (including those managed by governments and corporations), but effective governors understand that policy and finance must be rational, aligned, and self-supporting.
Establish clear accountability.
Governance requires well-defined responsibilities and a path for holding accountable those who are responsible. These roles must be broadly understood and formally accepted.
Cultivate a sense of honor.
Honor is neither prideful nor boastful; rather, it represents a desire to be remembered as an effective leader and manager who governed well. Some consider the concept of honor quaint or even archaic; we think it essential.
It can be tempting to sit back and judge those in the White House, Foggy Bottom and Congress, or to complain about the local governor or mayor or school board chair, to harp on the failures of corporate directors or negligence of nonprofit directors. After all, it is easy to critique those making difficult decisions, to question their motives and competence, and complain about their ineffectiveness.
But given our representative democracy with its free market system, the greatest governance challenge this decade will not be faced by those who officially govern, but rather by those who are governed, those who typically do not see themselves in positions of leadership, management, or even basic responsibility for society. What will the great “We the people” do when difficult decisions must be made, when compromises must be struck, when priorities must be established?
Will we educate ourselves, actively participate, and make sacrifices worthy of this moment in America’s history? Will we embrace—and be—the kinds of leaders willing to govern from a principled, skillful, honest place? Will we in effect approach our civic, work, and personal lives with good governance in mind? For if we do take these steps, anything is possible, even repairing the world.
And perhaps many years from now, the word they will choose to define our time will be “thankful” or “appreciative” or “redemptive.” Or maybe, just maybe, they will look back on the 2010’s and say it indeed was a time defined by “governance.” And we’ll all know what that means.
As we launch into the early stages of the 2010’s, the leading contenders for Word of the Decade look to be “democracy,” “globalization,” or perhaps “social media.” And while we can expect to see these words continue to play a role in the predictable predictions of the decade, we do not think that they will prove as impactful as our nominee. Being a bit contrarian, we at Syntrinsic propose that this decade will be defined by a word with little sex-appeal, one rarely used by even the most well-informed pundits, and one rarely used in regular conversation. It has its stalwart fans and even a handful of junkies (some of whom happen to be clients), but this word is not top of mind for even a modest percentage of the population. The word? Ready? Take a deep breath…
“Governance.”
Yeah. We thought you’d feel that way. We do too! The sobriety, the gravitas. Say it out loud (in private of course) and you can feel the inner statesman start to stir. For those of you who wondered if we were geeks, you need wonder no more. Case settled. Syntrinsic has a thing for “Governance” and our readers want to know why.
We believe that “Governance” will define this decade—must define this decade—because no other word will have a greater impact on the ability of our society to right what’s wrong and make meaningful progress toward crafting a sustainable and civil society.
What does it mean? Webster’s defines Governance as “the exercise of authority; control” as well as “a method or system of government or management.” Like other somber words such as fiduciary and stewardship, one generally assumes that to discuss governance is to assume one means good governance; thus, how one exercises authority well, or a constructive, responsible system of management.
Why does governance matter? Consider this year’s top stories:
Foreign Policy
Brutal dictators long financed, armed, and otherwise supported by the United States are under fire from their own people, many of whom also are angry with America for supporting their oppressors. How should we respond? To what extent should America condone and actively support bad governance elsewhere in order to serve the near-term interests of our citizens? In short, when if ever is it good governance to support bad governance?
State of the States
Over the decades, elected officials throughout the country have made compensation and benefit commitments to government employees that attracted votes but are not financially tenable. Simple tax increase or a few layoffs will not address financial agreements that are fundamentally unsound. What is a Governor, Mayor, Superintendent, or Chief to do? How do officials elected by a majority of their constituents make the necessary financial and policy decisions that by definition must negatively impact a majority of their constituents? How can a governor govern people that want, nay demand, financially irresponsible governance?
Corporate Governance
US papers are full of pictures of the directors of Japan’s Tokyo Electric Power Company bowing apologies to civilians made homeless by fears over nuclear meltdowns at some of the firm’s reactors. Meanwhile, in America, few if any directors of AIG, Goldman Sachs, Citigroup, Merrill Lynch, Bank of America, Wachovia, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, General Motors have even been publicly named, let alone held accountable by regulators, press, or the public for decisions made by the companies they supposedly governed into crisis. So what do we expect from corporate governors? Are there meaningful consequences for serving poorly as a corporate director? And if we cannot feel confident about corporate governance, then how does that impact confidence in the investment markets, let alone faith in the country’s economic underpinnings?
Nonprofit Governance
Okay, so we will concede that as usual, there are few headlines about nonprofit governance. Yet if one looks closely at the pressures faced by the generally volunteer directors of nonprofit organizations, there have been few times as difficult as this. Pressures to provide services have risen in the face of economic crisis, joblessness, and government cuts,; the financial models of many nonprofits—particularly those that rely on fund raising—are under great strain; and, few nonprofit boards operate with the resources, time, or expertise available to corporate boards and government agencies. To complicate matters further, members of both parties and the current White House keep questioning aspects of the tax code vital to nonprofit viability. Given these pressures, what does good nonprofit governance look like? Are we as a society willing to accept the cost of lazy, self-serving, or simply poor nonprofit governance? Can we even comprehend what that cost would be?
We believe that there are principles of good governance that can guide foreign and domestic decision makers, as well as the officers of for profit and nonprofit entities. And we believe that some version of these principles must become a more common part of the rhetoric of those who govern AND those who are governed so that there is greater alignment of intent in this free market representative democracy.
Principles of Good Governance
Take a long view.
Strategic decisions must be made so that people 30 years from now—and likely much longer—will be highly likely to thank us rather than regret our time in charge.
Make sustainable decisions.
We cannot afford to make short term decisions that will need to be undone later. Short terms for elected officials and quarterly earnings announcements punish those focused on sustainability—but only in the short-term.
Consistently apply values.
Good governors have clear values and apply them consistently. Inconsistent values foster uncertainty, uncertainty creates fear, and fear undermines good governance.
Be financially sound.
One can ignore financial reality when one is running a Ponzi scheme or other short-term hustle (including those managed by governments and corporations), but effective governors understand that policy and finance must be rational, aligned, and self-supporting.
Establish clear accountability.
Governance requires well-defined responsibilities and a path for holding accountable those who are responsible. These roles must be broadly understood and formally accepted.
Cultivate a sense of honor.
Honor is neither prideful nor boastful; rather, it represents a desire to be remembered as an effective leader and manager who governed well. Some consider the concept of honor quaint or even archaic; we think it essential.
It can be tempting to sit back and judge those in the White House, Foggy Bottom and Congress, or to complain about the local governor or mayor or school board chair, to harp on the failures of corporate directors or negligence of nonprofit directors. After all, it is easy to critique those making difficult decisions, to question their motives and competence, and complain about their ineffectiveness.
But given our representative democracy with its free market system, the greatest governance challenge this decade will not be faced by those who officially govern, but rather by those who are governed, those who typically do not see themselves in positions of leadership, management, or even basic responsibility for society. What will the great “We the people” do when difficult decisions must be made, when compromises must be struck, when priorities must be established?
Will we educate ourselves, actively participate, and make sacrifices worthy of this moment in America’s history? Will we embrace—and be—the kinds of leaders willing to govern from a principled, skillful, honest place? Will we in effect approach our civic, work, and personal lives with good governance in mind? For if we do take these steps, anything is possible, even repairing the world.
And perhaps many years from now, the word they will choose to define our time will be “thankful” or “appreciative” or “redemptive.” Or maybe, just maybe, they will look back on the 2010’s and say it indeed was a time defined by “governance.” And we’ll all know what that means.
Wednesday, March 2, 2011
I Live In a Land
In 1855, Walt Whitman—America’s “First Poet”—published Leaves of Grass, a collection of 12 poems about the landscape of his inner feelings and thoughts as projected on a still young country. How can’t we think of Whitman when people throughout the world are clamoring for the messy form of government that is democracy?
In the spirit of Whitman, and at a time when humanity valiantly struggles to be free, we thought it time to share poetic thoughts celebrating a way of life and form of government that we are able to embrace or reject in the hopes that we might support those who seek the same latitude for themselves and their children.
I Live in a Land
by Ben Valore-Caplan
1.
I live in a land
Where I can create my life
And so do my children.
Where creative energy
Like waves washes against
The shore of the present,
Shaping us slowly,
Imperceptibly,
Lulling us into believing that
The rhythm of change
Soothes always like water on sand.
Except when storms rage
And scare us through the uncertain night
Crashing upon our thoughts and comforts
Unsettling us,
Driving us beneath blankets of fear
And anxious dreams
In which all is lost.
Until the noise and chaos passes
And we awake to the calm of morning
The shore is different
And so is the air
And we are again alive
Energized
Refreshed
Reminded of the energy
We had taken for granted
The lapping waves that were changing the landscape
Even as they soothed us into thinking they were not.
2.
I live in a land
Where I can create my life
And so do my children.
Where I can walk the beach
Feel the pull of a spot of sand,
Settle in
Begin to build
A vision of beauty
Of function
Or something to pass the day.
Others might join me
Or I them
And build together for a time
Castle moat city
Something new
Something worth crafting
The beach here expands
As builders join in
And so do our imaginations
And the possibilities
And the surprises
That we had not thought to build
But someone did
And we share in the wonder
That such people have such ideas
As we shape each other’s landscape
And what we leave behind.
3.
I live in a land
Where I can create my life
And so do my children.
Where every day,
Seagulls cackle well meaning
Offers to protect me
From the heat and gales
Shifting sands
Unknown companions
Uncertainty
And myself.
Their tempting calls
Promise comfort
Security
Someone else,
They seek to lure me from
These gritty sands
And bitter water.
And when the sun is at its zenith
And my fears,
I contemplate their offers.
4.
I live in a land
Where I can create my life
And so do my children.
A frustrating, abrasive place
Chaotic and noisy and ugly
Where people jostle and crash
Stomp on each other’s creations
Throw trash on the sands of society
And pollute the waters of life.
It’s an obnoxious place
Disorganized
Disorderly
Disrespectful
Disturbing
Dissonant.
It’s a wonder really
That anything beautiful or functional
Ever happens here
And that it does
So very often.
5.
I live in a land
Where I can create my life
And so do my children.
And my children believe this,
And that
Will make all of the difference.
In the spirit of Whitman, and at a time when humanity valiantly struggles to be free, we thought it time to share poetic thoughts celebrating a way of life and form of government that we are able to embrace or reject in the hopes that we might support those who seek the same latitude for themselves and their children.
I Live in a Land
by Ben Valore-Caplan
1.
I live in a land
Where I can create my life
And so do my children.
Where creative energy
Like waves washes against
The shore of the present,
Shaping us slowly,
Imperceptibly,
Lulling us into believing that
The rhythm of change
Soothes always like water on sand.
Except when storms rage
And scare us through the uncertain night
Crashing upon our thoughts and comforts
Unsettling us,
Driving us beneath blankets of fear
And anxious dreams
In which all is lost.
Until the noise and chaos passes
And we awake to the calm of morning
The shore is different
And so is the air
And we are again alive
Energized
Refreshed
Reminded of the energy
We had taken for granted
The lapping waves that were changing the landscape
Even as they soothed us into thinking they were not.
2.
I live in a land
Where I can create my life
And so do my children.
Where I can walk the beach
Feel the pull of a spot of sand,
Settle in
Begin to build
A vision of beauty
Of function
Or something to pass the day.
Others might join me
Or I them
And build together for a time
Castle moat city
Something new
Something worth crafting
The beach here expands
As builders join in
And so do our imaginations
And the possibilities
And the surprises
That we had not thought to build
But someone did
And we share in the wonder
That such people have such ideas
As we shape each other’s landscape
And what we leave behind.
3.
I live in a land
Where I can create my life
And so do my children.
Where every day,
Seagulls cackle well meaning
Offers to protect me
From the heat and gales
Shifting sands
Unknown companions
Uncertainty
And myself.
Their tempting calls
Promise comfort
Security
Someone else,
They seek to lure me from
These gritty sands
And bitter water.
And when the sun is at its zenith
And my fears,
I contemplate their offers.
4.
I live in a land
Where I can create my life
And so do my children.
A frustrating, abrasive place
Chaotic and noisy and ugly
Where people jostle and crash
Stomp on each other’s creations
Throw trash on the sands of society
And pollute the waters of life.
It’s an obnoxious place
Disorganized
Disorderly
Disrespectful
Disturbing
Dissonant.
It’s a wonder really
That anything beautiful or functional
Ever happens here
And that it does
So very often.
5.
I live in a land
Where I can create my life
And so do my children.
And my children believe this,
And that
Will make all of the difference.
Tuesday, February 8, 2011
Thirty Years
Thirty years. An eternity really. Yet something those charged with predicting the future—investment analysts, ecologists, political scientists, pension stewards—must be prepared to anticipate. To grasp the sheer audacity required to predict thirty years forward, let’s first journey back thirty years.
Imagine you have travelled back to February 1981.
Anwar Sadat is President of Egypt. Hosni Mubarak is a boring bureaucrat serving as vice-president. Sadat’s assassination (and Mubarak’s miraculous survival) is still nine months off. The peace treaty Sadat had signed with Israel’s Menachem Begin in 1978 had earned him a share of the Nobel Peace Prize and the enmity of many of his countrymen and peers in the Arab World.
In America, Ronald Reagan had taken his oath of office just a few weeks ago, on the same day that 52 American hostages were released by the Iranian students that had taken over the US Embassy. According to many of the hostages, one of their captors was named Mahmoud Ahmadinejad. Whether he was actually part of the takeover or not, we did not know then that he would later become Iran’s puppet president.
The Dow Jones Industrial Index closes February 6, 1981 at 952. It includes companies such as Eastman Kodak, Inco, American Can, and US Steel. The thirty year US Treasury Bonds yield 12.8%, while the Prime Rate stands at over 19%. A conventional thirty year fixed mortgage can be had for 15.1%. The US Federal Debt stands at about $950 billion, which represents about 35% of GDP.
The Soviet Union is America’s great foil and includes in its empire the Ukraine, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, Belarus, Lithuania, Estonia, and Georgia. The Soviet Block includes puppet governments in Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and East Germany. Berlin is divided. The United States has just boycotted the 1980 Moscow Olympics. The 1984 Olympics have been awarded to Los Angeles. The Soviets are deeply mired in Afghanistan where they wage a cruel campaign against civilians, booby trapping toys with bombs and blanketing the country in mines.
Goods made in China are hard to come by and generally consist of hand-worked silk, ivory, and jade. US dollars are not permitted in China. Beijing and the Great Wall are closed to Westerners. There are few cars in China save a handful for top communist party officials. There are no sky scrapers of note in Shanghai or Guangzhou. It has been eight years since Nixon’s visit to China.
The internet has not yet been invented. There is no email, no texting, no chatrooms, no Facebook. A few folks have ponied up to acquire heavy mobile phones they connect to their car battery. People write letters and reports on typewriters. They use calculators and adding machines. GPS is only available to the military and is spotty at best. When people want to research information they turn to an encyclopedia or library.
There are three major network broadcasters as well as PBS. In some communities, there might be an extra TV station. 24/7 television has not yet been invented, and only a few people have cable. HBO has been around since the 1970s, ESPN for two years, and CNN for one, but all with limited access. There is no MTV, FOX, and CNBC. Most people get their news from local prime time newscasts or the local newspaper. Several communities have at least two daily papers. Local DJs rule the radio waves. Clear channel has not consolidated local radio.
We can agree that life was quite different in 1981. Yet now imagine that you were an economist or adviser in 1981 helping a foundation, a pension, or a future retiree plan for the next thirty years. What might you have considered?
You’d probably start by being concerned about fixed income. After all, with Treasury yields in the low double digits, you know that bonds will barely keep pace with inflation that has been running 11-14%. And if anything, bond yields and inflation both seem destined to keep rising. Who would want to lock in money at 12-15% for thirty years? So you would be cautious about fixed income.
Of course, given high inflation and interest rates, who in their right mind would allocate much to US stocks, an asset class that had been returning only about 8-9% per year for the previous thirty years? Investing in stocks in 1981 seemed to many investors to be a sure way of locking in real investment losses.
There were only a few “hedge funds” in existence, they were not yet accessible to most investors, and few investors would have placed money in them anyway. One could trade commodities or REITS but the markets were not very transparent, affordable, or well understood.
What Would You Have Predicted?
So if you were sitting with an investment committee or a family in 1981, how many of the geopolitical, economic and social changes that occurred between 1981 and 2010 would you have predicted? Would you have nailed the demise of the USSR? The advent of the internet, email, text, chat, and all that they entailed? Would you have guessed that you would have a computer strapped to your belt with more communication and research power than any combination of electronic devices that existed in 1981?
Would you have predicted that the Dow would transcend 14,000 once and 12,000 a few times? Or that most trading on the major markets would be driven by computer algorithms? Would you have guessed that 30 year bonds would for a time be discontinued, then reinstated, and that they would yield only about 4.2% as 2010 drew to a close? Would you have dreamed that a 30 year mortgage could be had for about 5%? Or that even those with near perfect credit scores would have difficulty actually securing such a deal?
Would you have predicted that Japan would rise as America’s greatest economic adversary, then stagnate? Could you have guessed that backward, communist China of all places would become our primary economic partner/competitor? Would you have anticipated the rise of the European Union, the successful issuance of the Euro, and the uncertainty that now stalks the very arrangement? Might you have imagined that the World Trade Center would be gone, US troops would be fighting in Afghanistan and Iraq, and that the nightly news would speak regularly of Mosul, Kandahar, and Kabul? Could you have dreamed that a black man from a family of mixed race, nationality, and religion would be president of the United States?
Could you have imagined that the Fed would be busy trying to stimulate inflation to something higher than the current 1.5%? Would you have expected that the US Debt would stand well over $13 Trillion? That somewhere around 1 in 10 US houses would be vacant? That serious discussions would be underway regarding how states and municipalities can declare bankruptcy? That over 20 million Americans who are part of the workforce would not be working?
Could you have conceived of Microsoft, Google, Facebook, Verizon, Apple, Hyundai? Would you have guessed that only nine of the thirty Dow Jones Industrial component companies in 1981 would still be in the DJIA in 2010? Could you have anticipated that five of the 2010 DJIA companies would be financial services firms when none were in 1981? There had been six financial companies in the DJIA in 2008, but Citigroup rose and fell from grace in the years between 1981 and 2010.
How Should We Look Forward Today?
Since we are in the business of helping prepare for the future, we cannot simply throw our hands up because forward-looking predictions are so difficult to make. We must find that balance between predicting what might happen and humbly knowing that we cannot. And in that place of balance, there are certain truths that form a foundation on which we can build a strategy for going forward.
• The companies that will drive innovation over the next thirty years have not yet been created.
• Some of those companies will be domestic and some will be foreign.
• Countries guided by the rule of law and citizen engagement will outperform those that lack either one.
• There will be bubbles and they will pop and people will lose a lot of money.
• Governments and companies that manage their debt loads most effectively will outperform those that do not.
• Through globalization, currency markets will continue to rationalize, driving the world toward a single currency, a stabilized basket of currencies, or relative constancy between a handful of dominant currencies.
• The demographic, social, and technological trends of the last thirty years will be quite different from those of the next thirty years.
• Governments that tax too much stifle innovation and growth which ultimately stifles civil society and promotes economic malaise.
• Governments that tax too little stifle civil society and encourage economic disparity, which ultimately stifles innovation and growth.
• Commodities and land are likely to remain constrained resources for the next thirty years.
• The global population is growing.
• People want to feed their families and provide them with access to health care.
• It can be more lucrative to own a company than to loan money to it.
• It can be much safer to loan money to a company than to own it.
• There will be governments that abuse their people.
• There will be people who abuse their governments.
We realize of course that the statements above do not render an asset allocation blend optimized for the next thirty years. But they do remind us that the next thirty years will be driven by themes we can expect and specifics we cannot.
So as investors plan for retirement, finance foundations and endowments designed to last in perpetuity, craft estate plans, and ensure the health of defined benefit plans, we must think critically, embrace uncertainty, and craft a course of action that anticipates both worst case and best case scenarios. If the last thirty years have taught us anything, it’s that both will most certainly happen.
Imagine you have travelled back to February 1981.
Anwar Sadat is President of Egypt. Hosni Mubarak is a boring bureaucrat serving as vice-president. Sadat’s assassination (and Mubarak’s miraculous survival) is still nine months off. The peace treaty Sadat had signed with Israel’s Menachem Begin in 1978 had earned him a share of the Nobel Peace Prize and the enmity of many of his countrymen and peers in the Arab World.
In America, Ronald Reagan had taken his oath of office just a few weeks ago, on the same day that 52 American hostages were released by the Iranian students that had taken over the US Embassy. According to many of the hostages, one of their captors was named Mahmoud Ahmadinejad. Whether he was actually part of the takeover or not, we did not know then that he would later become Iran’s puppet president.
The Dow Jones Industrial Index closes February 6, 1981 at 952. It includes companies such as Eastman Kodak, Inco, American Can, and US Steel. The thirty year US Treasury Bonds yield 12.8%, while the Prime Rate stands at over 19%. A conventional thirty year fixed mortgage can be had for 15.1%. The US Federal Debt stands at about $950 billion, which represents about 35% of GDP.
The Soviet Union is America’s great foil and includes in its empire the Ukraine, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, Belarus, Lithuania, Estonia, and Georgia. The Soviet Block includes puppet governments in Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and East Germany. Berlin is divided. The United States has just boycotted the 1980 Moscow Olympics. The 1984 Olympics have been awarded to Los Angeles. The Soviets are deeply mired in Afghanistan where they wage a cruel campaign against civilians, booby trapping toys with bombs and blanketing the country in mines.
Goods made in China are hard to come by and generally consist of hand-worked silk, ivory, and jade. US dollars are not permitted in China. Beijing and the Great Wall are closed to Westerners. There are few cars in China save a handful for top communist party officials. There are no sky scrapers of note in Shanghai or Guangzhou. It has been eight years since Nixon’s visit to China.
The internet has not yet been invented. There is no email, no texting, no chatrooms, no Facebook. A few folks have ponied up to acquire heavy mobile phones they connect to their car battery. People write letters and reports on typewriters. They use calculators and adding machines. GPS is only available to the military and is spotty at best. When people want to research information they turn to an encyclopedia or library.
There are three major network broadcasters as well as PBS. In some communities, there might be an extra TV station. 24/7 television has not yet been invented, and only a few people have cable. HBO has been around since the 1970s, ESPN for two years, and CNN for one, but all with limited access. There is no MTV, FOX, and CNBC. Most people get their news from local prime time newscasts or the local newspaper. Several communities have at least two daily papers. Local DJs rule the radio waves. Clear channel has not consolidated local radio.
We can agree that life was quite different in 1981. Yet now imagine that you were an economist or adviser in 1981 helping a foundation, a pension, or a future retiree plan for the next thirty years. What might you have considered?
You’d probably start by being concerned about fixed income. After all, with Treasury yields in the low double digits, you know that bonds will barely keep pace with inflation that has been running 11-14%. And if anything, bond yields and inflation both seem destined to keep rising. Who would want to lock in money at 12-15% for thirty years? So you would be cautious about fixed income.
Of course, given high inflation and interest rates, who in their right mind would allocate much to US stocks, an asset class that had been returning only about 8-9% per year for the previous thirty years? Investing in stocks in 1981 seemed to many investors to be a sure way of locking in real investment losses.
There were only a few “hedge funds” in existence, they were not yet accessible to most investors, and few investors would have placed money in them anyway. One could trade commodities or REITS but the markets were not very transparent, affordable, or well understood.
What Would You Have Predicted?
So if you were sitting with an investment committee or a family in 1981, how many of the geopolitical, economic and social changes that occurred between 1981 and 2010 would you have predicted? Would you have nailed the demise of the USSR? The advent of the internet, email, text, chat, and all that they entailed? Would you have guessed that you would have a computer strapped to your belt with more communication and research power than any combination of electronic devices that existed in 1981?
Would you have predicted that the Dow would transcend 14,000 once and 12,000 a few times? Or that most trading on the major markets would be driven by computer algorithms? Would you have guessed that 30 year bonds would for a time be discontinued, then reinstated, and that they would yield only about 4.2% as 2010 drew to a close? Would you have dreamed that a 30 year mortgage could be had for about 5%? Or that even those with near perfect credit scores would have difficulty actually securing such a deal?
Would you have predicted that Japan would rise as America’s greatest economic adversary, then stagnate? Could you have guessed that backward, communist China of all places would become our primary economic partner/competitor? Would you have anticipated the rise of the European Union, the successful issuance of the Euro, and the uncertainty that now stalks the very arrangement? Might you have imagined that the World Trade Center would be gone, US troops would be fighting in Afghanistan and Iraq, and that the nightly news would speak regularly of Mosul, Kandahar, and Kabul? Could you have dreamed that a black man from a family of mixed race, nationality, and religion would be president of the United States?
Could you have imagined that the Fed would be busy trying to stimulate inflation to something higher than the current 1.5%? Would you have expected that the US Debt would stand well over $13 Trillion? That somewhere around 1 in 10 US houses would be vacant? That serious discussions would be underway regarding how states and municipalities can declare bankruptcy? That over 20 million Americans who are part of the workforce would not be working?
Could you have conceived of Microsoft, Google, Facebook, Verizon, Apple, Hyundai? Would you have guessed that only nine of the thirty Dow Jones Industrial component companies in 1981 would still be in the DJIA in 2010? Could you have anticipated that five of the 2010 DJIA companies would be financial services firms when none were in 1981? There had been six financial companies in the DJIA in 2008, but Citigroup rose and fell from grace in the years between 1981 and 2010.
How Should We Look Forward Today?
Since we are in the business of helping prepare for the future, we cannot simply throw our hands up because forward-looking predictions are so difficult to make. We must find that balance between predicting what might happen and humbly knowing that we cannot. And in that place of balance, there are certain truths that form a foundation on which we can build a strategy for going forward.
• The companies that will drive innovation over the next thirty years have not yet been created.
• Some of those companies will be domestic and some will be foreign.
• Countries guided by the rule of law and citizen engagement will outperform those that lack either one.
• There will be bubbles and they will pop and people will lose a lot of money.
• Governments and companies that manage their debt loads most effectively will outperform those that do not.
• Through globalization, currency markets will continue to rationalize, driving the world toward a single currency, a stabilized basket of currencies, or relative constancy between a handful of dominant currencies.
• The demographic, social, and technological trends of the last thirty years will be quite different from those of the next thirty years.
• Governments that tax too much stifle innovation and growth which ultimately stifles civil society and promotes economic malaise.
• Governments that tax too little stifle civil society and encourage economic disparity, which ultimately stifles innovation and growth.
• Commodities and land are likely to remain constrained resources for the next thirty years.
• The global population is growing.
• People want to feed their families and provide them with access to health care.
• It can be more lucrative to own a company than to loan money to it.
• It can be much safer to loan money to a company than to own it.
• There will be governments that abuse their people.
• There will be people who abuse their governments.
We realize of course that the statements above do not render an asset allocation blend optimized for the next thirty years. But they do remind us that the next thirty years will be driven by themes we can expect and specifics we cannot.
So as investors plan for retirement, finance foundations and endowments designed to last in perpetuity, craft estate plans, and ensure the health of defined benefit plans, we must think critically, embrace uncertainty, and craft a course of action that anticipates both worst case and best case scenarios. If the last thirty years have taught us anything, it’s that both will most certainly happen.
Published with Blogger-droid v1.6.7
Friday, January 28, 2011
Syntrinsic's State of the Union
On Tuesday, President Obama presented his State of the Union address as required by the Constitution. Immediately following, Paul Ryan, Congressman from Wisconsin, offered the Republican response. We are reluctant to preempt either gentleman, and yet thought that this was a ripe opportunity to provide Syntrinsic’s first State of the Union commentary.
Syntrinsic’s State of the Union is informed by our daily work with good people across the political spectrum that are ethical, patriotic, intelligent, and of solid character. Syntrinsic is grounded in a very strong social agenda, though it is not a partisan one; thus, while our State of the Union may lack in standing ovations from 51% of America, we hope to compensate by referencing themes in 2011 relevant for all of us who care about the stewardship of our nation’s financial resources.
We have focused on one theme that is geopolitical, one national, one tied to the investment industry, and one tied to the nonprofit industry. Our last theme, we think, unites them all.
Geopolitical Theme: Beginning the Next Cold War
Much has been made in recent weeks of the rise of China’s military (e.g. stealth fighter), their increasing territoriality with their neighbors over control of the seas around China, and their desire to make the Yuan a global currency. Some pundits have attempted to position China and US in the beginning of a Cold War-like relationship, stirring up images of former Soviet-US tensions; however, this metaphor does not fit.
The US and China have developed a symbiotic relationship that never existed between the US and the USSR. The Soviets did not finance America’s government debt as China has, nor did American consumers finance the growth of the Soviet economy as we have and continue to do with China. While China and the US have become ever more interdependent, the US and the USSR largely lived in two isolated economic worlds, motivating each other, but doing everything they could to isolate and weaken the other.
We expect to see China continue to flex its growing muscles in the coming year, and yet also expect them to struggle to manage at least four major challenges that can destabilize a totalitarian regime: 1). A “hot” economy; 2). A demographic that includes far too many inadequately educated rural poor men; 3). Growing internal dissent around faith, corruption, government incompetence, and environmental devastation; and 4). Relations with North Korea, Japan, Taiwan, Myanmar, and India.
Will China overtake the US as the next global super power? Not yet. Will China and US relations deteriorate? Probably not. Will the US stop relying on Chinese products or China’s financing of our debt? No. Will the US compel China to become an advocate of human rights in North Korea, Africa, Myanmar, and elsewhere? No. Should we be wary of China? Of the people, no. Of the government, yes.
National Theme: Save our Cities (and States)
Closer to home, 2011 will be marked by the economic challenges of states, cities, and other municipal districts (e.g. schools, utilities, fire and police, airports, etc.). There will be budgets to cut, services to modify, pensions to renegotiate, and most likely employees to be terminated. Some municipal agencies will raise taxes to address the economic pressures, while others cut them with the same intention. Some unions will come to the table as constructive partners and some will do so as antagonists. Some citizens will understand the need to adjust expectations and others will rise up in anger. In some communities, business will partner with elected representatives to develop comprehensive solutions, while in other communities business will stand silently by.
While in most of America, we have moved away from citizen participation in local politics, the economic decisions that must be made may inspire renewed engagement. This is good. Just as the world has become more interdependent, our local communities have also become more closely woven into the web of broader economic and geopolitical forces. Former House Speaker Tip O’Neil liked to quip that “All politics is local,” and he was right. Were he with us today, he might well add that, “International has become local.” A rancher on the Eastern plains of Colorado is connected to one at the base of the Southern Andes in Chile and both are joined to the wheat farmer replanting a flooded field in central Pakistan.
Will our municipalities declare bankruptcy? Some, yes. Will they default on their bonds in greater frequency? Yes. Will pension contracts be renegotiated? Some, yes. Will it be enough? In most cases, no. It will just delay the inevitable for the next generation to address. Will America’s cities and states fall into perpetual decline? No. Many cities and states will need to reposition and make tough choices, but most Americans are resilient, loyal and have a strong sense of place. Cities and states will need to reinvent, but remember, we have done that before several times (e.g. New York City, Chicago, San Francisco, Atlanta, etc.)
Investment Industry Theme: Fiduciary Standard
Imagine if doctors were having a national debate as to whether they needed to put the health care needs of the patient before their own financial gain. Imagine if engineers were arguing in a public forum about whether bridges needed to be built for safe transport or simply to meet the business needs of the engineering firm. What if states were trying to decide whether teachers should strive to serve students before serving themselves?
We believe that were any of these debates going on, the nation would be riveted and strong feelings and extensive news coverage would abound. Yet such a debate is going on right now within the investment industry and even most investment professionals are not even watching from the sidelines. Yet this will be one of the most important decisions impacting the investment industry and its customers in the last 70 years.
In the initial drafts of what became the Dodd-Frank Act, language was proposed that would compel all broker-dealer representatives to meet the same fiduciary care that is required of Investment Advisers per the 1940 Investment Adviser Act. Per the 1940 Act, Advisers must provide loyalty and care to their clients first and foremost, disclose how they are compensated, disclose all conflicts of interest, and act in good faith. Rather than being a rules-based guideline, the fiduciary standard is intended as a principles-based guideline; thus, financial professionals would be expected to meet the spirit—not just the letter—of the guidelines.
Both Dodd (Chris Dodd, Senator from Connecticut) and Frank (Barney Frank, Congressman from Massachusetts), quickly struck the requirement for a fiduciary standard from the Act. Instead they required that the SEC study the situation and make a recommendation. On January 21, the SEC released their study to Congress. Now Congress, the SEC, FINRA (the self-regulating body of the broker-dealers), and lobbyists from the broker dealer, insurance, and banking community, financial planning advocacy groups, money management firms, and others are teeing up for negotiations.
Will Congress compel all financial professionals to meet the fiduciary standards defined by the 1940 Act? No. There’s too much money made under the current arrangement that consumers would not pay if they knew. Will Congress create a single, watered-down standard for everyone despite the SEC’s recommendation otherwise? Possibly. Again, there is much money at stake and great pressure to weaken, not strengthen, fiduciary standards. Will investors experience a more transparent investment industry designed to put their needs first? No. We continue to believe that the only thing that will materially change the structure of the investment industry is a change in consumer demand.
Nonprofit Industry Theme: Impact
The nonprofit industry feeds the hungry, houses the homeless, cares for the sick and abandoned, preserves history and protects the environment, cultivates the arts, and otherwise serves the faith, psychological, and educational needs of society. It helps make us a civil society, provides a safety net, and enables the many aspects of life that do not have short-term profit motive or potential.
Economic pressures in 2011 will continue to challenge nonprofit agencies to become even more efficient, better demonstrate their impact, and forge ever stronger relationships with those that provide financial sustenance, whether through contributions, reimbursements, or other revenue streams. Thus, like in other aspects of society, we can expect to see quality rise to the top. Nonprofits that are extremely well governed, well-managed, and sustainably resourced will continue to thrive. Those that have weak boards, ineffective staff or unsustainable revenue streams will go away, be absorbed, or, merge with peers. That’s okay.
In 2011, we will see continued interest in the expansion of social impact investment structures that raise capital to meet social needs in more creative ways. The line between nonprofit and forprofit will blur as social entrepreneurs move back and forth between legal structures and business strategies to strive to meet their social objectives. That, too, is good.
Will Congress look for ways to tax nonprofits on endowments, hard assets, or other aspects of their business? Yes. When revenues are tight and spending is high, expect Congress to consider everything, including taxing aspects of nonprofit business. That said, we think actually implementing such taxes will be politically difficult and thus unlikely. Will Congress reduce the tax deductibility of charitable donations as the Obama administration has proposed? See answer above. Same pressures to do it, same pressures not to. Will nonprofit organizations go out of business in 2011? Yes. Will the service demands on nonprofits increase? Yes. Will nonprofits be able to meet those increased demands? Some yes. Some will thrive in this environment as they will be able to demonstrate their value at a time when value is important.
Unifying Theme: Entrepreneurship
We hear again and again that people are concerned that America has lost its competitive edge, that we have become complacent, that we are Rome in decline, a shadow of our former greatness, no longer relevant or vital or even interesting. We would share the concern except that America has voiced that level of self-critical anxiety ever since the generation that took over leadership from the first revolutionaries in the 1790s. We believe firmly that America’s obsessive fear of becoming irrelevant keeps us hungry and motivated and relevant.
Once the housing/banking/credit crisis hit the fall of 2008, many Americans felt that the devastation was an indication that our most fundamental structures had failed. Anti-capitalists and anti-globalists reveled in a sort of schadenfreude (def.—“pleasure in someone else’s misfortune”) that the great exploiter had crashed and burned. Clearly government had not protected us from our excesses and perhaps even contributed to them. Many of our banks were unable to manage their own businesses and were taking us all down with them. Our heavy industry was shot, as was the housing industry which made everyone so rich for the previous 20 years.
We see it otherwise. America’s greatness is in its fundamental structure, not our temporal management (or mismanagement) of it. America’s constitution (small “c”) is based on rule of law, the free flow of capital and investment, a healthy civil society, human rights, and the opportunity to launch something, fail, and try again. We are imperfect in all of these endeavors and yet these factors exist in America as they rarely have in any other place or at any other time in human history. Few immigrants leave their homes and families and risk their lives to come here just to receive Social Security and Medicare. People around the globe still see America as a place where the lowliest among us can forge a life of value and meaning, can raise a family, can pray, and can become what one wishes. For that, people will give up and risk a great deal.
Is America perfect? No. Is America fundamentally broken? No. Are America’s partisan politics particularly bad now? Not by a long shot. We’ve improved tremendously over the past 235 years. Is the spirit of the American people broken? No. Can one start a company in America? Yes. Is capital available? Yes, for the right business plan and with enough tenacity. Will it be government spending that turns around the economy? On the margins. Government spending is a tax on the economy (today or tomorrow), so ultimately it is a zero sum impact. Will it be private enterprise that turns around the economy? Yes, as it ultimately is in every recession throughout history and across societies.
As we enter 2011, we have never been more confident, more excited, or more inspired by those among us who seek to make an impact in creating a more humane, secure, innovative, and loving world. Our Union has been rocked hard these past several years; yet, we possess the fundamental structures and thoughtfully engaged citizenry necessary to move from strength to strength. And so we will.
Syntrinsic’s State of the Union is informed by our daily work with good people across the political spectrum that are ethical, patriotic, intelligent, and of solid character. Syntrinsic is grounded in a very strong social agenda, though it is not a partisan one; thus, while our State of the Union may lack in standing ovations from 51% of America, we hope to compensate by referencing themes in 2011 relevant for all of us who care about the stewardship of our nation’s financial resources.
We have focused on one theme that is geopolitical, one national, one tied to the investment industry, and one tied to the nonprofit industry. Our last theme, we think, unites them all.
Geopolitical Theme: Beginning the Next Cold War
Much has been made in recent weeks of the rise of China’s military (e.g. stealth fighter), their increasing territoriality with their neighbors over control of the seas around China, and their desire to make the Yuan a global currency. Some pundits have attempted to position China and US in the beginning of a Cold War-like relationship, stirring up images of former Soviet-US tensions; however, this metaphor does not fit.
The US and China have developed a symbiotic relationship that never existed between the US and the USSR. The Soviets did not finance America’s government debt as China has, nor did American consumers finance the growth of the Soviet economy as we have and continue to do with China. While China and the US have become ever more interdependent, the US and the USSR largely lived in two isolated economic worlds, motivating each other, but doing everything they could to isolate and weaken the other.
We expect to see China continue to flex its growing muscles in the coming year, and yet also expect them to struggle to manage at least four major challenges that can destabilize a totalitarian regime: 1). A “hot” economy; 2). A demographic that includes far too many inadequately educated rural poor men; 3). Growing internal dissent around faith, corruption, government incompetence, and environmental devastation; and 4). Relations with North Korea, Japan, Taiwan, Myanmar, and India.
Will China overtake the US as the next global super power? Not yet. Will China and US relations deteriorate? Probably not. Will the US stop relying on Chinese products or China’s financing of our debt? No. Will the US compel China to become an advocate of human rights in North Korea, Africa, Myanmar, and elsewhere? No. Should we be wary of China? Of the people, no. Of the government, yes.
National Theme: Save our Cities (and States)
Closer to home, 2011 will be marked by the economic challenges of states, cities, and other municipal districts (e.g. schools, utilities, fire and police, airports, etc.). There will be budgets to cut, services to modify, pensions to renegotiate, and most likely employees to be terminated. Some municipal agencies will raise taxes to address the economic pressures, while others cut them with the same intention. Some unions will come to the table as constructive partners and some will do so as antagonists. Some citizens will understand the need to adjust expectations and others will rise up in anger. In some communities, business will partner with elected representatives to develop comprehensive solutions, while in other communities business will stand silently by.
While in most of America, we have moved away from citizen participation in local politics, the economic decisions that must be made may inspire renewed engagement. This is good. Just as the world has become more interdependent, our local communities have also become more closely woven into the web of broader economic and geopolitical forces. Former House Speaker Tip O’Neil liked to quip that “All politics is local,” and he was right. Were he with us today, he might well add that, “International has become local.” A rancher on the Eastern plains of Colorado is connected to one at the base of the Southern Andes in Chile and both are joined to the wheat farmer replanting a flooded field in central Pakistan.
Will our municipalities declare bankruptcy? Some, yes. Will they default on their bonds in greater frequency? Yes. Will pension contracts be renegotiated? Some, yes. Will it be enough? In most cases, no. It will just delay the inevitable for the next generation to address. Will America’s cities and states fall into perpetual decline? No. Many cities and states will need to reposition and make tough choices, but most Americans are resilient, loyal and have a strong sense of place. Cities and states will need to reinvent, but remember, we have done that before several times (e.g. New York City, Chicago, San Francisco, Atlanta, etc.)
Investment Industry Theme: Fiduciary Standard
Imagine if doctors were having a national debate as to whether they needed to put the health care needs of the patient before their own financial gain. Imagine if engineers were arguing in a public forum about whether bridges needed to be built for safe transport or simply to meet the business needs of the engineering firm. What if states were trying to decide whether teachers should strive to serve students before serving themselves?
We believe that were any of these debates going on, the nation would be riveted and strong feelings and extensive news coverage would abound. Yet such a debate is going on right now within the investment industry and even most investment professionals are not even watching from the sidelines. Yet this will be one of the most important decisions impacting the investment industry and its customers in the last 70 years.
In the initial drafts of what became the Dodd-Frank Act, language was proposed that would compel all broker-dealer representatives to meet the same fiduciary care that is required of Investment Advisers per the 1940 Investment Adviser Act. Per the 1940 Act, Advisers must provide loyalty and care to their clients first and foremost, disclose how they are compensated, disclose all conflicts of interest, and act in good faith. Rather than being a rules-based guideline, the fiduciary standard is intended as a principles-based guideline; thus, financial professionals would be expected to meet the spirit—not just the letter—of the guidelines.
Both Dodd (Chris Dodd, Senator from Connecticut) and Frank (Barney Frank, Congressman from Massachusetts), quickly struck the requirement for a fiduciary standard from the Act. Instead they required that the SEC study the situation and make a recommendation. On January 21, the SEC released their study to Congress. Now Congress, the SEC, FINRA (the self-regulating body of the broker-dealers), and lobbyists from the broker dealer, insurance, and banking community, financial planning advocacy groups, money management firms, and others are teeing up for negotiations.
Will Congress compel all financial professionals to meet the fiduciary standards defined by the 1940 Act? No. There’s too much money made under the current arrangement that consumers would not pay if they knew. Will Congress create a single, watered-down standard for everyone despite the SEC’s recommendation otherwise? Possibly. Again, there is much money at stake and great pressure to weaken, not strengthen, fiduciary standards. Will investors experience a more transparent investment industry designed to put their needs first? No. We continue to believe that the only thing that will materially change the structure of the investment industry is a change in consumer demand.
Nonprofit Industry Theme: Impact
The nonprofit industry feeds the hungry, houses the homeless, cares for the sick and abandoned, preserves history and protects the environment, cultivates the arts, and otherwise serves the faith, psychological, and educational needs of society. It helps make us a civil society, provides a safety net, and enables the many aspects of life that do not have short-term profit motive or potential.
Economic pressures in 2011 will continue to challenge nonprofit agencies to become even more efficient, better demonstrate their impact, and forge ever stronger relationships with those that provide financial sustenance, whether through contributions, reimbursements, or other revenue streams. Thus, like in other aspects of society, we can expect to see quality rise to the top. Nonprofits that are extremely well governed, well-managed, and sustainably resourced will continue to thrive. Those that have weak boards, ineffective staff or unsustainable revenue streams will go away, be absorbed, or, merge with peers. That’s okay.
In 2011, we will see continued interest in the expansion of social impact investment structures that raise capital to meet social needs in more creative ways. The line between nonprofit and forprofit will blur as social entrepreneurs move back and forth between legal structures and business strategies to strive to meet their social objectives. That, too, is good.
Will Congress look for ways to tax nonprofits on endowments, hard assets, or other aspects of their business? Yes. When revenues are tight and spending is high, expect Congress to consider everything, including taxing aspects of nonprofit business. That said, we think actually implementing such taxes will be politically difficult and thus unlikely. Will Congress reduce the tax deductibility of charitable donations as the Obama administration has proposed? See answer above. Same pressures to do it, same pressures not to. Will nonprofit organizations go out of business in 2011? Yes. Will the service demands on nonprofits increase? Yes. Will nonprofits be able to meet those increased demands? Some yes. Some will thrive in this environment as they will be able to demonstrate their value at a time when value is important.
Unifying Theme: Entrepreneurship
We hear again and again that people are concerned that America has lost its competitive edge, that we have become complacent, that we are Rome in decline, a shadow of our former greatness, no longer relevant or vital or even interesting. We would share the concern except that America has voiced that level of self-critical anxiety ever since the generation that took over leadership from the first revolutionaries in the 1790s. We believe firmly that America’s obsessive fear of becoming irrelevant keeps us hungry and motivated and relevant.
Once the housing/banking/credit crisis hit the fall of 2008, many Americans felt that the devastation was an indication that our most fundamental structures had failed. Anti-capitalists and anti-globalists reveled in a sort of schadenfreude (def.—“pleasure in someone else’s misfortune”) that the great exploiter had crashed and burned. Clearly government had not protected us from our excesses and perhaps even contributed to them. Many of our banks were unable to manage their own businesses and were taking us all down with them. Our heavy industry was shot, as was the housing industry which made everyone so rich for the previous 20 years.
We see it otherwise. America’s greatness is in its fundamental structure, not our temporal management (or mismanagement) of it. America’s constitution (small “c”) is based on rule of law, the free flow of capital and investment, a healthy civil society, human rights, and the opportunity to launch something, fail, and try again. We are imperfect in all of these endeavors and yet these factors exist in America as they rarely have in any other place or at any other time in human history. Few immigrants leave their homes and families and risk their lives to come here just to receive Social Security and Medicare. People around the globe still see America as a place where the lowliest among us can forge a life of value and meaning, can raise a family, can pray, and can become what one wishes. For that, people will give up and risk a great deal.
Is America perfect? No. Is America fundamentally broken? No. Are America’s partisan politics particularly bad now? Not by a long shot. We’ve improved tremendously over the past 235 years. Is the spirit of the American people broken? No. Can one start a company in America? Yes. Is capital available? Yes, for the right business plan and with enough tenacity. Will it be government spending that turns around the economy? On the margins. Government spending is a tax on the economy (today or tomorrow), so ultimately it is a zero sum impact. Will it be private enterprise that turns around the economy? Yes, as it ultimately is in every recession throughout history and across societies.
As we enter 2011, we have never been more confident, more excited, or more inspired by those among us who seek to make an impact in creating a more humane, secure, innovative, and loving world. Our Union has been rocked hard these past several years; yet, we possess the fundamental structures and thoughtfully engaged citizenry necessary to move from strength to strength. And so we will.
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