This note was originally published at 8am on October 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“There is no cause for worry. The high tide of prosperity will continue”.
-Andrew Mellon, June 1928.
Clearly, Mr. Mellon’s statement proved to be inaccurate and untimely.
Fortunately for him, Irving Fisher stole the limelight with his immortal quote made days before the 1929 crash, “stock prices have reached what looks like a permanently high plateau”. As John Kenneth Galbraith writes, in reference to Mellon’s statement, in his seminal work titled The Great Crash, “Mr. Mellon did not know. Neither did any of the other public figures who then, as since, made similar statements…it is not to be supposed that the men who make them are privileged to look further into the future than the rest”.
Later in The Great Crash, as Galbraith moves to discuss the weeks and days more closely preceding the ultimate stock market collapse of October 1929, he writes, “When markets fell many Wall Street citizens immediately sensed the real danger, which was that income and employment – prosperity in general – would be adversely affected. This had to be prevented. Preventative incantation required that as many important people as possible repeat as firmly as they could that it wouldn’t happen. This they did.” Here we are, in 2011, and important people are once again turning to preventative incantation. This time, dare I say it, is different.
As the “roaring twenties” came back down to Earth, the informational resources that were available to Main Street were rather limited. The New York Times, the Wall Street Journal, Barron’s and other legacy newspapers were the primary source of financial news for the vast majority of shareholders in this country. Indeed, during the most volatile days of the period leading up the 1929 crash, the tickers in the New York Stock Exchange could not keep up with the real-time prices.
Today, ordinary people are increasingly on par with so-called important people. Twitter, YouTube, and the acute desire for transparency are ensuring that this trend continues. Yesterday’s most important geopolitical event highlights this point perfectly. Muammar Gaddafi was dragged out of a sewer and killed by rebel forces in Libya after, in an ironic twist of events, pleading for mercy.
One of his captors decided to make a digital recording of the event and, forty-five minutes or so after the dictator was executed, anyone in the world with access to YouTube could see evidence of the event on their mobile phone or laptop computer. Not only could we watch an historic event unfold in just as timely a fashion as the Secretary of State, we could also see a clip on YouTube of Secretary Clinton being passed a phone with a message informing her of Gaddafi being captured. Newsreaders in years past may have wondered, “I wonder what it was like?”
“The Veil of Ignorance” is a concept discussed by political philosopher John Rawls in his book A Theory of Justice to frame an unbiased determination of the morality of a certain issue. Behind the Rawlsian “veil of ignorance”, parties to a debate on a social issue know nothing about their abilities, position in society or preferences. A less sophisticated interpretation of the phrase could be that a veil exists between Main Street and the elites of Wall Street and Washington. Movements like Occupy Wall Street and the Tea Party epitomize dissatisfaction with the status quo. Social media is enabling democracy, however indefinite the aims of some groups may seem.
Social media is to democracy what the Bloomberg terminal was to finance. Like the investors of the late 1920’s that had to wait until the ticker on the floor caught up with market prices, voters at the time were also deprived of the information flow that we are benefitted with. Preventative incantations, in the US, Europe and elsewhere, are fact checked and debated by main streeters everywhere. It has been said that deliberation is the essence of democracy and, if that is true, technology is the engine behind democracy today.
I can’t claim to have visited Zuccotti Park to decipher exactly what it is that the Occupy Wall Street movement wants, but I would imagine that a higher jobs rate might assuage some of the dissatisfaction they are feeling. Inequality is certainly a large theme of the protest, but a lack of jobs while corporate profits and cash balances remain so high seems to be central to what is causing discontent along all parts of the political spectrum.
Chief Executive Officers, like politicians should be to voters, are accountable to their shareholders. Growing profits and increasing shareholder returns are primary goals of any CEO. Does it make sense, then, to leave so much cash on the sidelines earning little-to-nothing? The easy answer is no, but most executives don’t want to risk the hard earned capital either. So what is a CEO to do - wait and watch? Here are some comments from CEO’s on the current economic environment:
Steve Wynn, CEO Wynn Resorts: “I cannot predict what healthcare costs are going to be, what regulatory load they are going to heap on us, what new taxes or other burdens this insatiable governmental appetite for money from the citizens will take us to.”
Paul Coghlan, CFO Linear Technology Corp: “Customers continue to be very cautious and are concerned over general global macro economic conditions. They acknowledge in-demand opportunities, but are in a wait-and-see mode. They're running tight inventories and order to the low end of our lead times.”
Stephen G. Newberry, CEO Lam Research Corp: “Since our June quarter call, macro-economic uncertainty has continued, including concerns over European debt issues and ongoing struggles in the U.S. with high unemployment and a growing budget deficit.”
All in all, it is clear that neither the stimulus nor preventative incantations from American or European politicians are reassuring those that matter – the job creators. Voters, too, can now see the impact – or lack thereof – of politicians’ lip service.
At Hedgeye we are trying to build a business that catches the wave of transparency that is changing how events unfold and are perceived. In 1929, political elites shifted blame and responsibility to each other with little fear of meaningful exposure, at least not in the immediate term.
Today, their successors are not afforded that buffer. In 1929, Joseph Stagg Lawrence’s book Wall Street and Washington, attempted to expose government policy and the impact it had on the prosperity of the nation. Today, the same aim, if it is to gain traction, has to be synthesized within the construct of social media. That is where Hedgeye is going.
While hope is not an investment process, we hope that this time it is different.
Function in disaster; finish in style,