Every kid loves a birthday party, especially their own, and all kids get fired up about birthday cake!!!! Without birthday cake there might be no party at all, which is why it is served at the end. The following birthday cake allegory encapsulates the utter collapse in US consumer confidence, the stunning number of apocalyptic queries- e.g. “Should I sell all my stocks?” and S&P’s downgrade of the United States’ debt rating.
Congress consulted with experts and decided to drop in on a kid’s birthday party; they were there to help. After everyone sang “Happy Birthday” and the candles were blown out, Congress swiped the cake. The kid threw a tantrum as he had every reason to expect cake on his birthday. Some members of Congress explained, “Your parents have bad cases of diabetes. They are probably going to die from diabetes related complication unless they change their lifestyle.” Because the kid had been worked up into a tantrum, the only thing he heard was, “My parents are going to die!” and this greatly exacerbated the tantrum. Other members of Congress added, “You are genetically predisposed to diabetes and you should start avoiding sweets. If not, you might die from diabetes related complications.” Again, the kid was in such a state that he only heard, “My parents are going to die and I am going to die!?!?!”
Wrong Message! In our opinion the Congressional handling of the debt ceiling put people into a mental state where they heard, “The US economy will crash and burn, because it is bankrupt!”
Wrong Time! After an economic recovery has been underway for a while, there is always a pause before growth resumes. In our opinion the economy was queued up to pause and for economic figures to weaken a bit. The economy had been in steady recovery for almost two years, so it was naturally tired. Japan, which has the third largest economy in the world, experienced horrific earthquake, tsunami, and nuclear reactor catastrophes. North African governments were being overthrown. European issues were coming to a head. The price of gold was screaming higher. With that backdrop, the Congressional behavior was appalling and weakened a sluggish economy!
It is no wonder that we were drawn into so many apocalyptic conversations, in both social and professional settings. And those conversations occurred before the big market drops in August. This is not to say that the US debt and budget issues are not important. They are of critical importance. Generational changes are an especially interesting topic for discussion in that regard. Many consider the Baby Boomers to be fiscally childish as their use of debt has left the majority unprepared for retirement. Generation X leaders seem to be primed to make sweeping reforms. Perhaps it is worth a healthy debate about the likelihood of Generation X leaders making the tough choices that prior generations would not.
Our optimism about the future of the United States is unwavering. Even if Markel Corporation helps bail out Greece by buying the island of Crete and recreating Utopia, we will still think the USA is the best place in the world. America is indeed “The Land of Opportunity” and the culture primes the pump of innovation. We attract the best, the brightest, and in many cases the bravest. As we have said before, “our Asians are better than Asia’s Asians, our Mexicans are better than Mexico’s Mexicans, etc…” In many cultures, failure results in deep stifling shame; in the USA, entrepreneurs are expected to fail a few times before succeeding. We have heard from biotechnology analysts, but have not independently verified, that the rate of attempts to discover a new drug has been remarkably steady over the past several decades despite ebbs and flows of policies discouraging or encouraging the pharmaceutical industry. This anecdote and others suggest the innovative American Spirit cannot be altered even in face of abominable politics.
Speaking of birthdays, I recently turned forty. A friend gave me a collection of magazines that were as old as I.
Notable stories included:
Too much violence and advertising on TV is turning kids into violent, mindless consumers.
China policy is awful (Nixon surprised everyone there); Vietnam is a disaster.
New regulations and centralized trading are going to cause Wall Street firms to go out of business in droves. New York City will never be the same. (They said this after 9/11 and were equally wrong!)
The test tube baby is a viable concept.
Advice on how to find a job: Dark Clouds Over the Land of Opportunity and A Grave New World.
There were advertisements for:
Cigarettes and Liquor (in abundance and often with sexual appeal).
Kodak Instamatic, Polaroid 400s, Smith-Corona typewriter, Marchant portable calculator.
Trim Jeans- guaranteed to reduce your waist, tummy, hips and thighs by at least 6 inches in 3 days!
BankAmericard- (one of the first credit cards) – “Think of it as money.”
No one could have predicted the innovations that drove the next 40 years, 20 years, or even 10 years. The US GDP cracked the $1 trillion mark in 1970. Such a number may have been as inconceivable in 1930 as today’s $15 trillion run rate may have been to someone in 1970, and as $225 trillion in 2050 seems now. In the forty year periods of 1930-1970 and 1970-2010 there were several wars/military conflicts, seven recessions, and many more than seven financial crises. Just because you cannot see how the economy will grow doesn’t mean it will not grow. For most it is simply distressing to be confronted by the fact that the future is unpredictable.
We are constantly confronted that our predictions about essentially everything are wrong. One of the most patently wrong predictions was in 2007 to think that Apple might earn $10-12/share in 2011 (Apple will earn about $27/share). Yet because we were wrong in the right direction, there is a tendency to think “Hey, they really got the Apple story right…” Wrong! We continue to believe that being owners of great companies is the primary way to create wealth. We look forward to seeing what great companies come up with next.
It is always difficult to purchase any asset when fear is present. However, for longer term investors, it is an opportunity. To quote a great investor, Sir John Templeton, “To buy when others are selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.” If we were to add one other thought, it would be that patience will also be required as the current problems will not be solved overnight.
Important Disclosures:
This blog is for informational purposes only. The statements contained herein are solely based upon the opinions of Redmond Asset Management, LLC and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This blog contains no recommendations to buy or sell any specific securities and should not be considered investment advice of any kind. Past performance is no guarantee of future results. In making an investment decision individuals should utilize other information sources and the advice of their investment advisor.
