| 12 May 2009
“England swings like a pendulum do …” are the words of a Roger Miller song from the sixties that remind me that life is like a pendulum. Things seem to move far one direction before they reverse course and head the other way - like a pendulum back and forth.
The banking system collapse is one example. It happened suddenly, but the problem was building for a long time as lax oversight by regulators allowed excessive risk taking. When the system provides rewards for success with no penalty for failure, there are bound to be problems. For years, financial firms have acted in there own interests rather than ours, paying themselves salaries and bonuses that have far exceeded any value they have created for society. They failed to self-regulate, so now we must all pay for their mistakes. The credit markets will get back to normal before long, but new regulations to curb abuses may end up stifling productivity.
Don’t blame Capitalism for the problem. Risk taking is an essential ingredient to create the lifestyle we enjoy today. Innovation and the entrepreneurial spirit of Americans is our greatest competitive advantage and should be fostered. Despite the current problems, we live better today than in previous generations. I believe that future generations will also make this same claim.
Individuals have spent money they didn’t have for years. They have amassed record amounts of debt, while using their homes and 401(k) accounts as ATM machines. We had to know it couldn’t last forever. Our society went crazy with unbridled spending for a time. For now, consumers might rein in spending to the short-term detriment of the economy. This reaction will be largely due to the unavailability of easy credit, but also from the shock to our collective psyche. Some will learn some enduring lessons. Greater savings and investing will be a welcome change from the over-borrowed, consumerism of recent years. We should enjoy it while it lasts, because I suspect that memories will fade and we will eventually see fiscal irresponsibility again.
The economy moves constantly in cycles from expansion to contraction. The question is never “will there be a recession”, but rather “when and how deep”. Recessions are normal and we always recover from them. We are in one now. Your guess is as good as mine as to how long the recession will last, but the pendulum is likely near the bottom now and about to accelerate upward very soon.
Political changes are another great example of the pendulum affect. It’s hard to imagine a starker difference of philosophies than those of the Obama the Bush administrations. Our system of government provides checks and balances to keep policies from going too far in any direction. There are congressional elections every two years and a presidential election every four years. Regardless of your political leanings, nobody should get too comfortable with the status quo, because it won’t be the status quo for long.
The pendulum philosophy is one of the reasons that I’ve remained optimistic given the gravity of recent events. The financial markets have a way of self-correcting over time. Bubbles expand and bubbles burst. It only took a few years for investors to forget the tech frenzy and start a real estate bubble. Some day soon, inventors will forget the pain of 2008 and invest with confidence again.
To get through this tough time, investors should focus on what they own rather than the numbers on a piece of paper. In addition to a sizable allocation of stable income-based funds, my clients typically own more than 10,000 public companies throughout the entire world via a diversified portfolio of low-cost funds. These businesses have buildings, factories and other assets, and during this downturn they continue to produce valuable goods and services. They are not going away. Given time, these companies will be worth much more in the future than they are now. In the meantime, a diversified portfolio of stock and bond funds produces cash dividends much greater than the interest offered by banks.
It’s been said, that the only thing certain is change. Despite wars, terrorist attacks, recessions, bank failures, natural disasters, and a host of other scary world events, the U.S. economy has always prevailed. That is one thing that I don’t see changing.
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