June 20, 2006
By Andrew Schmookler
My financial guy has all the good sense that comes with understanding that most of the time, the world keeps working the way it has worked before. But sometimes things are not normal. Sometimes, the hoofbeats are not those of horses, but of something more extraordinary.
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My financial guy (JS) and I go back more than thirty years, to just a couple of years after he first became a stock-broker and I first started getting involved in investing as part of my managing my money. In the course of those thirty-plus years, our business relationship has become also a friendship.
Among the virtues of JS as a financial advisor is that he's a solid and sensible fellow.
Having entered the business in the early 70s, and continued on into the new millennium, JS has seen both bad times (1973-82) and good (1982-2000) in the market. He wasn't one of those young turks on Wall Street in the 1990s who, never having seen a real bear market, thought that what went up could not go down. Nor was he one of those enthusiasts who bought the latest "this time it's different" illusion-- an illusion according to which it really was appropriate for some high-tech company that had never yet earned a profit to have a larger market capitalization than that of old established American blue chips.
He's got a basically stable, Republican-type temperament that resists panicking when there's "blood in the streets" (and so he counseled staying put when many frightened investors were stampeding for the exits at the bottom in 1982) and that also resists irrational exhuberance (and so he steered clear of stocks with three-digit P/E's in the late 90s, when the NASDAQ was about to lose 80% of its value).
He knows a lot about how the markets have behaved over the past several generations, and he advocates a course that's premised on the notion that as things have been so are they likely to be in the future. There will be ups, there will be downs. Over the long haul, stocks go up, and they earn better returns than things that don't entail similar risks-- like high-quality short-term bonds.
Yes, things can go wrong. But there have always been things to worry about-- always been worst-case scenarios. The best markets climb "a wall of worry."
As it has been, so shall it be. He's like the guy who wrote Ecclesiastes: nothing new under the sun.
He's never greatly alarmed. He never thinks the world has changed. And he's usually right.
A "new era," and "unprecedented development," a great catastrophe-- all these things are much rarer than are the declarations one hears that they are at hand. He didn't agree with me in 1999 when I wanted to hedge against possible losses from a y2k dislocation-- he didn't buy the scare talk, and of course he proved right.
That old medical adage well suits his world view: "When you hear hoofbeats, think of horses, not zebras." In other words, most of what patients will present your average doctor will be colds and indigestion and heart disease and other common ailments, while the rare diseases they heard about in medical school they'll likely only see in the text books. For every time a fever signifies some dramatic, news-making disease, a doctor will see a thousands of cases of garden-variety flu.
JS thinks horses. And he's been a valuable and faithful ally helping me deal with the various garden-variety challenges to my financial health.
But my friend JS also has the fault that goes with his virtue. The problem is, I'm not sure that JS would ever think zebras. Too sensible to ever be a Chicken Little, I suspect that if the sky started falling he'd not notice.
JS inhabits a world of normalcy. And sometimes --even if rarely-- history moves outside of what has been normal.
That's why in my most recent investment moves I have acted with his help, but without his agreement. You see, my friend JS sees the presidency of George W. Bush as American politics within the range of normalcy.
As a good, conservative fellow, and as one who's main community and subculture is entrenched in the world of business, JS is naturally inclined to vote for Republicans. He's a moderate person, and has no lust for the radical transformations that people like Pat Robertson or Tom Delay would impose on us. But as a herd of zebras have taken over his political party, he's been thinking horses. And though no great fan of George W. Bush --he'd never suggest that God had chosen him for his crucial moment-- he does not see anything unusual going on. And if the Republican Party has morphed into something completely different under his feet, he's not noticed it.
I, of course, see it differently. I see a degree of irresponsibility and even criminality unprecedented (at so high a level) in American history. It is because of what I see as the extraordinary, unprecedented nature of this moment in our history that I am working full-time to combat a regime my friend JS sees as within the bounds of the normal.
For me, the financial implications of this lawless presidency are less than secondary. But still, I suspect there might be such implications, and among my responsibilities is safeguarding the future for my family.
While I could very well be wrong about the purely financial dangers ensuing from the irresponsibility and criminality of this regime --JS might be right in thinking only horses with regard to the markets-- I do not doubt that I'm right about its dark nature. And, believing that the markets are largely made up by people like my friend JS who do not see what I see, I've temporarily shelved my hard-won wisdom that told me, some years back, that I ought not act as if I were smarter than the market. On this one point, I think I know something much of Wall Street is blind to. And so I've violated my general rule and I've been second-guessing the financial markets.
Though not convinced that there will be any great financial catastrophe, I feel the chances of some kind of break-out from economic normalcy is a good deal higher than the conventional wisdom--embodied in the market's evaluations of various assets-- understands it to be.
And so, couple of years ago, having no faith in the American leadership, I moved my assets mostly overseas, mostly to Europe. That worked out pretty well.
Then as this year wore on, I had still deeper misgivings. I started to sense a precariousness in the whole system --again, at least partly derived from the world's having lost, in Bushite America, any semblance of a trustworthy leader in either the economic or the geo-political realms. The nature of that precariousness semed such that it could threaten all the world's markets. I felt that it was time to hunker down: give up all possibility of meaningful gain in order to protect against major loss.
But I hesitated. I am not nearly rich enough to be able to secure my future while taking no risks by buying the three-year Treasury Notes I was considering. And JS was clear that he did not endorse any such move. What if I got out, only someday to have to get back in at much higher levels? History shows that "market timers" do much worse, in general, than people who get in and stay in.
But finally, in April, my sense of danger finally grew strong enough to overcome my concern about losing out on a rising market. With JS's help and counsel, I liquidated most of our retirement holdings and moved into short-term treasuries and the like by the end of April.
Since May 10, that's looked like a good thing to do.
Of course, this might just be a momentary correction-- the kind that happen all the time. Indeed, I actually suspect that's the case: there has not yet been any obvious financial calamity in the world to justify my sense of danger. A year from now, things may well be higher --even much higher-- than they were on May 10.
But then again, maybe not. I suspect that the market will sooner lose 15 % than gain 15% from where it is now.
With nothing being done to prepare for Peak Oil; with climate change coming on apace, while our "leaders" pretend there's no such problem; with the United States seemingly itching to take on Iran; with American domestic policies putting the squeeze on the middle class; with the Bushites still trying to cut taxes for the very rich while the budget deficit swells; with American political discourse having been so debased that the country is incapable of having an honest and constructive discussion of any issue; with huge trade imbalances putting the dollar at the mercy of governments friendly and not so friendly; with the American people binging on debt, spending for immediate pleasure the increased values of their houses in a real estate market that can fall as well as rise and generating a savings rate less than zero for the first time since the depths of the Great Depression; with the world's one-time leading nation now the object of suspicion even among our traditional friends and the object of counter-balancing coalitions among other major powers... with all that, I can imagine we could well be heading into times that are not like the "horses" we've come to think of as normal.
It is not often that history makes a radical break with the pattern set over the course of generations. But it does happen.
With my temperament, and my ancestral background, I may be inclined to attend to catastrophic possibilities more than a person needs to. During the Cold War, I worried about a nuclear catastrophe-- it didn't happen, though we came close at least that once. Since the late 60s, I've worried about the degradation of the earth's biosphere-- and that is a worry that I carry still. Nowadays, and most urgently, I fear the loss of our constitutional democracy. I think the probability of the rise of a full-fledged tyranny to be about a 15-20%. Not probable, but likely enough to be my main current concern. (And the damage already done to our polity is already both deep and widespread.)
My friend JS has an ingrained sense of continuity. And, serious discontinuity being rare, that makes him in the great majority of situations a sound judge and guide.
But for all of us it is a challenge not to meet every situation in too habitual a manner, not to assume that whatever challenge we are facing in the present is like the ones we're accustomed to from the past.
In this context, I recall a little fable told by the great 19th century American satirist, Ambrose Bierce. The fable is called "Philosophers Three."
A BEAR, a Fox, and an Opossum were attacked by an inundation.
"Death loves a coward," said the Bear, and went forward to fight the flood.
"What a fool!" said the Fox. "I know a trick worth two of that." And he slipped into a hollow stump.
"There are malevolent forces," said the Opossum, "which the wise will neither confront nor avoid. The thing is to know the nature of your antagonist."
So saying the Opossum lay down and pretended to be dead.
There are many millions of Americans who are presently stuck in their habitual modes of adaptation. And meanwhile, like the flood facing the Philosophers Three, dangers unlike what we've experienced before are threatening us.
Authors Bio:Andy Schmookler, an award-winning author, political commentator, radio talk-show host, and teacher, was the Democratic nominee for Congress from Virginia's 6th District. His new book -- written to have an impact on the central political battle of our time -- is WHAT WE'RE UP AGAINST. His previous books include The Parable of the Tribes: The Problem of Power in Social Evolution, for which he was awarded the Erik H. Erikson prize by the International Society for Political Psychology.