Observations – December 2008

The headlines have been continuously harsh - the US economy is suffering from a titanic credit aneurysm. Plaque in the form of speculation and greed accumulating over many years has finally caused the blockage of the primary credit arteries in our financial system. Trust and confidence, the lynchpins of a free and capitalistic society, have mostly disappeared at this writing. Our collective immune system has been overrun by panic and fear – a normal response to an economic plague for the century. A detailed diagnosis with appropriate remedies and therapies is not available because this pandemic is bigger and deeper than ever seen before. But the short to medium term prognosis is not good:

  • Continuing and deepening financial and economic pain – for all – and everywhere; illiquidity and insolvency are recalcitrant issues – the US business landscape is undergoing a transformation
  • Some therapies will simply not work, but will be vociferously supported by posturing politicians
  • Other remedies may unfreeze the credit arteries (financial bypasses), but these prescriptions may cause severe side effects that will linger long into the future
  • Regaining strength will be a long, slow and arduous process, and require moderating risky financial behaviors, overcoming fear, re-building trust, and just plain old hard work
  • Humor will be in short supply – we are heading into a time of lament and the blues
  • Determination, focus and teamwork will be required globally, and at unprecedented levels

The grim signals of high cholesterol levels in our way of life were diagnosed years ago. There were warnings, and worrisome indicators have been reported along the way: years of easy money, outrageous executive compensation arrangements, escalating leverage as a way of life, a drumbeat for the consumer to spend using credit cards, unwillingness (or inability?) to save, trade and budgets in deep and enduring imbalance – as a nation, we have been blinded by our own collective incandescence. And now, the mortgage apparently is due on our castle in the air, as the expression goes.

But amidst the wailing and gnashing of teeth, here is what I come up with in the way of a silver lining:

  • Broadly speaking, change is good – never easy – but ultimately should produce positive outcomes (e.g. working closely with Europe, Asia and Latin America to sort it out, and plan more effectively) – convulsive change is especially difficult, and even wrenching
  • Re-pricing and re-balancing represents a necessary and ultimately favorable phenomenon in a competitive world
  • Technology will continue to drive greater market efficiencies and higher productivity levels
  • The growing power of communities born out of the internet – unification of mutual interests and a spirit of collaboration and sharing – we are all in this together
  • Emergence of new product and market opportunities that show promise in alternative energy sources, nanotechnologies, waste removal and treatment strategies, environmental quality and protection, recycling as a way of life, new and more cost-effective healthcare service and delivery paradigms, virtualization, robotics, biopharma, to list a few
  • Stable (and low?) interest rates, descending petroleum (and commodity) prices, negligible inflation

And finally – this pithy comment represents a great lesson from the master investor: “It is only when the tide goes out that you learn who has been swimming naked.” (Warren Buffet)