Maximum Optimist
Autumn 2008
We said goodbye in July to the investor, philanthropist and knight, Sir John Templeton.
Born into a poor Tennessee family, he worked his way through Yale,
attended Oxford on a Rhodes scholarship and landed on Wall Street in 1939.
Nearing the end of the Great Depression, he borrowed $10,000 to invest in 104 companies.
His forward looking investment made him a very wealthy man by the end of WWII.
Far from practicing his investment philosophy of “buying at the point of maximum pessimism” personally,
Templeton remained an incurable optimist throughout his life, using the “point of maximum pessimism”
to describe the outlook of others.1
News
It is hard to believe that the first thing most Americans heard about this mess was the August 2007 headline “Subprime Sinks Stocks!” While the market did stumble for a month or two, the Dow Jones Industrials went on to post an all time high on October 9, 2007. But in a classic tail wags the dog, the tremors of August rumbled January like an overloaded freight train. The government-led forced sale of Bear Stearns in March reinforced investors’ confidence in the system to reign in, what at the time looked like a serious but single investment bank failure. Markets rallied through April and May setting the stage for June’s dramatic fall, ultimately hitting an official Bear Market on July 3rd.
Like the late ’70’s TV ads for the Ginsu knife would spout: “But wait folks – there’s more!” July brought reignited fears of the instability of the financial sector with IndyMac Bancorp’s failure. Rumors of the failure of Fannie Mae and Freddie Mac in early September were almost unfathomable, but fail they did – right into the arms of government conservatorship launching what I believe was a “permission slip” from King Henry and Gentle Ben to fail if you want to – we (the government) are here to save you. But in an inexplicable turnaround, Messrs. Paulsen and Bernanke let Lehman Bros. declare bankruptcy on Sunday September 15th only to do the Teaberry shuffle two days later with the immense federal bailout of insurance giant AIG.
About this time in our story, ol’ King Henry went on up to Capitol Hill wagging his finger at our fearless leaders threatening them with the worst of the worst if they didn’t pass his meager $700 billion request to fix the mess they had made. My guess is they didn’t like being found out so they did nothing for a week just in time to let the nation’s largest bank failure happen before their eyes. Yup, your WaMu accounts were magically turned into JP Morgan Chase accounts at fire sale prices. Thanks guys. And, just to be sure that everyone was scared by now, Wachovia Bank almost collapsed just prior to the story’s heroes in the House of Representatives delivering a $700 billion baby gift to future generations of Americans. Pass the Pepcid, please.
Commentary
These are challenging and at moments, disturbing times for you and all Americans as we witness unprecedented events unfold almost on a daily basis. No one is immune from the affects of this widespread financial meltdown. It is exactly at times like these to remember that your financial and investment plans were designed thoughtfully and purposefully and that wholesale changes to them based on reactions to market conditions is typically not a good long term decision. We have made defensive moves in your portfolios throughout this time and will continue to prudently respond as conditions warrant.
Even after passage of the Congressional plan, history would indicate that while we may not be at the bottom, we are within striking distance. My guess on a recovery is that we have a 40% chance of going the way of Japan (a decade-long period of slow growth after an incredible housing bubble) a 60% chance that we will have a 2003-like market that took off like a rocket and a 100% chance that it will not be either. 2009 may be a slow growth year as the housing/credit/mortgage bubble dissipates, but I hope I am wrong. Much depends on how events pan out over the next few weeks and months. Oh, and maybe the elections too.
Ideas
I am using this quarter’s IDEAS section to give you an “idea” of how we got to this point based on the facts as I have researched them while at the same time acknowledging Warren Buffet’s quote that “It is better to be approximately right, than precisely wrong.” So who is the true bogeyman behind this horror show and what caused the dislocation of our financial markets? I was recently interviewed on the radio about this very topic and would direct you to our website for the archive of that audio.
Any respectable account of history starts with a beginning and this story starts with the Community Reinvestment Act - a well-intentioned Carter era law designed to encourage minority homeownership - a good thing by anyone’s account. However, the Clinton administration put this Act on steroids bringing in “Fannie Mae” to help out. Lenders were steered into lending practices that would have had their board of directors’ heads spinning a decade earlier. How times change. Banks, no one’s fool to be sure, rewrapped those sub-prime mortgages like duplicate wedding gifts, and passed the risk down the line to those ‘helpless’ investment banks like Lehman Brothers and Bear Stearns (remember those titans?). Unfortunately, the housing bubble, aka “Flip This House”, ended like every other fairly tale of wealth for no effort - in a smoking heap.
As soon as banks began demanding some kind of value for the mortgages that their competitors had on their books, the jig was up. Seems like due to over reactive accounting rules setup by the Congress after Enron’s collapse, everybody had to start valuing the assets on their books as to what they thought they were worth today, rather than what their inherent value was. Last time I looked, bricks and mortar were not worth zero, but that’s how WaMu and IndyMac had to value themselves and puff they’re gone! Don’t get me wrong, these boys certainly took advantage of the ‘relaxed’ lending standards - but mortgages worth zero? Come on.
That brings us right up to the moment with a bill from the hyper ventilating Congress that supports buying bad assets from questionable banks and may not address the hangover from this mess - liquidity. It seems that banks are really reasonable sorts of fellows after all. They just want to know if the party they lend money to will be there when the check comes due. Just like you and me. The problem is that the focus on Capitol Hill has been how fast can we get these bundles of money out in front of the train called the presidential election - not, “is this Constitutional?”, or “should we have hearings?”, etc. Call me crazy, but this is a lot of money folks. I think if it took a less-incensed Congress 5 months to figure out the Resolution Trust Corp during the S&L Crises, it should take more than 5 days for CNBC to expect Barney Frank to come up with a solution.
As always, I remain unsinkably optimistic in the American entrepreneurial spirit - one that has solved problems of greater magnitude before. The only reason I am hedging my bets is that the collective press has not been so pessimistic and gloom & doom in my lifetime and maybe yours. Shame on them for fear-mongering and mischaracterizing what is certainly a serious event, but come on - it’s time for Maximum Optimism.
Gregory T. Busch, CFP
Clarus Financial, LLC
1World Magazine; Warren Cole Smith; July 26, 2008
This newsletter and the ideas expressed herein are my own and is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any security discussed herein.
Information and any statistical data contained herein is obtained from other sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.
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Autumn 2008 »
Maximum Optimist
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It’s Déjà Vu All Over Again
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March Madness
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Year In Review 2007
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Roller Coaster Ride ’07
Mid-Summer 2007 » A Mid-Quarter Briefing From Clarus Financial
Summer 2007 » Mission Accomplished
Spring 2007 » Our Interests May Not Always Be The Same
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The Year In Review
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FILL’ER UP
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Summer Doldrums?
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Presidential Cycle: market indicators for an uncommon 2nd term president