S&P up 10% YTD
March 9, 2013 was the forty eight month anniversary of the bottom of our recent global financial crisis. On Monday 3-25-13 Cyprus was filling leading financial headlines around the world. The story was full of dread and panic that the Cypriot banking system was on the verge of collapse and that it would begin a domino effect into other banking systems in southern Europe.
My first reaction was confusion that I had not heard of this before. Was now the time that a big shoe was ready to drop on the wonderful market run that has recently blessed global equity markets? When was the last time the Cyprus was in the headlines? Difficult questions for sure. With some basic reading I learned that Cyprus has a population of less than 600,000 residents (about the same population as Albuquerque, New Mexico) and around .2% of the Euro zone economy. The popular tourist destination is also a center for Russians looking to expatriate their wealth beyond the reach of their mother country.
According to The Economist from 3-16-13, “Cyprus is a small island with an outsize banking system. Thanks to a growth strategy based on becoming an offshore financial centre, particularly for dodgy Russian money, the balance sheets of Cyprus’s banks soared, reaching 800% of GDP in 2011. Several banks had big exposures in Greece. When Greek debt was restructured, they were hit hard.”
Cyprus is another example of a series of financial / media events that can look important and frightening only to fade quickly from market psychology. The reality is that offshore banking for “dodgy” assets is inherently risky. This is not an indication of much more than some ironic justice being rendered on bank depositors trying to evade their home government.
Here is a short list of recent events that were cited as beginning points of what seemed at the time like a potential domino chain of disaster:
For complete timeline see http://timeline.stlouisfed.org/index.cfm?p=timeline
Failure of Bear Sterns
Bank of America acquires (failing) Countrywide Financial
Bank of America acquires (failing) Merrill Lynch
Failure of Lehman Brothers
Federal takeover of Fannie Mae and Freddie Mac
The TARP
Executives of Ford, GM and Chrysler testify before congress and request access to TARP loans
Federal Reserve Bank of NY begins lending to AIG
American Recovery and Reinvestment Act of 2009
S&P Downgrades credit rating of USA
Debt ceiling debates and political deadlock
To the above list we can then begin to add all of the headlines and events from Europe regarding Iceland, Ireland, Greece, Italy and Spain. It is remarkable that this has all transpired over the last five years and yet the sun still rises in the East…
So where are we now? The market is up 130% or so from the lows of March 2009. Housing prices are beginning to rise. Car sales are up. Unemployment is declining at a (stubbornly) slow pace. Our elected leaders are lurching from one standoff to the next. The same old story, right? Not Quite… Back on the home front, we have just been handed the best first quarter in US markets since 1998. The demand for quality US equities is robust and growing. “All time highs” on the Dow and S&P notwithstanding, it is quite possible that this trend may have some real power to drive the market further and significantly past what many “experts” have forecasted.
When global market psychology changes, prices will be impacted accordingly. The market has not appreciated significantly since the early 2000s. This is quite unusual. Value of quality assets tend to rise over time. It is likely that the market is catching up from this long period of stagnation. In the face of what seems to be insurmountable challenges, progress and innovation go forward. It is often so easy to think about what can go wrong. Lots of things are going to go wrong for sure. Bad events, be they wars, natural disasters, financial disasters, are a constant of our human condition. Yet, with each challenge, the spirit of man rises and climbs beyond.
On 3-29-13 I was struck by a piece in the Wall Street Journal http://online.wsj.com/article/SB10001424127887323361804578390772458161986.html?KEYWORDS=Mom+and+Pop+run+with
The Journal article delves into the recognition by retirement savers that they need to be in the market. This dynamic has been created by …rising prices!? That’s right folks. Now that prices are up, people want to …buy high? “When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling “sucker punched”, she says, they swore off stocks and put their remaining money in the bank.
So when prices were low, these doctors arrived at the remedy…sell low. In 2008 it was very, very difficult to not feel the way that the Whites felt. Recognition of the reality that lower prices usually do not lead to even lower prices was a leap that many retirement savers could not see. The crucial vision that we all have to have is that investing is an act of OWNERSHIP. Sometimes things are not going to go well for the owners. Thinking like actual owners of businesses can help immensely when the fear in down times creates an impulse to flee.
Later in the WSJ piece, the quote “I don’t want to lose all my money in the stock market”. This the classic emotional statement that makes little sense in light of long term market history. Fearing complete destruction of a moderate diversified portfolio is something that seems utterly irrational. As stock and other asset prices went lower during the crisis psychology of 2007-2008, they eventually became attractive to buyers. That is when the market began to turn. For investors that persevered and continued to behave like owners of businesses, the whole cycle passed without the need to make decisions like “getting in” or “getting out” of the “market”. We can just keep owning great companies like Home Depot, Exxon, Google, and Berkshire Hathaway, etc.
All of this optimism should not crowd out the reality that unemployment has stayed quite high and that even more Americans have simply left the workforce permanently. For perspective on this issue, I highly recommend the recent piece produced by the popular Public Radio show, “This American Life”, episode 490. http://www.thisamericanlife.org/radio-archives/episode/490/trends-with-benefits
It is quite difficult to hear in great detail how so many American workers are applying for Social Security disability benefits (SSI). It seems that the complexity of our modern digital and technology driven economy is leaving scores of workers behind. Once again we are reminded in the NPR piece as to how our government programs that were initially designed to help many of our most vulnerable citizens are now being exploited in many troubling ways.
It is imperative that we all strive to facilitate the evolution of our public education system so that many more workers can participate in the wonderful opportunities that await us all. The areas of opportunity can be seen in energy, manufacturing and the endless growth that is the modern digital world. It all comes back to work and sacrifice that is not as apparent in light of the staggering disability statistics.
It is very possible that the United States is at the doorstep of incredible opportunities in manufacturing and workforce growth. The trends in offshore manufacturing are changing in interesting ways.
A recent piece on Bloomberg.com http://www.bloomberg.com/news/2013-03-26/foxconn-plant-in-peanut-field-shows-labor-eroding-china-s-edge.html
discusses the erosion in wage advantages that China is now experiencing. The rebound in American manufacturing efficiency and competitiveness is a story that has been repeated more often in financial and mainstream media;
“The gap between manufacturing costs in the U.S. and China has almost halved in the past eight years and will fall to 16 percent this year, according to Hackett Group Inc., a Miami- based consulting company. That’s a “tipping point” that will prompt some companies to shift factories back to the U.S. or to destinations nearer consumers, says Hackett, which lists customers including Pfizer Inc., Microsoft Corp. and Boeing Co. on its website.”
Could it be that we may be witness to a renaissance here in the US that will help more people participate in the good fortune of a growing domestic economy? It seems quite probable to many experts. I would like to think that that strategic mindset of the (business owner) long-term investor will be a great way to benefit from the dynamics that we are now witnessing. Stay tuned, and stay invested.