The Blame Game May 2010
What caused the financial meltdown and subsequent recession of 2008? The following effects seem more apparent than their causes:
- Nearly a 10% adult unemployment rate. For American teenagers, the jobless count is off the charts. Not surprisingly, the fixed costs of employees have never been higher.
- Toleration of gigantic federal budget deficits is mind-boggling. As a result, the aggregate national debt will move beyond levels that many experts believe are sustainable.
- While the federal government still borrows cheap, interest rates available to savers have been next to nothing for a long time.
- Government sponsored entities regulated by Congress dominated the home mortgage industry before the financial collapse and they are dominating the market more than ever in 2010.
- Despite experiencing the very first domestic energy crisis in 1973, thirty-seven years and eight administrations later the U.S. economy is more dependent on foreign oil (60%) than ever before.
- Nearly every state budget in the nation has sunk into red ink thanks in great part to unsustainable promises made to working and retired bureaucrats. In Greece this sort of predicament has brought that nation to the brink of bankruptcy.
What are elected officials from both political parties in Washington doing in the face of these systemic problems? They are doing what they have always done, only with ever-greater frequency. They are simply looking for someone to blame so it “appears” they are doing something instead of nothing. And while the latest popular scapegoat themes have validity, we find it ironic that in the face of all the implied outrage in Washington that most Wall Street investment houses continue to maintain their insidious ties to elected federal government officials through floods of influence-purchasing campaign contributions. In fact, so powerful has the federal government become these days that the initial crisis response of Wall Street firms was to seek government assistance early and often to repair damage done by their own ridiculous blunders. So, it is worth keeping in mind that while Goldman Sachs executives received their obligatory public flogging in late April on Capitol Hill, few of the perpetual hypocrites in Congress were willing to concede that it was under their watch that Goldman (and other favored entities) were allowed to issue government-guaranteed bonds and notes at extraordinarily low interest rates helping to pave the way for their private recoveries.
Let’s peruse the scapegoat landscape and see what else is going on out there.
We read an article a few weeks ago that said: if America is looking for a scapegoat, it should NOT point to the under valued Chinese currency (yuan), as some American politicians do regularly. Instead, it was suggested, we might consider blaming the process known as “globalization.” Of course the term globalization is merely a code word for the difficulties resulting from good old fashioned “competition.” What about this “competition” thing?
When the American nation was a bit younger and less complacent school children were encouraged to prepare to climb living standard ladders one rung at a time and expect to “compete” vigilantly in the marketplace for economic benefits. What has changed? The answer seems clear. There is now a firmly entrenched competing economic philosophy to the old fashioned “one rung at a time” merit-based approach to prosperity. These days the idea of simply cultivating a rich sense of entitlement has found a huge following.
Why has the nation increasingly chosen to whine and borrow instead of compete and achieve? Again the answer is simple. For so-called leaders, it has been made much easier to conjure up images of high profile scapegoats when explaining the gradual reduction of readily accessible economic cookies. The idea of doing all the work necessary to compete is an increasingly tough sell as the entitlement mentality has metastasized. Accordingly, American politicians have become ever more engaged in the process of identifying politically plausible scapegoats and justifying reasons to promise and borrow. These are now the primary job descriptions of successful American leaders in both parties.
The signs are everywhere. No doubt the effectiveness of the American public education system appears to be permanently impaired. Never before have we spent more. And never before have we gotten less. Each year there is a shortage of students that are sufficiently proficient in math and science coming out of American public school systems. While smaller more nimble charter schools like KIPP in the South Bronx produce academic achievement, their remarkable successes are down played. Why? Entrenched bureaucratic interests are adamant about keeping control of the hundreds of billions of dollars thrown at public education. And these interests provide incredible political barriers to enacting sweeping reforms that would lead to greater academic achievement.
The results of the failure of America’s primary public education system are unmistakable. Many graduate school slots in the most important fields are occupied by more qualified foreign students- mostly those born in countries where emphasis on academic competitiveness is more focused than here in the U.S. or in Western Europe where instead the blame game is the favorite pastime.
The mindset of blame assignment and unearned entitlement has become so entrenched in the national culture it has actually spawned a thriving growth industry. The greatest domestic beneficiary of the blame industry is……the American Bar Association. When attorneys began advertising a few decades ago, they increasingly found that running local, regional, and even national ads was quite useful in the production of lucrative complaints. And while virtually every other business has developed a litigation weary attitude bordering on obsession, at least in the advertising community, with the proliferation of lawsuits, we see a pocket of prosperity with attorneys buying more and more ad space and piling more and more expensive lawsuits on the back of the U.S. economy.
Many best sellers at American book stores often offer nothing more than blame targets as themes. In the 1990’s a great American success story, Microsoft, gradually descended from an admired source of home grown wealth to the role of favorite whipping boy of domestic finger pointers. Despite donations of billions of dollars by Bill Gates to charitable causes all over the globe, critics seem incapable of tempering their indignation and wrath towards the competitive commercial edges created by Microsoft. These days Wal-Mart often takes on the role of most favorite target for ultimate pariah honors in the national “blame game.” However, the list of other popular scapegoat favorites is almost endless. Find American business stories that succeed on a grand scale and the envy peddling political detractors will be close by looking for ways to question their profit motives and their contributions to society.
Despite the whirl winds of confusion caused by the blame games swirling all around us, as investors we realize the process of identifying securities offering competitive rates of return is still the name of the game. Increasingly, we recognize that our success requires an understanding that we are operating in an investment world where the relative merits of our choices are being constantly transformed by America’s national obsession with the blame game.
Constantly navigating the landscape of fixed income instruments requires an ability to consistently define and re-define what constitutes “competitive.” What makes a fixed income investment “competitive,” particularly in the post-banking system meltdown world, is high credit quality. The primary characteristic of any good interest bearing instrument is that it is relatively “safe.” These days there are fewer and fewer instruments that still fit this narrow definition. Accordingly, we have become the Groucho Marx of lenders. We tend to refuse to buy any interest bearing instrument that will generate a “high” rate of return, even if the glitzy sales pitch from a Wall Street investment house is impressive.
Fortunately, the task of performing superior common stock selection has not changed. This endeavor has always been about evaluating competitiveness. Great companies have, by definition, always managed to compete and compete well. And any company seeking sustained greatness must make managerial decisions that continuously produce competitive advantages that are not only superior, but durable. We are happy that there are still companies that fit this description despite popular culture’s ongoing adoption of the entitlement mindset.
So, while we lament the abandonment of a competitive attitude in pop culture, the idea of identifying “competitiveness” must remain the cornerstone of our investment thinking. And of course, when we misjudge competitive circumstances, we have nobody to “blame” but ourselves.
Spence Asset Management, Inc.2455 E. Missouri Ave. Suite C Las Cruces, NM 88001 575-556-8500
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