CNBC’s Rick Santelli's calls for a Chicago Tea Party (here) are patriotic, American, and on point. A Chicago Tea Party is what our rabble-rousing founding fathers envisioned, and I will be there this July 4. Santelli’s diatribe of genius, fury and heart had one quick quote that you may have missed.
“Don’t get scared, Joe. They’re already scaring you.”
We are being scared into a submission. It’s not “their” intention, but you know that road to hell. We cannot submit. We have not so utterly gone down this road.
Our government started this race to bottom in the dark days of November, 2008. This was about the time I decided that Paper Is Dead.
Paper Is Dead
Jim Cramer has a post on TheStreet.com that you can read here. It is frightening that Cramer – whose life and repute have been tied to cheerleading the market – is citing the death of “paper”. To quote:
“The changes are so vast and so overwhelming that you really can have only one takeaway: Why did we ever come to trust this paper? Why did we have so much faith in it? Because the actual indictment here isn’t of the companies themselves, it is of an asset class that sheds value with a velocity that just didn’t seem possible even one year ago.
“I, for one, find the exercise sobering because the carnage, which we think is contained largely to financials, has really spared nothing, no sector, no group. And it is obvious from this week’s action that the crunching has got a way to go before it is done.”
Ours is a time of moral hazard. We launched into this time, this world, because our elected representatives wanted to ease the pain. But the pain must come. The pain is healthy.
Government intervention killed paper, and it keeps killing paper and the promises that this paper was meant to keep. When General Motors’ (GM) bondholders are locked out of dialogue about how to run the firm, they are left only to watch their bonds’ values plummet. Without the stick that their bonds promised, they might as well hold Confederate scrip.
That government intervention would lead to moral hazard was apparent. You can read my blog-post of November 12, 2008 here. Or below, in its entirety.
Paper Is Dead
Nov 12, 2008 – Financial paper is a promise to pay. Consumer or Company Debt is a promise to pay so much at certain intervals. Sometimes this promise is ordered and orderly, as in corporate bonds. Sometimes this promise (consumer credit card debt or commercial paper) is free-floating.
In any event, paper is only a promise.
Corporate common stock is similarly a promise to pay… as in, you get what is left after all of our firm’s other promises. Any CPA can tell you that.
Corporate promises have gone out the window. The (increasingly jumbled) government intervention – thanks, Hank, for today's press conference – has made it such that ALL companies’ promise to pay is suspect. This is the moral hazard of which we have been warned. If GM is let out of its promises, why not KBH (KB Homes)? Why not Comcast Cable (CMCSA)?
Why not any other company that has issued “paper”? Isn’t today’s wisest choice for any established company’s MBA to urge a rush to the bottom? That is, show a terrible “loss” at company XYZ - why not General Mills (GIS), Sun Micro (JAVA), or General Dynamics (GD), and apply to suckle at the government’s teat?
There are two answers. The first is that is that the broad market for paper – or the promises of established companies to pay – is dead.
The other answer is that the real money is going to be made by brand new companies that don't have any traded “paper” out. These are the simple start-ups who have to meet their obligations, because their very existence is dependent upon such. They are start-ups who cannot rely on any interventionist government to come through with today’s or yesterday’s bailout.
You can look around at the paragons of today’s economy for the Who’s Who of companies or brands that were started in similarly “bleak” environments. They are Intel (INTC). Cisco (CSCO). Apple (AAPL). Snapple (DPS). Charles Schwab (SCHW). (Go back to the Depression and the list of icons grows innumerable.)
Welcome to the new economy.
Let the creative destruction begin.
And all praise this creative destruction. Those start-ups who choose to battle on, in today’s heavy fogs, will be the brands and companies that drive the world of tomorrow.
Washington: let the creative destruction begin. We know you can’t stay out of the way wholly, nor should we want you to. But you need to uphold the contractual, legal, and moral promises that those who sold the paper made to those who bought it. The chains of preference implicit in each person's role must have value, and that value needs to be unlocked.
Let scarce capital be allocated to the newest, hungriest and best. For established firms, let the bondholders join the dialogue and not be captive to zombie managements who only hang on. If management’s path is the best, the bondholders can decide.
We have to make paper, and the promises written on it, stand for something again. Until we do, paper is dead.
The Chicago Tea Party
In the long run, we are not all dead. In the long run, we die and future generations live on.
I do not care one whit if I am able to pass on to my children the consumerist, leveraged, falsely prosperous America that we may have had for two decades.
But I will be damned to hell if I do not pass on to my kids what it is to be American. Capitalist. Striving. An America where the best and brightest succeed, a promise has meaning, and there is consequence.
Markets ebb and flow. I think we bottom early March, rally up into summer.
This is not about the markets. Rather, it is about what makes markets – what makes those pieces of paper have and retain value. We are Russia if promises are not kept, chains of preference not honored, and apparatchiks select winners and losers.
So ours is a quest for a nation’s soul. Santelli’s answer, mine or yours may not be the right one: the searching is the thing.
This July 4, join The Chicago Tea Party wherever you may be. All else is silence.