The last 2009 issue of the Economist had an interesting article on Americans and optimism. In case it wasn't already well known, the article says that we are a very optimistic people. Which may be great from a psychological point of view, though I wonder if we are so optimistic why sales of anti-depressants are so robust and why shrinks make such a good living. But from an investing point of view, it is quite tricky to be a realist (a term I prefer over pessimist) in an optimistic country.
After graduating from medical school in India, I spent a year in rotating internship prior to residency, and during that time I undertook a 3 month rotation through psychiatry. It was an enlightening experience, and while I swore never to go near a psychiatry program, I did begin to pay more attention to human behavior. With that perspective, coming to America was quite amazing.
This was in 1986, with Reagan's sunny optimism in full swing. There was reason for some of that optimism - new companies were being formed, new technologies being invented, taxes being lowered. With Clinton in the 1990s, it appeared that a time wrap had taken us back to the roaring 20s. But by 1998, the euphoria had reached a level that I considered unsustainable. What were the internet companies really offering? Eyeballs instead of revenues? I began to buy puts. Soon, I understood the saying that the markets can be irrational longer than you can remain solvent.
By 2000, I was out of the market, no calls or puts. So the recession of 2001 - 2003 was not a surprise to me, but the subsequent rebound was. I guess I learned the meaning of another Wall Street saying, don't fight the fed. But if you look at maximum periods of stock market gains, they occur when some new technology has altered the environment. For example, in the 90s we had the internet, telecommunications, PC revolution, etc. But in 2003 - housing? Fed's loose monetary policies?
By 2006, I began to go short again. This time I stuck to housing and the dollar. Overall, that strategy worked out okay. I'm now largely in cash.
What do I do with that cash? How do I invest in an optimistic country? Despite the 10% plus unemployment, I still don't see real signs of desperation. I talk with my patients to ask them how they are doing - they complain about aching joints but despite horrible finances, seem blase about it. A case of la belle indifference? The politicians still seem out to lunch (with their lobbyists, no doubt). Deficit financing continues and future inflation looms large. On Dec 25th, Nightly Business Report had a special on careers for the next decade. On the list - health care advocates, translators, Asian business specialists, and immigration specialists. This is going to make the US richer? While the competition from countries such as China keeps getting tougher? Our patents stagnate while those from countries such as China and Korea keep increasing?
Where is the V shaped, 5% growth going to come from? Jim Grant, who has forgotten more about economics than I will probably will ever understand, wrote an op-ed in the WSJ that the steeper the downturn, the more rapid the rebound. But, Mr. Grant never explained how this would take place, what industries would lead us to the "rational exuberance". I've been reading various pundits for the past six months, and not a single optimist has shown me exactly how a SUSTAINABLE rebound will take place. Especially once the government's stimulus program runs out. Americans were once brave and willing to take risks, not just for the short term but with a longer term horizon.
Railroads, steel, airlines, etc were not built overnight. Now it seems there is a short term mentality with little long term vision, the same short term mentality that drove folks to flip houses and sell CDOs they didn't understand, except that they could make oodles of money in a few days. In the pharmaceutical sector, where I have spent 15 years, everyone (VCs, large pharma, even large biotechs) shuns risk. Everyone wants a proven drug, preferably proven in phase II. So who is going to take the risk of getting to phase II? For my biotechnology company (which has proven oral TNF antagonists), I was amazed to find out that even state sponsored incubators are leery till you are pretty much a slam dunk. Risk aversion is not the fertilizer for innovation and growth.
One standard line I come across from optimists is that over the long term, stocks outperform all investments. Another thought process, as Mr. Buffett seems to like, is that you don't bet against the US. Both these lines of thinking assumes that the future will duplicate the past, and the US will continue to grow in the future as in the past. But if you read the fine print in some mutual funds, past performance does not guarantee future performance. If it were, the Greeks, Egyptians, Indus Valley residents, and the Romans would still have their empires. But they don't and as The Buddha said, everything is transient. So there are no guarantees that America's power shall remain forever unless we work hard at it.
Are we working hard at it? This brings us back to psychiatry and human behavior. The human mind is an amazing object - capable of great insight as well as great deception, to others as well as to oneself. However, beyond a certain point, the trauma it suffers takes a toll, and it shows up in psychiatric diseases (anxiety, depression, mania, etc), psychosomatic diseases (conversion reaction, etc) or physical diseases (such as fibromyalgia). One of my patients is convinced that as long as I inject her trigger points, her fibromyalgia will be cured - despite the fact that her real issues lie within her head.
Unless the underlying issues are dealt with, medical treatment is ultimately futile. In the body politic, the same applies. Unless the underlying issues are dealt with (for starters, social security, medicare, medicaid, and all the other mandates, deficit financing, debt and congressional pork), the country will suffer. So it sometimes seems that by being optimists, we can say things are not that bad, and we don't have to take difficult decisions or make hard choices. We can listen to speeches of how America's best days are ahead of us (John McCain) or that we are the change we have been waiting for (whatever that nonsense means). But, as the past 11 months have shown us, nothing has changed - at least not for the better.
So, much as I would like to sing Kumbaya, call me a skeptic when it comes to prognostications about 5% growth and V shaped recoveries. All the investments that I can think of seem to be of the negative kind - gold and TIP (due to inflation and collapse of the dollar), TBT (betting against the US treasuries), etc. Much as I would like to agree with Mr. Grant and Buffett, I will have to quote The Buddha as I finish:
"Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense."
Disclosure: No positions