With the backdrop of the last recession many years behind us and with the investors and central banks of the world telling us the U.S. recovery is well underway. The worlds remaining localized financial problems are seemingly unfolding miles away from US shores. Yet, every month I find SA authors predicting pain in 2015. A pullback, a recession number theory, or some other kind of analysis that bolster their headlines. Personally, I think their predictions of future pain while accurate in substance isn't nearly as important as discussing the effects of capitalism and how the last recession will dictate how the next crisis unfolds.
Perspectives Of The Last Financial Crisis
Alan Greenspan blamed the last recession in part on human frailty. Greenspan said, "I have come to the conclusion that bubbles, as I noted, are a function of human nature." Most investors realize there is a whole world of other plausible explanations, with plenty of room for a range of discussion.
We can blame institutional failures. We can say that banking regulators were asleep at the switch. That a shadow banking system, engineered their way into a catastrophe they could not escape. The solution was of course that institutions had to be reconfigured and new legislation needs to be written. We might say the Dodd-Frank Wall Street Reform and Consumer Protection Act solved the institutional failure problem. But this of course sets us up for the next blame game and the next institution that will fail. This kind of circular crisis and legislation though isn't quite the panacea it might seem like.
Then there are those authors obsessed with an incorrect theory, they read too much John Keynes, Marx, Friendman or another particular author and they mistakenly believe in the efficiency of markets. Maybe if we all took Keynes more seriously the next crisis could be avoided, as if.
We could also blame cultural origins. We could say this is an American disease that caused this. Investors can engage in the kind of thinking that leads someone to believe a localized problem has nothing to do with them. The German press blames the Greek character for their crisis or for example. Some might blame the U.S. cultural value of homeownership, why are 64% in U.S. home owners, while only 44% are in Switzerland. Is it because home ownership is a deep cultural value supported by banks, mortgage interest and a tax subsidy? That it is a left over from a time in the 1930s that debt ridden workers will not go on strike.
Each investor writes their own story as to the causes of the last crisis. So I thought what kind of article can I write that is none of the above. What kind of article will explain the next crisis and how to invest for the next crisis?
Is Kool-Aid Good For You?
There are many whom believe the current recovery is little more than financial ingenuity. The U.S. Federal Reserve's stimulus programs have been dreams come true. The current recovery is a bedtime story of how the money got together at the right place, at the right time and at the right volume. That's financial ingenuity and financial innovation, which always has the effect of empowering the financiers. The result is of course that the U.S. is now well into recovered financial market. The Dow Jones Industrial (NYSEARCA:DIA) has shown tremendous growth over the past few years.
Many investors believe that capitalism as an economic system never solves its crisis problems, it moves them around geographically. The problems that we can see today of course are the Russian ruble, the repeated and continually discussed Greek exit from the euro, China's diminishing growth and the less discussed rising wealth inequality across the globe.
The current solution can be summarized with the idea we were able overcome the problem of effective demand by pumping up the credit commodity. Everyone says, the U.S. is in recovery, meanwhile the rest of the world is now looking a bit weakened.
Now many other nations are looking at the solutions the U.S. implemented and are cooking up their own versions. The EU has its own version of QE, China has its own version of loosened monetary policy. Several nations are lining up to drink the same Kool-Aid. Each nation looking for a result that will likely be similar to that of the U.S.. The question on everyone's mind, when indebtedness and valuations spike again, what will happen? The other more important question is, where is the growth going to come from? What is going to drive the worlds growth?
Incremental Increases In Efficiencies - Part 2
Which brings me to part two. How to invest for the next crisis? The simple answer, I invest in simple economies which can only have small incremental increases in efficiencies and cannot be disrupted by advances in one of the pillars of global growth. To learn what I mean by this you'll have to stick around for part two of my thoughts on Kool-Aid capitalism.
Disclosure: The author is long VTSAX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Waxing philisophic about the nature of economies is just plain fun. I grew up and went to school and didn't learn anything about about the worlds economies. After all, how do you teach people about the economies of the future when we can't anticipate what the economy will look like next week. Simply, we can't invest like we did in the past, we must invest for the future we imagine.