|
The Artist’s
Almanac
October 2008
download and print this installment as
a PDF
(you will need Adobe Acrobat reader to open this file, you can
get
it here free)
A rare bird on this earth, like nothing so much as a black swan
- Juvenal
In my wanderings over the past three
years I have made a new friend. He lives in a large log house
facing the Tollunteeskee’s Trail, the oldest Indian path in Middle
Tennessee. It was built by his ancestors in 1790 on high ground
overlooking his beautiful farm and the surrounding countryside. He
is no stranger to hard work and he is determined to hang on to his
way of life, which is passing, and to his home place. This week I
saw him in a cloud of dust cutting down his drought-ravaged corn
for silage. His soybeans also failed in this, the second straight
drought year. He does not expect to gross enough to buy even seed
and fertilizer for next year, not to mention fuel.
We, who do not depend on rain
for our livelihood, look forward to a beautiful October. Yesterday
the thermostat clicked on for the first time and I began rummaging
upstairs closets for corduroys. The air has a new clarity and the
Indians, were they still around, might call this the
‘time-of-shielding-eyes-against-sun-at-stop-lights’. Indian Summer
was for them as it is for us a good time for getting out and going
places – clear, dry, and cool enough for the searchlight sun to
feel good. We, sheltered by comfortable houses, our jobs or our
pensions, feel insulated from the whims of nature, and can enjoy
October color from our car.
The View from Poverty Hill
Plein air sketch made Sept 29. 2005 across the valley of Lick
Creek and Castalian Springs – Bill Puryear
Until this year. Despite football Saturdays, dove shoots, and
pumpkins, October feels ominous. The cost of gas, when we can find
it, food, and electricity are higher by half, yet government
reports tells us inflation is low. We cannot sell our house if we
need to; real estate is frozen in place. Banks lack capital for
small business loans and we worry that our even our cash in them
is not safe. When at dark we turn to television for diversion we
are faced with an unremitting stream of bad news and we are told
that we are in political revolution, witnessing the meltdown of
markets and even capitalism and are facing another great
depression. Are all our crops failing at once? Is our seed corn
safe?
Attending an investment conference of Universities and Foundations
last year I was given an unusual book entitled Black Swans.
Its thesis was ‘we never see the one that gets us’ – that however
we anticipate, diversify and prepare for all contingencies the one
that changes our lives most dramatically is the one we do
not anticipate – as rare as a black swan. September 11th is cited
as an example.
The book was poorly written and
pedantic and I threw it away. Besides, what he said was disproven,
for the prior year at the same conference we had heard from a
prophet, appropriately named Jeremiah (Grantham), about what was
coming down the pike. But like all prophets of doom, Gerry was
shunned. Wall Street with its banks of sophisticated computers had
designed an amazing new product – a blend of good, middling, and
awful fixed income securities called, variously, CDOs
(Collateralized Debt Obligations), ABS (Asset Backed Securities)
Residential Subprime Mortgages, Secured Credit Instruments, and
Leveraged Loans which, by using just the right statistically
proven diversified allocations might be redesignated as Triple A
credits. If the Rating Agencies and the Accountants could be
persuaded to go along with this scheme, as they subsequently were,
this would result in a vast new infusion of capital into our
financial system.
This indeed occurred, or seemed to.
Now, Mortgage Bankers, formerly limited to lending their own
deposits in their own communities to credit-worthy customers whom
they knew personally, were able to sell the paper around the
world. National Mortgage Companies advertised no-down-payment
loans to anybody calling in, pocketed the commissions, and the
investment banks spread these via the new exotic securities to the
world at large. The government sanctioned Fannie Mae and Freddie
Mac Corporations joined the dance, paying their politically
connected executives huge bonuses. Government Regulatory Oversight
was lax, yet banks were forced to make bad loans to bad risks in
bad neighborhoods in order to satisfy political correctness. The
effect of this was to create a huge bubble in residential real
estate as well as consumer spending, largely on imported goods
from China, as individuals used their home equity loans like
credit cards or bought homes they could not pay for.
Meanwhile volume and volatility was
growing in the equity markets. A device legitimately used by
holders of large blocks of stocks or commodities to insure
themselves against loss by selling what they owned today for
delivery in the future was developed into a new art form by a
group of short sellers. This was like going to a horse race and
betting, not that a horse would win, but that it would lose. Like
malicious gossip, it was an anonymous slander against a company,
and the companies hated it. The effect of this was to create a
class of securities that was not really a security, but an
anti-security, a black hole that sucked capital from companies
that needed it. It was gambling - not an investment, but an
anti-investment.
At the investment conference the
question was asked, but what if these new securities prove
uncollectible – what then? The answer was, not to worry,
there were companies setting up to insure against just such losses.
My question there, never recognized by the chair, was, who are
these insurers and who is large enough to underwrite such
potential losses? Now we know the answer – us, the US.
The investment bankers who invented
this new blend of sausage were too clever by half. The investor to
whom they were served up was rather like the young Anglican priest
breakfasting with his Bishop who, when asked how he liked his
boiled egg, replied ‘parts of it are excellent, your Grace.’
Only last week my wife was preparing risotto for our supper. We
assumed the black specks in it were a different color grain, as in
wild rice. Before tasting it we took a closer look at the sealed
jar it came in and its sell-by date of 2011. It was crawling with
weevil, deposited there as eggs years before. The seeds of the
destruction of our markets were sown years ago, and only now are
hatching.
The first lesson we learned in
Economics 101 was that banks create money. Borrowing from and
lending to known customers in their community with mutual trust
and regard they have made possible jobs, home ownership, new
business and the creation of wealth. Going worldwide through
layers of middlemen with fat commissions and unreadable
prospectuses is another case altogether. Trust has been sucked out
of the system and putting it back will take many, many years.
Those of us that thought we no
longer depended on nature’s bounty and the law of gravity were
mistaken. The complexities of our markets and of capitalism,
despite all the regulatory agencies and unreadable prospectuses,
do depend on fundamental natural laws – trust, truth and mutual
regard. Without these we are beasts.
It’s too late and too dry now to
plant turnip greens for this fall, but I may buy some seed next
spring and plant a garden. It’s more entertaining than TV and the
return is better than the markets.
Upcoming Events
|
