March 22, 2010

RAGE
On February 12, 2010, Professor Amy Bishop, upon learning she was denied tenure, goes on a shooting rampage and kills a number of her colleagues; On February 18, 2010, amateur pilot Joseph Stack intentionally flies his small airplane into the Internal Revenue Service building in Austin, Texas killing a number of  IRS employees. Are these cases isolated incidents caused by unhinged individuals with faulty brain chemistry? Or, alternatively are they the result of the perfect storm that can result when unstable  individuals become caught up in   the anger and frustration permeating the larger  society today.

I can state with some conviction that many of you are angry out there. I don’t need to rely on a barrage of media reports showing frustrated citizens shouting or holding signs, to know this. I come to this conclusion by talking to you everyday and meeting with you about your finances and or estates. Some of you are angry about Wall Street and irresponsible behavior, some are angry at the government and how it (mal)functions, many are angry at Congress , many are angry about rising health insurance premiums and almost everyone seems to be angry about taxes. Republicans are angry with Democrats and Democrats are angry with Republicans; Many of you are angry with the President, and many of you are angry with those who are angry with the President. You may be angry with your neighbor, your sister in law, your employer, traffic on the way to my office and, of course, Goldman Sachs. Some of you seem to be angry about everything, and some of you seem to be unable to coherently articulate to me exactly what it is you are angry about. So what’s up America?

I find myself very concerned about this behavior, because unchecked anger can lead to rage.   And in worst case scenarios, blinding rage can sometimes result in the type of incidents of terror referred to at the top of this page.

At a minimum, I find anger to be counter-productive. Angry people are usually unable to engage in the rational discussions   that can potentially help them resolve the very issues that are troubling them. As an economist this worries me because an angry and unproductive populace is obviously not conducive to economic growth.

“Our anger and annoyance are more detrimental to us than the things themselves which anger or annoy us” --Marcus Aurelius

FEAR
As I meet and talk with clients I see that there is also a substantial amount of fear lingering out there when discussing economic issues. However, I find the emotion of fear, when considered from a certain angle, much less troubling than that of anger.

When it comes to financial decision-making, as well as life in general, we can experience two types of fear. One type is of a debilitating nature, causing investors to freeze and avoid decision-making altogether, or to take counter productive actions. These actions can bring them short term relief, but ultimately will be highly detrimental to their financial health.  I consider investor behavior in the first quarter of 2009 to be emblematic of this type of fear (i.e. selling into the crash).

“No passion so effectively robs the mind of all its powers of acting and reasoning as fear” --Edmund Burke

The good news is that it’s the other type of fear, which is actually a healthy type that   results from lessons learned, that I am finding as a motivating dynamic amongst investors at this point.  Investors are finally returning to calmly weighing the facts, listening to expert guidance and taking calculated risks. This type of cautious approach is precisely the correct one in light of recent events and the current market environment. While there are many reasons to be optimistic about the economy going forward, there are still lingering concerns and reasons for caution, especially after the recent run-up in bond and stock prices. The last thing any professional financial planner wants to see now is overly exuberant investors fueling another overinflated market.

The new healthy cautiousness and current uncertainties have led portfolio managers and investment advisors to tweak the way they are allocating client portfolios.  The traditional buy and hold asset allocation model has given way to a newer “Core and Satellite” structure in which there is a well diversified, rebalanced  “core” portfolio along with a smaller but substantial position in  “satellite”, alternative investment asset classes. These low-correlation, non-traditional assets provide tactical opportunities and greater flexibility to improve performance and protect against volatility.* 

MY VIEW OF THE ECONOMY
While economic indicators point to an economy on the road to recovery, growth has been slow and economists expect it to continue to be so.  Unfortunately, many in South Florida were caught up in the still ailing real estate market and that patient remains in the hospital hooked up to an I.V.

Anecdotally, clients of ours, not directly involved in the real estate industry continue to recover, but not at the pace they had hoped for. I do expect the pace of the recovery to quicken somewhat in the fourth quarter, but at the same time I can see some headwinds on the horizon for financial markets. As growth continues, at a certain point, the Federal Reserve will begin to raise interest rates to more traditional levels. This will, in all likelihood cause corrections in the stock and bond markets. Yet, I remain cautiously optimistic in the long-run, as I believe the financial markets will rapidly accept and be able to absorb the reality of rising interest rates that will be the result of real economic growth.

REFLECTING ON WHAT MATTERS
My caution stems from the earlier discussion about rage and anger. I believe this country needs and deserves a fix to the tax system, health care system and financial marketplace. Intelligent people should be able to speak to each other civilly, and to negotiate and compromise and find solutions that benefit the public at large. Rage and anger will not serve us well, and in my view are the greatest threats to our economic growth.

Yes, I believe in the boundless creativity and entrepreneurial talents of the American people. But I know that our full potential can not be realized in an atmosphere of negativity. At the risk of sounding like a Yoga coach, I wish that Americans would lighten-up a bit, look at ourselves, and reflect on all the great things we have and what this country has to offer. We need to go to work, smile at our colleagues and co-workers and stop thinking about what we don’t have. Then we need to talk and work through our differences and find solutions to real problems. At that point we can become innovative and productive again which will result, inexorably, in strong economic growth.

In a nutshell, then, my recipe for economic recovery and real growth would be a healthy serving of good old-fashioned Capitalism with a side dish of rational compromise on market/banking fixes, and a dash of yoga and mindfulness thrown into the mix---Sound good?

MORE FOOD FOR THOUGHT...
At a conference last week, I had the opportunity to meet with and be truly inspired by a unique motivational speaker, Benjamin Zander. He is conductor of the Boston Philharmonic and author of the best selling book, The Art of Possibility. Regarding   the problems highlighted above that stem from a counter productive focus on the negative, I offer you the following enjoyable quote from his book:

 “A shoe factory sends two marketing scouts to a region of Africa to study the prospects for expanding business.  One sends back a telegram saying, SITUATION HOPELESS-NO ONE WEARS SHOES.  The other writes back triumphantly, GLORIOUS BUSINESS OPPORTUNITY -THEY HAVE NO SHOES.

Until next time,