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Whitman: Opportunity of a Lifetime

2008-10-13T07:00:00-04:00

Well, I guess this is what makes a market.

My previous post linked to Jeremy Grantham of GMO in Barron's saying to hold off buying stocks (but even then he'd probably be buying too soon once he started at some point in the future). And the same day The New York Times runs a piece with this:

Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.

“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”

Grantham: Biggest Mistake Will Be Buying Too Soon

2008-10-12T23:56:00-04:00

GMO's Jeremy Grantham foresaw the current mess, making his interview in Barron's a good read. He's not beating his chest. In fact, he says the current crisis is much worse than he expected. And Grantham freely admits the next mistake will be buying too soon -- and then selling too soon. (An affliction many value seekers have.)

About his current allocation:

In a nutshell, we are as conservative as we can possibly get. One bet that has been very successful for us, touch wood, has been long high-quality, blue-chip stocks, particularly in the U.S., and short risky companies. We have been screaming against risk-taking for a long time, and in recent weeks, it has paid off enormously.

About commodities:

Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper.

And where we're headed:

I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.

I don't know if he's right. But it feels like he may well be. We'll see.

Five for the Weekend #10

2008-10-10T18:15:06-04:00

Looks like a panic, folks. So I guess the Panic of 2008 will be listed with those of 1907, 1893 and so on. This is NOT a time to sell. That is, if you've been sensible. I saw that Jim Cramer said to sell all stocks if you'll need the money in the next five years. I think you shouldn't have ANY money in stocks that you've been planning on using within that time frame. And I've posted that here several times since starting this blog in 2005. With that, lets bring on five items you might check out this weekend.

Jim Grant's next book, Mr. Market Miscalculates: The Bubble Years and Beyond, will be out soon. Todd Sullivan of Value Plays reviews it on the GuruFocus site. Plenty of talking heads are speculating who the presidential candidates would nominate for Treasury secretary. The heck with the names put forth to this point. Any candidate promising to put up Jim Grant gets my vote. ;-)

Carmi Levy, a telecom analyst in Canada, says BCE (BCE/NYSE) faces being broken up if the deal doesn't go through. Levy argues it is the only way Bell Canada can remain competitive.

David Stevenson writes in the Financial Times about his guilty secret: he's started buying shares this week. Here's a bit: "My colleague Merryn Somerset Webb might think that the markets are still going to hell in a handcart and I don’t disagree with her on a macro level – I think we’ll be testing 4000 for the FTSE, bank rescue or not! But, in some sectors and in some investment spaces, value is abundant – with a huge margin of safety – and getting more abundant by the day." He's probably a bit too early, but that shouldn't matter in the long run (if he's right).

Scott Black, a money manager I'm familiar with somewhat because he participates in the Barron's Roundtables, was interviewed on Bloomberg TV today (scroll down, just below the one with Jim Rogers). Black says he doesn't think the market will go to zero, and there are bargains around, but suggests people with cash stay on the sidelines for now.

In his new Bloomberg column, Michael Sesit laments the lack of a unified European response to the financial meltdown, writing "the longer Europe resists a universal approach to the credit crisis, the greater the odds it will be confronted with corporate bankruptcies and demands for bailouts."

Have a great weekend -- turn off the TV and do something fun, relaxing or both. The world can do a good enough going to hell in a hand basket with you and me. :-)

Is It Time to Bet Against Excessive Pessimism?

2008-10-10T07:57:00-04:00

Ian Cowie writes that he agrees with Anthony Bolton that it is. His Spectator column stresses that jumping in and out of the market means you could miss the turning point -- where gains are made in a short period of time.

That sounds like cold comfort to many investors in this climate:

None of which will impress the fearful who are fleeing into cash or bonds right now. They will dismiss all of the above as statistical sophistry; which is fine by Anthony Bolton — and me. He explains: ‘For the first time in a couple of years, I have started to feel more optimistic in recent weeks and there have been signs of a market low in recent days. There has been evidence of final capitulation, with people talking about looking into the abyss and how the whole system could collapse. I have applied the same analysis for 30 years to identify periods of excessive optimism or excessive pessimism and — whether it was 9/11 or when Kuwait got invaded — invested by betting against them.’

In last week's Five for Friday I linked to a Daily Telegraph article on Bolton's favorable views on buying stocks now.

BCE Deals Facing Fresh Obstacles

2008-10-09T22:42:49-04:00

Well, this can't really be considered a surprise. The BCE (BCE/NYSE) takeover by Ontario Teachers' Pension Plan looks shaky in the face of the world's worsening financial crisis. Or, perhaps more likely, the deal might still go through but not at the C$42.75 per share price.

From today's Globe and Mail:

Even though Teachers has an iron-clad agreement with its banks, legal experts said the pension fund could run into political headwinds if it sought to sue a bank that now has the British government backing it as a major shareholder.

"We are into a new reality," said Malcolm Hitching, a banking specialist at British law firm Herbert Smith LLP. "Regardless of what a contract may say between a bank and a borrower, it may be that there are greater political considerations that have an impact."

June 2007 seems like ages ago now. Getting this deal done has been like pulling teeth.

Ambrose Evans-Pritchard: Will The Euro Survive by Christmas?

2008-10-09T08:45:00-04:00

I once had someone from Britain tell me that the euro was doomed because, he said, most of the countries making up the euro-zone couldn't stand each other. I don't know if he's right -- just one person's opinion, you know -- but the current crisis looks to put a lot of stress on the euro at the very least.

In fact, Ambrose Evans-Pritchard wonders if the 15-member euro will survive by the Christmas.

Interesting bit:

An ugly recession is coming, as debt leverage kicks into reverse. The purge will be slow and punishing. Some 12 million Americans are already trapped in negative equity, but at least they can see where this might end. After much drama, the US institutions have risen to the challenge. The Fed, the Treasury, and Congress have managed to take some sort of coherent action. The jury is out on Europe, where the hurricane is now smashing the banking system.

Those such as German finance minister Peer Steinbruck – who thought the sub‑prime crisis was just an "American problem" – have had a rude shock.

And this article comes just as central bankers are cutting rates. I'm no interest rate watcher, much less an expert on the subject. But the idea of cutting rates here, raising them there, playing "maestro" to giveth the punch bowl and then taketh away never rang true with me. I mean, the notion that someone like Alan Greenspan could be a maestro and direct the economy like a conductor with an orchestra seemed a bridge too far. Too top-down.

I wonder how all this plays out. Then again, we all are.

The Audacity of Stock Market Hope

2008-10-08T23:38:58-04:00

Tom Stevenson writes in the Daily Telegraph that "hope will only emerge when we're utterly submerged in bad news." Most regular readers here will agree. And I didn't know that the word "crisis" comes from the Greek word for "turning point."

I'm not sure I go for Stevenson's view that we've had a 30-year experiment with free markets. In fact, I know I don't. Western countries (he's in the UK, I'm in the US) have mixed economies and the problem isn't lack of regulation, but regulations and government entities -- see Fannie Mae and Freddie Mac -- that distort events and markets. And that's entirely apart from the corruption of so-called "public servants" lining their pockets at taxpayer expense.

Look folks, I'm old enough to remember the 1970s. And anyone who says government wasn't largely "the problem" is kidding themselves. I'm all for government regulations that enforce the honoring of voluntary contracts, throw the book at drunk drivers, and perhaps even have rules limiting the amount of leverage used by financial institutions. Yet just as Sarbanes-Oxley has been, on balance, a negative, we can expect Sarbanes-Oxley on steroids in the future.

But let's get back to Stevenson's piece. He says something I hope people across the spectrum can find beneficial:

The stock market cycle is always the same. It moves from optimism through excitement to euphoria before turning down via anxiety, denial, fear, desperation, panic and capitulation to a low point of despondency and depression. Only when this point of utter revulsion is reached can investors look out at a new dawn of hope.

The timing and duration of each phase is unpredictable. What always holds true, however, is that when investing seems most scary it is likely to be most profitable.

An audacious sentiment for some, no doubt.

Tulip Mania

2008-10-08T01:53:43-04:00

In his interview with Charlie Rose last week (see several posts back), Warren Buffett said we had a mania in residential housing in America. He compared it to other manias in history, such as the tulip mania.

Lew Rockwell interviews former banker Doug French about the tulip mania here. The audio is only a bit over 11 minutes. Check it out.

Jim Grant on the Bad Medicine

2008-10-06T23:29:29-04:00

From the Washington Post op-ed by James Grant (H/T Maoxian):

Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.

The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are "upside down," as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards.

But inflation and debasement are the very policies being put in place.

And that's just the first two paragraphs plus the first sentence of the third. It gets better. Or worse, if you know what I mean. ;-)

The market had a bad day today. Yet it could easily have been worse and was for much of the trading. I'm typing this on Monday night, US Eastern Time. I glanced at TV a little while ago and the screen said Asian markets were down. Does that foretell another bad day for the US markets? Who knows?

Among the numerous things found troubling with the Congress debating the bailout last week was this: Many times I saw Senators and Representatives of both parties talk about what the stock market would or wouldn't do based on whether or not the bailout passed. Considering stock prices while considering legislation strikes me as a foolish move.

Now, the fact that the market hasn't down well since the vote on Friday means nothing. Just as if it skyrocketed would mean nothing. In the short run. Recall Ben Graham's statement that in the short run the market is a voting machine and in the long run it is a weighing machine.

My hunch is that over time the prescription is that of Grant, and not the folks in the US Congress.

Five for the Weekend #9

2008-10-03T19:13:11-04:00

If you need a few things to read between now and Monday, you might check out the following.

Prem Watsa of Fairfax Financial (FFH/NYSE) gave an interview in Canada, which qualifies as must-read in my book. Asked about the US Government bailout and what the average person should do, Watsa said, "$700-billion US, or whatever, is not going to stop this. This is going to be long and deep and people want to save money. Be careful about risk. There are unintended consequences in fixing this and all are ahead of us. This will take years to sort out. There will be problems here in Canada, too. If the U. S. has a recession, we will. For individuals, safety is No. 1. Buy real estate for your family, but not as an investment. Don't borrow for new cars. Keep borrowing at a minimum. Now's the time to protect your money. Keep your life simple. Be mortgage-free if you can. People must hunker down." I suspect the late John Templeton would say the same.

Watsa's words of caution -- "people must hunker down" -- ring true in this environment. At least to my ears. I'm an individual investor and personal finance is largely outside the realm on this blog. But not entirely. Last June I posted about Why I Maintain an Emergency Fund. The benefits of having such a fund aren't simply financial.

Richard Beales of BreakingViews states something that should be obvious, but probably won't be to some casual readers. That Warren Buffett's recent investments in Goldman Sachs and General Electric aren't stock tips -- they're preferred stocks paying 10% dividends.

Anthony Bolton is the legendary UK value manager not all that well known in North America, unfortunately. No one is perfect and he had a bad patch in the early 1990s. But Bolton has proven successful over the long haul and his opinions are always welcome here. This article in the Daily Telegraph has Bolton saying now is the time to buy.

Africa Confidential continues making its lead story free on its website. It's a treasure to find in-depth reporting on a continent receiving far too little press in America. This lead article focuses on South Africa's political scene with Thabo Mbeki losing power.

If you only can read one article this week, read the linked interview with Prem Watsa. I hope it won't wreck your weekend. ;-)

Warren Buffett on Charlie Rose

2008-10-03T00:39:31-04:00

By now you've almost certainly heard or saw Warren Buffett on Charlie Rose's PBS show. But in case you haven't, here's the link.

I actually think Buffett is still the best stock-picker on the planet (no surprise). Certainly since the aftermath of WWII. And perhaps in all of history. What's more, just think how much better he'd be these days if he wasn't limited in what he could buy due to Berkshire Hathaway's size.

The whole hour was great stuff -- and Buffett got off his usual number of good, folksy lines. Such as he'd rather be "approximately right than precisely wrong."

All that said, I'm still very doubtful about the wisdom of the plan in Congress. Buffett even seemed to say he didn't know if the plan would work. (I'm operating from memory, not reading a transcript.) My hunch is that most politicians and talking heads want the plan to pass because if nothing is done, and the world comes to an end, they want to say at least they tried. Just a feeling I have. No proof. Look what the leave themselves open to if the oppose the plan, and the worst happens.

One thing that's surprising is Buffett's praise of FDR during the Great Depression. That FDR was a great leader and wildly popular is undeniable. But cooler heads can look back at the facts and see that the New Deal was not effective in battling the Depression -- and in fact prolonged it. The facts I'm pointing to are things like unemployment.

Oh well, I've posted before that I'd love Warren Buffett to run my portfolio and even be my CEO. But that doesn't mean I'd want him to be my airline pilot, my dentist or the guy replacing my roof. Or even set public policy. For that last part, I'd rather be ruled by his late father, Howard Buffett.

Stevenson: It Never Pays to Panic

2008-10-01T23:15:04-04:00

I thought Tom Stevenson had given up writing columns for the Daily Telegraph some time back to devote his energies to his day job. Perhaps he's come back -- he's written several pieces recently -- due to the market turmoils.

And good thing he has. He talks sense. Wish we had more like him on this side of the pond.

Stevenson's latest is on the money:

From the point of view of survival, fear is a good thing. Hesitation, even for a split second, can be the difference between life and death. Fight or flight is hard-wired into our brains.

If the threat to our well-being is financial, exactly the same reactions are triggered. When it comes to preserving our capital rather than our life, however, fear is not always desirable. Very occasionally, panic can turn out to be precisely the right response for an investor. In most cases, though, the person who gains most is our broker.

And he ends with this:

Value and the unmistakeable whiff of fear. Historically, that's been a happy combination. But don't expect anyone to listen – they're too busy watching the end of the world.

Here's hoping Stevenson's column keep appearing in the Telegraph. Even when the markets recover.

Monday Night, US East Coast Time

2008-09-29T23:58:19-04:00

What a day. I didn't enjoy it when I glanced at my brokerage account to see a sea of red -- with the exception of Fairfax Financial (FFH/NYSE). But I WOULD have voted "no" on the bailout if I was in the House of Representatives.

It's late and I'm dog-tired. So I'll just make a few random thoughts:

Anyone who sold a stock or stock mutual fund today was a fool. This was either a panic or semi-panic and you don't need to be in that crowd if you're patient.

The media really needs to start reporting Dow and broad market drops in terms of percentages, and not points. That won't sound as dramatic, but is closer to the objective truth the journalists claim to pursue.

The individuals most at-risk here are retail investors on the verge of retirement. Hopefully as they've approached retirement they've limited their equity exposure -- but some have probably not done the prudent thing. (And that is their responsibility, not the taxpayers.)

Flipping the channels tonight I caught Ben Stein on Larry King on CNN. He pointed out that long-term investors in stocks who won't be touching the money for 10 years will be fine. I agree, and think it won't take that long. But remember, what Ben Stein and Controlled Greed say plus two bucks will buy you a grande coffee in Starbucks.

Always remember that TV anchors don't hold their positions because they're wise or particularly intelligent. Some may be, but most aren't. They have their jobs because they have a certain look, have voices suitable for broadcast audio, and can read prompters without looking like they're reading prompters. That's true when they cover their normal beats of politics or (increasingly) pop culture. And it's especially true when they move over to stock markets. In the UK, the BBC calls these people what they are: news presenters.

Like clockwork, right after posting about 3i Group PLC it fell more than 12% in London Monday. In times like these there are good bargains out there. But only buy if you have a long-term horizon -- what is cheap now could be much, much cheaper tomorrow.

3i Group Weathering Credit Crunch

2008-09-28T23:18:00-04:00

In this lousy market, we'll take good news wherever we can find it. Apparently one place with good news is portfolio holding 3i Group PLC (which trades in London under symbol III).

If you're a long-time reader of this blog, you'll recall that one of the things I like about 3i is its focus on medium-sized deals. Most private equity outfits target mega deals. This strategy is paying off for 3i:

According to Charles Stanley analyst Stephen Peters, the company has also been operating in the mid-cap investment market, where lending by banks has not been hit as severely as for multi-billion dollar takeovers. "As 3i has said in the past, it has always had a good relationship with mid-market banks across Europe. Instead of going to two or three banks, it may have to syndicate out to five or six, but it can still get the deals," he told Forbes.com.

Further down the story:

Patrick Dunne, 3i's director of communications, told Forbes.com that the company had become "very picky" about its investments and realizations since the credit crunch began last August. "Although the rate of realization is lower, the profit per pound is the same as last year," he told Forbes.com.

He says the company is also optimistic about good opportunities amid the market turmoil. "Clearly the infrastructure sector is very interesting for us, and we think there will be great opportunities in the mid-market buyout market, and a fledgling buyout market in Asia." He added that the company expects to see strong growth within its capital business, which provides equity to companies, such as those expanding internationally.

3i Group's share price is down since I bought it in 2005. But it's been a winner counting dividends and special payouts (the company had some large payouts in 2006 and 2007). It's currently trading at a discount to net asset value, making it particularly attractive in my view.

I try to resist falling in love with managements -- but I admire CEO Phil Yea and his team immensely. Of course, now that I say that it could blow up. Or we could see a financial disaster so severe it takes down even the best managed firms. I don't think that will happen for a second. But that's why we diversify our money over several holdings, and not bet the bank on one stock like an Enron dolt.

Five for the Weekend #8

2008-09-26T20:28:22-04:00

With all the bailout frenzy and the presidential debate taking place after all, there's no shortage of media reporting to watch and read and listen to. And here are five more items to fill the weekend.

Nouriel Roubini is not someone I've read extensively. The word I hear is that he's been dead-on in anticipating much of the credit crisis. And he seems impressive in the interviews I've seen him take part in on Charlie Rose and other shows. Forbes is running a piece by Roubini on the 10 steps needed for recovery.

Matthew Lynn makes the case for UK banks being the big winners in the credit crisis in his Bloomberg column. He names Barclays, HSBC Holdings and Lloyds TSB Group as ultimately benefiting, with Royal Bank of Scotland getting weakened. Buying ABN Amro at the market peak continues to have negative ramifications for RBS.

The long-awaited authorized biography of Warren Buffett by Alice Schroeder, The Snowball: Warren Buffett and the Business of Life, will be out in a few days. If you subscribe to the Financial Times you can read an extract.

Speaking of the FT, the paper is reporting that Liberty Media's John Malone has been talking with Time Warner about swapping Liberty's stake in the company in exchange for AOL. From the linked story: “There have been limited discussions,” Mr Malone told the Financial Times on the sidelines of an investor presentation in New York. He emphasised, however: “Time Warner still needs to divide the business.”

Simon Nixon writes in The Spectator and "challenges the new conventional wisdom that all bankers are greedy, share traders are spivs, governments know best and capitalism is doomed." Even if you don't agree with everything in Nixon's piece, know that the current environment is rich ground for opportunists looking for media lynchings. Right now target number one for politicians and hack journalists is the "free market" -- never mind that Fannie Mae and Freddie Mac would have never existed in a free market system.

Have a great weekend, guys and gals.

Jeff Randall on America's "Trickle-Down Communism"

2008-09-25T21:33:57-04:00

Really nice, very, very nice column by Jeff Randall in the Daily Telegraph:

Having failed to deliver victory in the War on Terror, President Bush is hoping for better luck in the War on Error. His goal is to limit damage from the egregious mistakes of sub-prime mortgages; his tactics are to carpet-bomb the banking system with federal funds. The upshot, in Jeffersonian terms, is that US taxpayers are about to be enrolled in an economic chain gang.

I'll add that in addition to the War on Terror, American taxpayers have been burdened by the War on Drugs and the War on Poverty. And if the wars on terror and now error are anything like the ones on drugs and poverty, you can be sure they will be with us for generations to come.

Back to Randall:

In place of rip-roaring markets, according to a Wall Street trader, America has embraced "trickle-down communism". This system involves the state paying "cash for trash" to benefit a few miscreants, and then hoping that some of the taxpayers' largesse will trickle down to the masses.

Toxic rubbish will not be made to disappear by Mr Paulson's proposals. All that will be different is ownership. It will be like removing nuclear waste from a failing business and parking it in a government building. The risk moves from private to public.

And another nice bit:

Those who borrowed to buy assets at the wrong prices will have to suffer, as financial gravity re-asserts its downward pull. There is no policy yet invented that can make fifty cents worth two bucks forever.

If you like the parts posted here, read the whole thing. Well worth your time.

Altucher's Back -- and He's Got Stock Ideas

2008-09-25T11:55:00-04:00

Regular readers know I'm a fan of Jim Altucher's Financial Times columns. No columns were being run for about a month, and I was worried that the FT had dropped him, or he quit the column on his own.

But fear not, he took some time off and the column has been back for a couple of weeks now. Here's the latest:

So in this New Economy, who are the winners? First off, pawn shops are doing great. And when the economy weakens, more people need to borrow money from them. No subprime here. Its sub-sub-subprime - with the main difference being that people leave their collateral at the store when they borrow money, often at a 30 per cent loan to value. Meanwhile, the collateral that they've left at the stores, usually gold, is going up every day in this environment.

He names a couple of names, and check 'em out if you're a subscriber to FT. And writes this near the end of the column:

This is a hard time. It's possible to say: "This time things are different." But we've been through 9/11, the 1987 crash, wars, scandals, depressions, stagflation and the markets always come back to make new highs. Always. This time the world financial system is supposedly going to collapse and capitalism is being called into question. But it's not...

I've posted here several times that Jim Gant is the finest writer in financial journalism. "Just plain words writing," as John O'Hara said of F. Scott Fitzgerald. Altucher at his best approaches Grant. I've never regretted reading a piece by either man, even when I might not agree with everything expressed. And my guess is you won't regret reading them, either.

Stevenson Says It's Time to Follow Warren

2008-09-25T07:35:00-04:00

Writing from the perspective of a UK investor, Tom Stevenson says this may be a great buying opportunity. He talks about Warren Buffett, Ted Williams and the "fat pitch" (which must warm the heart of George over at Fat Pitch Financials) investors desire:

By waiting for only the "fattest" pitch, Ted Williams secured baseball's highest-ever batting average. We don't need to be so precise – investors are scared and buying from scared investors pays off in the end. The pitch is fat enough.

You can read the entire Daily Telegraph piece here.

Bill Thomas, R.I.P.

2008-09-24T23:55:00-04:00

Former Capital Southwest Chairman and CEO William Thomas has passed away at age 80. I first heard of Thomas in the early 1990s when reading an interview with Marty Whitman of Third Avenue Value Fund. Whitman called owning Capital Southwest stock "hanging out with Bill Thomas" -- and he said he'd been "hanging out" for 15 years at that time. (Third Avenue remains a shareholder of Capital Southwest.)

I've been something of a follower of Thomas and Capital Southwest since then. I first posted about Thomas and his unique shareholder letters in 2006. I missed several opportunities to buy the stock, but I corrected that mistake earlier this year.

Bill Thomas was a principled leader, exemplary businessman, friend of shareholders and a true gentleman. And he was all those things while never seeking the spotlight or the attention of the media.

Thomas served as a U.S. Army officer for more than five years and was awarded the Bronze Star, Purple Heart and Korean Service medal with five battle stars for heroic actions during the Korean War. During the 45 years that Thomas served at Capital Southwest, the company's split-adjusted net asset value increased over 100-fold. In addition to his natural business acumen, Thomas placed a significant emphasis on fiscal stewardship, patience and integrity of its business managers, which contributed greatly to the financial stability and growth of the company.

Rest in peace, Mr. Thomas.

US Dollar: Nothing Left to Believe In?

2008-09-24T22:01:54-04:00

Spectacular op-ed by Jim Grant in The New York Times. More than just about the bailout debate, it's about the US Dollar -- the "faith-based currency."

All was well for a time — indeed, for one of the most prosperous times in modern history. Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant. The early 1960s were a kind of macroeconomic heaven on earth.

However, by the middle of that decade it had come to the attention of America’s creditors that this country, fighting the war in Vietnam, was emitting a worryingly high volume of dollars into the world’s payment channels. Foreign central banks, nervously eyeing the ratio of dollars outstanding to gold in the Treasury’s vaults, began prudently exchanging greenbacks for bullion at the posted rate of $35 per ounce. In 1965, William McChesney Martin, chairman of the Federal Reserve, sought to reassure the quavering dollar holders. He lectured the House Banking Committee on the importance of maintaining the dollar’s credibility “down to the last bar of gold, if that be necessary.”

Necessary, it might have been, but expedient, it was not, and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched.

I know it's popular to dump on Nixon whenever possible. Yet as bad as the 1971 move was (and is), Tricky Dick probably had no choice. Every post World War II administration has spent too much -- Truman, Eisenhower, Kennedy, Johnson and Nixon (who took office in January 1969). LBJ was particularly bad in spending, painting Goldwater as a war-monger in the 1964 election only to put half a million troops in Vietnam while spending on his Great Society that featured Medicare (which is a nightmare still to come). The US simply didn't have enough gold for all the money it printed.

But lets get back to Grant's piece:

Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.

Where all this might end, nobody can say. But it is unlikely that either the dollar, or the post-Bretton Woods system of which it is the beating heart, will emerge whole. It behooves Barack Obama and John McCain to do a little monetary planning. In the absence of faith, what stands behind a faith-based currency?

And that's the question. Not only do politicians not want to answer that, they don't want you to ask it.