September 23rd, 2013
Dear Clients and Friends,
You remember the old joke, don’t you? The one that goes, “Aren’t you glad I’m not the type to say ‘I told you so’? Well, I told you so.”
Well, I did. Over the last four years I have been handed every newsletter out there predicting the worst stock market crash of all time. Some were pushing gold, some were pushing the gold standard, some were blaming the Fed, some the Democrats, some our “FIAT” currency and some the crisis in Europe. I suggested that one of the best predictors of an upside in the economy and the stock markets is a proliferation of people making a living selling negative predictions. Remember how in 1989 there were five best-sellers predicting the end of our economy as we knew it? Ravi Batra. Paul Erdman. Howard Ruff. Robert Prechter and some fellow named Figgee, predicting hyper-inflation. At the time I said that if there were a deep and terrible crash they would all claim the proof of their theories. However, what if the crash didn’t happen then? If it happened twenty years later, or thirty, would they all cry out that they had been right? How long do we have to wait until we decide they were wrong?
There will always be downturns, some shallow, some deep. If you’re selling newsletters predicting disaster, that disaster has to happen pretty soon, and for the reasons stated. But it simply didn’t happen. Gold has been off its highs by nearly 25%. Inflation is below 2%. The stock markets have passed their previous peaks, yet are still rising. Granted, the markets are rising on the backs of working people and the middle class. I’m talking about economic cycles right now. I’ll get back to “social” issues and what we can do about some of them in a minute.
I have never known a time when there were no risks of economic downturns. The sellers of economic doom and gloom have used those risks to make millions selling fear. Fear is what drives America now. We don’t let our children outside to play with other kids on the block because we are terrified of “stranger abductions.” Nobody notices that the rate of stranger abductions has not increased. Just the reporting of them. “If it bleeds, it leads.” How can we watch the news today without shivering in terror?
There are risks in the economy now, as there have been since 2009. Some of them are greater risks than existed in 2007. The banks are bigger and are taking more risks. There are more credit default swaps being traded than ever before. There are Iran, Syria and Egypt. Will we be at war again, and soon? Angela Merkel was re-elected yesterday, promising more austerity in Europe. Some economists believe that continued austerity will cause a depression there.
Of course, there are the environmental issues, long-term risks to the animal life on the planet and to the economy. Climate Change / Global Warming, overpopulation, the end of clean water, diseases released as we cut down the rain forests, the creation of super bugs by the use of antibiotics in concentrated animal feeding operations (CAFOs) and my favorite, massive species die-off. These are major disasters in the making, but they aren’t going to collapse capitalism or your portfolio this year or next – maybe not in our lifetimes (“Heck, let’s leave it for the kids to fix”).
Then, maybe the biggest short / mid-term risk to the economy: The influence of corruption on the economic cycle. Out of the last six stock market downturns, at least four of them were driven by corruption, rather than by the normal cyclical nature of our economy. Drexel Burnham Junk bonds, The S&L crisis, the rigging of corporate balance sheets by the “Big Eight” accounting firms and the astonishing tie-in between predatory lending and the creating of fictitious value in the derivatives built on those loans.
So, what’s the message here? There will always be downturns in every sector you can invest in. However, don’t believe those who are making a living selling fear of those downturns. They were wrong in 1989 and they have been wrong over the last four years.
Instead, make realistic plans for your future. Adjust for changes in your long-term results. Allocate as if there will be growth in your savings, as well as downturns, while keeping the money you intend to spend for your short-term needs out of the stock markets.
Meanwhile, here is a very strong possibility. Perhaps even a probability: As the new debate over the debt ceiling approaches, this will cause uncertainty in the markets, and almost certainly a downturn this fall. If the Republicans drive us over a cliff the downturn will be greater. So make sure that any of your short-term needs are invested in conservative instruments, such as short-term bonds, cash and community notes (keeping in mind that not all issuers of community notes are safe – you should talk with me about this).
Don’t try to time the markets here. This isn’t the “big crash of all time” coming up. I think that while the bull market is not yet over, it may take a short nap. If the Republicans and conservative Democrats cave, remembering the price they paid for shutting down the government in 1995, there might not be any downturn worth mentioning at all. I’ve been hearing of the imminent and soon-to-come collapse of capitalism since 1969. Those predictions just keep on coming. Keep on sending them to me – just don’t take them all too seriously. I expect capitalism to change or fall someday. Our economy can’t keep on growing forever.
One of the main reasons the markets have continued rising as they have is that many corporations have laid off their workers, then hired them back as contractors, working long hours at reduced wages without benefits. This practice results in historic increases in productivity and this grows the value of their stock. Such behavior is unsustainable.
With the failure and shrinking of organized labor from a third of the working population to less than seven percent there is no labor core to the Democratic party. We need to make labor policy a central issue of national and local elections. Can anyone remember anything at all accomplished by Obama’s first Secretary of Labor, Hilda Solis? I can’t.
What can we do? Labor relations are a primary concern of socially responsible investing and SRI shareholder engagement. This needs to increase. Every year the SRI professionals around the world debate what issues we will press. Please write to me, to your portfolio management firms, to First Affirmative and to your SRI mutual funds, asking them to keep labor issues in the forefront of their activism. This is crucial.
What else can we do right now? What actions will be more than symbolic?
I suggest we put some focused muscle behind a few wedge issues, struggles whose goals can be accomplished and if they succeed, will change the nature of the conversation.
I will pick three for now.
First, contribute to Elizabeth Warren’s campaign. She (and John McCain !!) is spearheading a bill that would reinstate Glass-Steagall, the law that kept the banks from gambling with your money (until Clinton, Rubin, Summers, Gramm, Leach, Bliley and CitiGroup killed it). Tell your bankers that your financial advisor recommends this and watch their faces. elizabethwarren.com
Next, contribute to Healthcare for All, the lead organization fighting for Single payer in California. healthcareforall.org/
Next, contribute to the Public Banking Institute, the lead organization fighting for public banking in America. publicbankinginstitute.org
And finally, I am going to be out of the office (and out of the country) from September 26th to October 8th, tending to a family emergency. Then, from October 24th to October 31st I will be at our annual SRI conference, this year in Colorado, learning how to better serve all of you folks.
Thanks for being supportive of socially responsible investing.
Up the Rebels !!