Thursday, March 19, 2009

Reconstructing the Social Fabric

Like Icarus’ fall, this crash was necessary. Now don’t misunderstand, I wish it were not so. I wish asset inflation could have steadily eroded our debts and currency while floating the collective’s boats, in a non-catastrophic way. But irrational actors, i.e. regular people, are simply too darn greedy to let peace and prosperity reign for too long. Wall Street professionals weren’t satisfied with their $500,000 salaries; no, they needed to start hedge funds charging 2% management fees and 20% of profits (2+20 in industry parlance), in order to achieve 8-figure paydays. Meanwhile, guys selling windows, chucked lucrative jobs to go into the house-flipping business.

Similar other anecdotes abound. The point however, is cleansing, repentance, and a return to core American values is the mandate today. While American society propelled consumerism it wasn’t always mass consumerism. That would be putting the cart in front of the horse. Prosperity requires productive core values. And Americans have these in spades: thrift, diligence, work ethic, tenacity, perspiration, inspiration, and idealism. Above all: Optimism and Faith. With these traits, the productive spirit of the individual is released, so long as the civic values are in place: good government, fairness, the rule of law, and the respect for natural laws. These principles of civil society have been with us, and improved upon, for over 200 years. The requisite values of a prosperous society are the individual ones, which, within the safe environment of civil society, propel the energy of man forwards in productive activity. These are: creativity, spirit, work-ethic and risk-taking (the good kind - entrepreneurial activity). These values come, by definition, first. Goods and services can not be produced in a vacuum or in an unfree-society. American industriousness and pragmatism, our utility, our unburdened consciousness- these are our collective cultural values which foster and drive our countries awesome industrial capacity. We didn’t need the value of conspicuous consumption in order to become a great production society. We only needed mass consumerism to create the bubbles of recent times. When CEO payoffs our in the $100s of millions of dollars, then something goes awry in the social fabric of our culture.

And it's this pretense of reality, which embodies the only world Generation Xers (Born 1965-1979) and Generation Y's (born 1980-2000) have ever known. Further, its this world that the Baby Boomers mainly know. Anecdotes of past generations and old movies seek to bridge our vapid experience, but fall woefully short if the educational goal. That’s where the invisible hand comes in to save the us from ourselves.

Thanks to Bernie, ourselves, and all others, we have economic hard times. The punchbowl has been taken away. As a great nation, we are retrenching. As a great people, we return to the core values that are the drivers of production and innovation, the mainspring of wealth and a consumer society. I have no doubt that economic prosperity will return to us in the next decade. Better yet, we will be wizened, and more appreciative, when it doth arrive.

In these Lenten days, let us cherish the solid values that we as a culture embrace, knowing in our hearts, that this too shall pass. The economy will begin to recover in 2010. Failed companies, fallen CEO’s can, and will, in time, be replaced. As the auto industry evaporates, and strip malls deteriorate, we can rest easier, knowing that the future will be brighter when domestic car manufacturers receive their due, while the consumer society of the future will engender nicer places to shop, than the suburban blight of the ubiquitous strip mall.

Early this week (March 9th) the New York Times picked up the “Going Galt” theme that apparently Rick Santelli of CNBC helped propel early this month; Good thinking, but beyond the scope of today’s Blog. See “The Opinionator” at for more info.

Suffice it to say, that as long as the Chinese buy our government debt for 2% and 3% interest, we have the luxury to pay-off the excesses of past decades with cheap, easy money. The United States will lead in product innovation in new industries. We will continue to be a leader in advanced production technology. Collectively and individually, we will thrive again, as we come through this period in 2010-2012. For the moment: retrench, pay off debts, save, and find an intelligent, trustworthy person who really takes the time to know you, when planning your financial life. A new era is coming just as sure as global warming, it's just a question of when and how fast. At Barnes Capital, we are expecting markets to begin to improve in 2010, and the economy a few quarters thereafter. Stay well through this difficult time. And button up.


Daniel A. Barnes, CFA
Barnes Capital

Barnes Capital is an independent investment advisor serving private clients in Lafayette, California. We help clients develop a vision for their financial future which encompasses their goals, dreams and values. We turn our client's vision into reality by acting as their personal chief financial officer.