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March 4, 2009
Getting Our Haircut
This post is on an all too normal interest and I promise not to do another one like this for a while. Like most retired people who once worked in the semiconductor industry, my family's daily bread depends on a combination of income from our investments and our social security. I also have a very small pension but it is, in terms of our expenditures, small indeed. I also get a few consulting gigs here and there. I don't really need them but it's fun to stay in touch. But looking at what has been happening in the stock market is just plan scary. We aren't in any trouble. Over the last few years, Shirley and I taken steps to greatly reduce our portfolio risk. By great skill sheer luck, we avoided investing heavily in banks, housing or insurance companies. And we watch things fairly closely. It's hard to envision circumstances in which we would be in real trouble as far as our day to day cash flow goes. But seeing one's net worth, no matter how modest, slowly evaporate is not much fun. And the volatility is really frightening.
That said, a significant portion of today's worldwide economic problem resulted from the kind of short term thinking in industry and government that looked at weekly or even daily (sometimes hourly) fluctuations in the stock market as if these market fluctuations, no matter how large, no matter how scary, were the best indicators of successful corporate or government policy. Some time ago, I worked for a company that gave quarterly bonuses against advancements in the company's stock price rather than for any actual increases in the profitability of the company or even for anything that might position it for long-term success. Everyone, including those who set up the bonus structure, complained about this shortsighted approach and everyone worked their tails off to get his or her shortsighted quarterly bonus. During several years of my career, I was in a position, at a different, much larger, company where the best thing I could do as a marketing manager to make my management happy and put money in my pocket was to announce plans for new products. It didn't matter how far in the future those products would be introduced or how large the investment required to bring them to market or even how small the potential market. It didn't even matter if two days later we decided not to introduce one of those produces. If that wasn't crazy enough, the most senior management of the company put pressure on me to make such an announcement about once month! One announcement caused the street price of this $8 billion company to go up nearly 10% in a single day. We planned to introduce this product in eighteen months, in other words, we hadn't started its design, and its estimated product-life sales, assuming it didn't attract competition, was around $100 million. I was a hero with a word processor and a spreadsheet and nothing else. No wonder senior management liked these announcements. But it was crazy and everyone, including our senior management, knew it was crazy. And that was in those old, old, days when management had a relatively conservative approach to inflating the street price of a company or investment. At least, we were taking product and market risks rather than naked financial risks. Over the last couple of decades, companies have taken purely financial risks without even bothering to calculate those risks. I blame much of this on the elevation of financial MBAs to management roles that product marketers once held. But that may only expose my prejudice.
Madoff ran an illegal Ponzi scheme but the whole economy became a legal Ponzi scheme reaping large short-terms gains from an economic pool that grew at a much slower rate than those gains. One of the most vexing aspects of all this is that everyone knew it. Everyone talked about it. Everyone worried that a purely financial market driven economy with ever decreasing engineering, manufacturing value added would lead to disaster. When the profit from any investment out grows that investment's market (in the case of mature markets, market growth generally equals population growth) compounded by improvements in productivity, a bubble forms. All bubbles, small and large, burst. When government policy, including lack of appropriate regulation, further inflates these bubbles their explosion can be devastating.
Even today, we hear people who know better, claiming that the continued fall of the stock market is a sign that the Obama administration's policies are not working. Of course, it's not working for the stock market. It shouldn't be. It can't just yet. If it were working just now for the stock market, it would be bad for the longer term. Early in the turnaround, perhaps a little before a turnaround is felt my most of us, but after most of the bad news is out, the stock market will begin to climb. How long that will take, I do not know. How fast? I am not sure. What will happen to the market between now and then? I have no real idea. And at one level, the only level that really matters, I don't care. I do know that we are not as yet early in the turnaround. There is more bad news to come. I only hope we are late in the decline but I'm not too confidant of that. But for the policy makers to use relatively short-term, meaning even quarterly, changes in the stock market to measure the success of policies is to guarantee that those policies will fail. I don't know if the Obama administration's policies will save us from a far worse economic disaster. My inclination is to think that taken together they will. But I do not know. I do know that measuring the success of those policies by looking at the stock market is a bad idea.
So we may all need to take a further haircut as the venture capitalists sometimes say. But we'll all look much better once it begins to grow back.
Oh, Goody! The Dow closed up 150 points today. See, President Obama's policies are taking hold!
Posted by Duane Smith at March 4, 2009 1:35 PM | Read more on Current Events |
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