"Words - We Should Say What We Mean and Mean What We Say"

Sydney M. Williams

Thought of the Day

“Words – We Should Say What We Mean and Mean What We Say”

May 25, 2010

In our frenetic lives, between disruptive capital markets and discordant Washington, most of us have a tendency to speak first and listen second. We read, watch and listen to those with whom we agree. We hear what we want to hear. We are determined to persuade those who disagree that they are in error. The crescendo is like Humpty Dumpty, speaking to Alice in Through The Looking Glass:

“I said it very loud and clear;

I went and shouted in his ear.”

Thought and reflection have become alien. In capital markets, despite the thirteen month rally, fear has been the dominant emotion since the credit crisis began nearly three years ago. In the immediate aftermath of the Lehman bankruptcy the situation was binary: either the Western, democratic, capitalist system was going to survive or it was not. It did, for reasons we all know.

Examples of reasoned discussion – like interviews conducted by Charlie Rose – seem rare. More common are the shoutings of Rick Santelli, Larry Kudlow, James Cramer or Dylan Ratigan. I sometime agree with their findings, but find it difficult to listen to them. In the arena of politics, the same can be said about Jon Stewart on CNN or Glenn Beck on Fox. It is the absence of those whom Peggy Noonan refers to as the “elders” –reporters and commentators like Irving Kristol, Walter Cronkite, Robert Novak and William Safire – who are missed. Dignified responsibility has been replaced by narcissistic self promotion.

While the pace of economic recovery has slowed – inventory replacement is largely behind us and the stimulus package has topped out – economic numbers continue positive. The Economic Cycle Research Institute’s (ECRI) leading indicators, among the first gauges to predict the sharp growth in GDP in the 3rd and 4th quarters of 2009, is now pointing to more moderate growth – something less than 3%, but up. The national unemployment rate remains at 9.9%, but 38 states showed job growth in April over March. Bottoms up, operating corporate earnings for the S&P 500 are estimated to be about $75.00 for 2010, putting the market at 14X. Corporate balance sheets are under leveraged. Nevertheless, portfolio managers who only a few weeks ago thought the market needed a ten percent correction, now that it has arrived, have become increasingly fearful, fed by news from Europe and, today, North Korea and Spain. However, the fear has been abetted by a Press, which (to borrow a line from Macbeth) is “full of sound and fury, signifying nothing,” or, at least, signifying less than they would claim.

We have yet to learn the full lessons of that fall of 2008, or of today’s problems in Europe. Fairness and equality do not include promises that cannot be kept, whether it is offering mortgages that depend upon rising asset prices and falling interest rates, or promises to state union workers that prove impossible to honor. We cannot continue to consume more than we produce. Holders of sovereign debt should not assume they will always be protected against default. There is such a thing as personal responsibility; we should be rewarded for our successes and suffer the consequences of our failures. Greek students and government union workers, demonstrating against budget cuts, are only now beginning to grasp that when there is no money, there is no money. The threats of such cuts are already being heard in New Jersey and will be soon heard in California. No favor is conferred when empty promises are made by politicians, who know better, in exchange for votes.

It is politically expedient to cast blame for the financial crisis on Wall Street, and certainly we deserve our share. But Wall Street did not act in a vacuum. Rating agencies eased the way. Regulators failed to regulate. Politicians promised the moon, expecting that when it came time to “pay the piper” they would be safe in a retirement they had guaranteed for themselves. And millions of people acted irresponsibly. The financial crisis, the ensuing recession and the ripple effects of subsequent melt downs have created a lot of stress and heated debates. We see it in demonstrations in Europe and Asia, in the Tea Party and in recent primaries. The situation is combustible and it behooves those with an audience to speak honestly and unapologetically, but calmly and openly, recognizing that for most questions regarding the market and politics there are no concrete answers, only opinions.

Words are important, as is the manner in which they are conveyed. When emotion rules markets, reason should be the response. This morning we hear North Korea President Kim Jong II order his troops to become “combat ready” – an inauspicious remark in a tinder-ready world. Fortunately China seems less inclined to support her neighbor than she might have been five or ten years ago. The government in Spain, also this morning, pressured four banks to merge by June 30. The combined banks would have assets of €135 billion, making it the fifth biggest bank in Spain. This is not dissimilar to action taken by our FDIC when banks are in trouble. In last weekend’s edition of the Wall Street Journal, Jason Zweig interviewed the legendary Seth Klarman who remains concerned: “We didn’t get the value out of this crisis we should have…” It was over too quickly for the lesson of loss to be fully realized. “All of the obvious hedges [including gold] are extremely expensive.” But he added that his own ideas “on bottom-up opportunities in undervalued securities are more likely to be accurate than my top-down on what’s going to happen to the world at large.”

Further on, in Alice’s interview with the singular Humpty Dumpty, she continues:

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master – that’s all.”

………………………………………………..

“When I make a word do a lot of work like that,” said Humpty Dumpty, “I always pay it extra.”

We should not have to pay the price of misunderstanding the intent of Wall Street, Washington, Brussels or Pyongyang. We are best served by clear and respectful answers to basic questions. But perhaps that is only a “consummation devoutly to be wished.” Nevertheless, words matter.