"The Economy and the Market - A Perspective"

Sydney M. Williams

Thought of the Day

“The Economy and the Market - A Perspective”

September 8, 2010

A long plane ride provides an opportunity to read the papers more closely, and to think about and consider the myriad questions that envelope us every day. A flight on Tuesday morning gave me that chance.

The financial world is always confusing. Just as we think we understand what is happening, and therefore feel confident in our assessment as to the future, our preconceptions are interrupted, sometimes rudely and other times pleasantly.

There was a wonderful article in Tuesday’s New York Times on a recently cut down willow tree in Turtle Bay garden, memorialized in E.B. White’s paean, Here is New York. The Times story by Victoria Shannon is a reminder that the Press, so often accused by me and others as purveyors of partisan political polemics, can rise above the furor and provide the reader observations on the basic goodness and humanity of the world beyond the immediacy of our financial and political travails.

Gideon Rachman, in the same date’s Financial Times, writes of the risks of adamant economists who with “physics envy” reach precise predictive conclusions as to the direction of future trends based upon their formulaic responses to today’s events. In contrast, Mr. Rachman writes, “Historians know their work cannot be used to predict the future. History can suggest lessons and parallels and provide wisdom - but what it cannot do is provide a sociological equivalent of the laws of physics.”

The risk in economists presuming to “know” the consequences of the action they recommend is that they lose their flexibility and their ability to adapt. They become stubborn. Curiously (and instructionally), action taken by policy makers in the aftermath of the Lehman collapse was never hindered with that sense of certitude. Those of us in the investment world who have seen over decades the many sizes, shapes and directions of markets realize that “certainty” is not part of the lexicon. Investment expectations should be tempered, especially in an environment as uncertain as today’s appears.

Of course historians have the luxury of studying the past, not forecasting the future. They ask “what if” questions, such as had Germany proved victorious in World War I would World War II inevitably have followed? While such questions make for stimulating debates, we must live with the world as it is, not as it might have been. On the other hand, policy decisions taken today will impact our lives tomorrow.

In that regard, I found Peter Orzag’s (former director of the White House OMB from 2009-2010) op-ed in Tuesday’s New York Times disappointing. He wrote of the troubling economy and his suggestion that the Bush tax cuts be extended for two years - a good suggestion in my opinion. But he went on to argue that, “Additional revenue - in the range of 0.5 to 1.5% percent of the economy - will be necessary to reduce the deficit to sustainable levels.” He asks, rhetorically, “How would we do this?” His answer is to impose new and higher taxes. At a time when the federal budget, as a percent of GDP, is the highest since World War II, his answer is that salvation lies in making government even bigger.

Higher rates may be part of the solution. I don’t know, but I strongly suspect that successful initiatives for private industry will propel investment, so they would be the principal contributors to economic growth and, thereby, federal revenues. Government’s share of GDP has been reasonably constant in the post-World War II period at about 20%. It is now three or four percentage points above that. I agree with former British Prime Minister Tony Blair when he wrote in the weekend edition of the Wall Street Journal, “The role of government [in a financial crisis] is to stabilize and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led by industry, business and the creativity, ingenuity and enterprise of people.”

Taking a longer view is always difficult and especially in these times when politicians, reporters, economists, portfolio managers and pundits are seemingly afflicted with a bad case of Attention Deficit Disorder. It explains why tough decisions, despite exhortations to the contrary, like Social Security and Medicare get kicked down the road. In Washington, frugal congressmen are never as popular as big spenders.

James Grant, in the current issue of Grant’s Interest Rate Observer, writes of the current period of low interest rates and their cyclical nature. He quotes Sidney Homer, author of the classic History of Interest Rates, “The cost of borrowing has tended to rise and fall at generation-length intervals.” No matter the logic behind the reasoning, economics and markets can never be forecast with mathematical precision. They are, as Mr. Grant puts it, cyclical in nature and subject to “the fallibility of human judgment.” So, no bell will be rung marking the end of the bull market in bonds, even as the twenty-eight year old current bull market approaches generational levels.

Life is akin to E.B. White’s willow. To Mr. White, the tree came to symbolize the city of New York, but it is also a metaphor for our lives: “Life under difficulties, growth against odds, sap-rise in the midst of concrete, and the steady reaching for the sun.” That willow, as all things alive must, died. But, as Ms. Shannon points out, the tree, in giving hope, served its purpose. And, in death there is life. Bill Logan, who lives in Brooklyn and who cut down the willow, saved some cuttings. Ms. Shannon quotes Mr. Logan about one of the cuttings, “It’s doing fine! It’s now fully eight feet tall...we better decide what to do with it before it gets too big to move.”

Life does go on. And so will we, perhaps in directions different from what we imagine, but, with an understanding of the past, while living in the present, and remaining flexible as to the future, we will survive and, with care and diligence, thrive - comforting thoughts as my plane descended into San Francisco.