Though we think about the details of our investing almost all the time, rarely do we fully examine the foundations of our investment philosophy. If you will, they are treated as given. One of the standard analytical techniques is to contrast a particular viewpoint with something very different. Most often after the examination, we conclude that our basic premises are correct and if anything, believe in them even stronger as they survived being rigorously challenged. As part of this occasional exercise I look beyond the center of our beliefs, even beyond the periphery, to the fringe. In the following two sections I will briefly discuss two unconventional ideas in the spirit of providing contrast to conventional thinking. I have not concluded that these ideas are more correct than the conventional views or necessarily believe in the views expressed. (Just as I don’t believe in what I see in the bathroom mirror on some mornings.)
“Jobs” is an insufficient answer to global economic problems“Jobs” is an insufficient answer to global economic problems. In numerous posts of my blog I have commented on the power of various four-letter words, some that can be used in polite society. Jobs is probably the single most used four letter word in today’s political world that can be printed in family newspapers. The lack of sufficient employment to create economic growth is a problem facing many, if not most, nations of the world. In the United States, the figures may show that if we include the unemployed, the under-employed, those who have officially dropped out of the work force, the young that never had a chance to find a paying job and the undocumented immigrants who are supporting families add up to perhaps 20% of the employed base. We know of hardly an extended family that does not have a member qualified to be included in this total. The conventional thinking is that government needs to indirectly cause employers to hire these people.
An unconventional approach would say that this is the wrong way of looking at the situation. As is usual
we measure what is easy to measure, not necessarily what is important. Both for the employed and those who are beyond payroll status, what is important is the quality and quantity of the work being done. There are many unmet needs of our society that should be addressed. In almost every society there are at least three common deficits. When we look around us, up-close and at a distance, our physical infrastructure is approaching an unsafe condition. Our method and practice of education is producing children who are not prepared to get, hold and prosper in the jobs of today and tomorrow. The third major shortfall is that there is a crying need to modify people’s behavior in terms of what they eat, exercise, and how they use their precious time, etc. Today’s government cannot really address these issues and if it could, it would probably do a poor job. Private businesses are stretched to meet their own internal needs; thus some of the workload falls on the non-profit world. The problem is that these institutions and to some extent families, all manage their expenditures carefully and for the most part, extremely prudently. What they don’t do is measure the productivity gained through the changed lives of their various assisted clients.
These productivity measures (including the value of work and maintaining a home) are difficult to measure, but some attempts are needed. As someone who is involved with a large number of tax exempt organizations (usually regarding their investments and other financial considerations), I hear very little comments relating to the measurement of the productivity that is being created for the various users of the organizations’ services. What is the lifelong value of a healthy baby compared to a chronically sick one? Returning a worker to full employment is worth what? Educating a child to get and hold a job of the future has what benefit? Helping a family eat healthier has what value? As is often the case, any measure is better than none; and over time, with diligence, measurement gets better. My guess is that for our economy these aggregate improvements, if encouraged, could in a somewhat tangible value, equal our commercial production of goods and services. Remember those employed in the US and in many other countries are a minority of the total population.
OK with the thought, now what should be done about it? There are many things that we should do. First, encourage volunteer activities for all who are not fully employed or in an organized sport or intellectual activity. Second, if we continue to have complex tax codes, recognize the value of these non-profit gifts to society through the tax code. Third, organize work parties to help with building the infrastructure in our schools and neighborhoods. Finally, track the benefits to the clients helped, to instill senses of pride and accomplishment for the individuals and their commitment. An interesting side benefit of this potential surge in volunteerism is that it may well be a very good training ground for future employment. So when you hear various political leaders talking about a jobs program, guide them to a work-oriented program both on the pay and volunteer level, but in all cases demand various measures of productivity.
Could there be some benefit if temporarily the US debt ceiling is not raised? I am sitting here on a lovely sunny Sunday afternoon with the television on mute waiting to see if anything of substance comes out of the political conference between the White House and legislative leaders on the debt ceiling. I believe that all of us hope that they can agree on a series of sound decisions on expenditures and possible changes to the tax code. But what would happen if August 2nd came and there was no agreement? We have never experienced this exact situation before. Many are afraid that it would be cataclysmic. Some believe that while bad, that there can be some benefits. As required by law, all bonded debt with interest will be paid. This is important, as an increasing portion of our debt is owned by foreigners. However, since we have been operating at annual deficit for many years, there will not be an immediate source of income to pay our non-bonded debt, which is largely various government payrolls (and payrolls dependent upon federal funds) to many Americans. To meet most of these requirements, like the rest of us, the government will have to come to a difficult decision to prioritize its payments. A possible offset to fill a portion of this hole is the sale of some of the government assets. We don’t know the true situation, as no balance sheet with the estimated value of the US government’s assets has been published.
One of the legitimate concerns of some is that an internal payment lag would hurt the standing of the dollar in the world and in the marketplace. In a strange and convoluted way, the monetary value of the dollar could rise. First, one needs to recognize that almost all paper currencies are losing value to inflation and in many cases, increasing their debt load. Many international investors believe that the dollar is the best of a bad lot. The recent rise in the relative value of the dollar is perhaps due to the fact that it is safer than other currencies. This safety is not a function of a government balance sheet, for as noted, it does not exist. The safety is primarily based on the strength of our military and geographical location to avoid a rapid foreign take-over. (With the expected substantial cutback planned for our military forces, we need to be thankful to wide oceans and reasonably friendly neighbors.) Traditionally the value of our currency was based on the implied promise of our taxing power on our citizens. The current impasse questions the strength of this implied action. Out of this clash of too high expenditure and too low tax revenues will come, eventually, a new equilibrium. As the problems that caused this conflict have been building for many years, perhaps as far back as the 1930s, the economic value of the dollar based solely on domestic considerations should have been declining. This new equilibrium may well give the dollar a sounder base and could in turn lead to some appreciation.
The second result that may come out of this is a clearer understanding on the ability of a creditor to sue the US government. Historically, no suit is possible without its permission. This is why, in many respects, high quality corporate debt is more valuable than US government paper. Quite possibly coming out of a temporary delay in payment by the government, a new standing of its obligations will be confirmed by a competent court.
What do you do with these unconventional thoughts? After some consideration, you should see if these views change your existing investment outlooks. Second, and much more importantly, you should review existing more conventional views to see whether you are prepared for some unexpected result to challenge your portfolio. A list of current somewhat conventional views is shown below:
- Interest Rates will rise over the next several years.
- We will see the price of oil at least at $150-200 a barrel sometime in the foreseeable future.
- Past performance is a good way to screen for investment managers at all times.
- In choosing an investment management firm an easily explainable investment process and discipline is required.
- Only managers with a well-defined succession plan for their operating companies and investment managers should be considered.
What Do I Recommend? Even though I very much value my US Marine Corps training, I do not want to be invested in a lockstep portfolio that is rapidly marching only in one direction. I believe in regularly examining some unconventional approaches and people, to combine with more conventional approaches. The value for my clients is that we provide individually selected portfolios of mutual funds that permit having a number of different views working for them. The visibility of their portfolios and other critical disclosure information is reassuring most of the time.
Please share your thoughts on conventional and unconventional thoughts and how they might impact your investing.
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