13.9.08

A Momentary Reflection on History

“History shows us the truly amazing extent to which intelligent, well-informed and resolute men, in the pursuit of economy or in an altruistic passion for disarmament, will delude themselves about realities.” (Modern Times, Paul Johnson, p175)

Nothing has come so close to capturing the heart of our current financial situation as this statement written—not primarily about markets and economies—about the regional instability and political blindness that led to the rise of Japan as a global threat in the 1930s and, ultimately, World War II.

It is easy to say that the housing bubble was predictable, easy to call “blind” the men (and women) at the helm of stations like Bear Stearns, Lehman Brothers, Washington Mutual, IndyMac, Countrywide, and a thousand other banks. Everybody loves being a sidelines quarterback—silent when wrong, but multi-active on the blogsphere (and Fool boards) when right. “I called it!”

I’m not saying these leaders didn’t make bad decisions, nor had lapses in judgment. But eventually, alterations in models force all of us to reexamine our fundamental principles and, at times, cause us to radically change long-held suppositions. For example, how long would the rise of oil have to increase (recognizing we are currently in a commodity pullback), before even the “bubble bears” would have to say, “Something has fundamentally changed and so too must my model.”

In fact, that is the reality of investing. Otherwise, we’d all be piling in to Corel, Hotmail, and Altavista. These each were leaders in their areas at one point. As late as 1990, Wordperfect (not yet owned by Corel) was the de facto standard for word processing. Corel Draw owned a market unfamiliar with the name of Adobe. Altavista was one of the lead search engines a decade before anyone would use the term Google (despite the “misspelling”) for anything but a mathematical formula. What changed? Fundamental trends which, over an ever-lengthening period of time completely adjusted fundamental application of core principles. No, “we” didn’t stop buying value, or looking for growth. But how this was applied—that changed.

So here are 10 questions to think about over the weekend:
1. Did the rise in the dollar (by 4 points in the last 3 months) cause the fall in commodities, or vice versa? Or was there any correlation whatsoever?
2. Was the flight from commodities due to fear over being overbought and, if so, are they now oversold? Or was the flight from commodities due to the cash crunch that many banks, funds, and individuals find themselves in?
3. For the first half of the year, equities and commodities reacted inversely, but now are tracking in parallel? What does that mean for investors?
4. Will the Fed bail Lehman Brothers over the weekend? With what equity backing? And what will that ultimately do to the value of the dollar internationally?
5. China and Russia are the largest holders of the US Dollar. Relationships with both are…less than optimal. China continues to be the leader in energy growth consumption, while Russia remains the leader in Natural Gas. How does this bode for the US, especially in light of our continued printing of fiat money to back failing investment banks?
6. Will Russia seek to acquire once-held segments of Ukraine, just as it now is holding sections of Georgia? Will NATO respond, and how?
7. What long-term impact will the Iranian Oil Bourse have on dollar stability and oil prices?
8. McCain wants to extend our military imperialism (think Brittan, 1920)—and pay for it with what?
9. Obama wants to tax the heck out of big oil and the top 20%—and do what when these entities are in their waning seasons? He also wants to make healthcare free to all (think France in the last 30 years)—what will this ultimately do to the healthcare industry?
10. What will be the global consequences of either a) pulling our extended military out of Iraq and Afghanistan or b) actually getting one or both of these nations to a place of (some semblance of) stability?

These are global questions, intricate in their implications, complex in their development, massive in their scope, but altered often by nuanced decisions—a condition ripe for “intelligent, well-informed and resolute men, in the pursuit of economy or in an altruistic passion for disarmament” (of which many of us claim to be!) to delude ourselves about reality—to make mistakes, have lapses of judgment, and let a truly-changing global politico-economic environment affect long-held beliefs.

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