With the days of esoteric investments behind us, we will need to look at the investments of the old economy if we are going to find the opportunities of the future.
One view of what has happened over the last couple of decades is that simply put, too much leverage has created too much capital, generating too much wealth demanding too many opportunities. As financial engineers devised new places to park cash, they began to believe their own balderdash, and so more leverage was created to take advantage of the growing marketplace for their contraptions masquerading as investments.
If we are going to get through this period, and if we are to thrive in the next decade, we are going to need to get back to basics. If we all continue to go to work, those of us who retain our jobs, put in our best effort and look to create real value, the economy will at least putter through. That said, and despite the staggering losses reported, there is still a ton of cash and wealth on the planet. For the most part our financial system is a zero sum game. Although I’d argue that temporary bans on short selling might actually, and ironically, cause real losses of capital, that is probably the making of another post.
Nonetheless, for most trades there is a buyer and a seller, or more recently a winner and a loser. After all, each person who sells a depressed asset below its fair value is giving value to the counter party. The only way we really create value is to create or offer products and services that we need or want, even if we don’t yet know we need or want them, think iPod.
As we move through and past this storm, the eye of which has yet to hit us, we must consider how we rebuild and how to create rules that will enhance the ability of real people to make real products and offer real services, as opposed to financial widgets of mass destruction.
As Michael Pollan notes in In Defense of Food: An Eater’s Manifesto, we need to eat those foods that our grandparents would recognize, or at least consider ingredients that they would know. I propose that the future of our economy may follow an equally simple philosophy: only invest in things that your grandparents would understand.
This article by Thomas L. Friedman was penned yesterday and printed today. It is a wonderful view on many of the comments I have posted here in recent weeks. I’d encourage all to read it.
Green the Bailout
Thomas L. Friedman, New York Times, September 27, 2008
Statler & Waldorf
Eric Liebowitz, New York Times Op-Art, September 26, 2008
This one is straight from Wikipedia. You’d have thought someone in charge of markets had heard of this before:
In engineering, Fault-tolerant design, also known as fail-safe design, is a design that enables a system to continue operation, possibly at a reduced level (also known as graceful degradation), rather than failing completely, when some part of the system fails. The term is most commonly used to describe computer-based systems designed to continue more or less fully operational with, perhaps, a reduction in throughput or an increase in response time in the event of some partial failure. That is, the system as a whole is not stopped due to problems either in the hardware or the software. An example in another field is a motor vehicle designed so it will continue to be drivable if one of the tires is punctured. A structure is able to retain its integrity in the presence of damage due to causes such as fatigue, corrosion, manufacturing flaws, or impact.
We need more than a bailout, we need solutions.
Wikipedia, 06:45, 1 September 2008
In dealing with Wall Street types, the moral is not trusting the devil you know over the devil you don’t. The moral is that anyone you strike a deal with is likely to, in fact, be the devil. Caveat Emptor.