FINANCIAL CRISIS - The Crime of the Short Term

FINANCIAL CRISES AND REMEDIES
Tracking the Wrong Dogs

. . . so it doesn’t happen again? Not

Warren and John and me
. . . plus a Polite Condemnation

The Crime of the Short Term

Three Related Items from The Wall Street Journal
September 9, 2009

Page One

"Harvard, Yale Are Big Losers
In 'The Game' of Investing"
What remotely possible good does this serve the reader, the public, or anyone? None, I submit, except a certain, possible schadenfreude among those who did not go to Harvard or Yale. The schools' longer-term records show memorable, praiseworthy outcomes. Harvard: 14 to 17% per annum over the past 30 years, and Yale, 19.1% per year for the past five fiscal years.

But this headline and story segue directly to Justin Lahart's report, "An End to the Focus On Short Term Urged", page C16. And that's where the shocker lies. It points to the setting and circumstances of a signed, extremist petition to the U.S. government. It urges to remedy an absolutist, but erroneous, 'cause' of the ongoing financial and economic crisis which the petitioners bemoan along with the rest of the world. See here.

By accident of alphabet, and perhaps some other factor of random choice, John Bogle and Warren Buffett are the first two names of signatories on the list of 28. These two gentlemen are titanic icons of investing among the public and many professionals, myself included.

Still, with great respect and not enough humility, I am moved to call them and their co-signers on the carpet for their well meant, but serious and dangerous error which will extend the harm it is meant to cure.

Messrs. Buffett and Bogle don't know me. I have never met either of them. But it is clear to me that they both subscribe to the identical philosophy--value investing. The antithesis is growth investing. The most complete antithesis is pure price trading, ignoring totally anything to do with information regarding the value of a company or its earnings-growth rates. That's me, ignorant of information, but aficionado of price behavior. I tell you this in full disclosure so that you may discount possible bias you may perceive in my following analysis and daring (?) conclusion.

The Aspen Institute Press Release
Posted: Sep 09, 2009 – 09:39 AM EST

"28 Business, Investment, Academic,
& Labor Leaders Join Aspen Institute
in Bold Call to Overcome
Short-Termism"
Link

" . . . to endorse a bold call to end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good."

"Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work,” said Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “Now is the time for bold ideas to drive change in the incentives and behaviors critical to transformation of how value is created and sustained."

Translation: "short-termism" is the cause of financial crisis. The government must step in now and abolish it by law, regulation, and taxes.

The great flaw in The Aspen Statement as described above is an unsupported premise without proof or documentation, and the danger is government action where none is warranted.

I was astonished to find two public national icons of investing--the capstone activity of the capitalist, free-market process--commingled with other icons of business and industry, espousing, even thinking, of an invitation for government to step in. And to fix by regulation and 'motivational' taxation through law, rules, and mandates what they, the signatories, and others, apparently perceive and articulate as the problem which causes or aggravates the financial panic and crisis we are now enduring.

They have all fallen, I am afraid, including the rest of us, victims to a transient illness most are unaware of and which is subject to no known remedy. The pall of dysconfidence has clouded the minds and judgement of the best intellects in the country and on the planet.

It is a disease. But it is psychotropic, indiscernible to standard medical diagnostic and practice. Do you know anyone who believes this, let alone even considered it? Even the best of our minds think in squares and tunnels nearly all of the time. To think outside the squares and tunnels requires a deliberate affront to established norms, dogma, and tradition.

To put it simply, this disease is the advent of public lack of confidence, rapidly erupting into panic, then descending continuously into chronic confusion, worry, and despair. The disease is cyclical. It rises and abates about every other generation--roughly 70-75 years. It is not curable because it's cause is beyond human control. It effects may be ameliorated through anticipation, not through financial regulation or other government-sponsored measures.

All the sequences and maladies offered as causes to date, including now 'short-termism', are symptoms, not root causes at all. The symptoms are not the disease but the pointers to it. You have to look beyond the system itself to find the possible pathology that afflicts it.

To do so, we must burst forth from the customary tunnels and boxes in which we spend our days and years thinking and acting. For example, take Aspen's 'short-termism'. That is an abstract idea, not a physical thing. Suppose there were a physical-thing corollary to the abstract, non-physical idea. Further suppose that there is a connection in time between the two.

Then you would become able to match something that lies in the realm of soft science with something in the domain of hard science, with the great benefit that the related soft phenomenon becomes quantitative, specific and measureable on the hard, physical-science side.

That's all I have done. I am not the first, nor only one to do so. The premise is: finances (micro and macro) move with the cycles of planets. Thereby the physical affects the mental and emotional. This is obvious in everyday affairs. The sun rises and we work. It sets, we play and sleep. The seasons come and go. Crops flourish and are harvested. Tides rise and fall. We swim or drown. Do you not think, the human body being 55 to 60% water, is not subject and responsive to the same forces on nanoscale as are the rivers and oceans and other living matter on the planet, scales so small as to be undetected and unmeasurable with currently available instrumentation?

The physical analog to dysconfidence and its topside inverse (überconfidence) is the synodic period of Saturn and Neptune.* These planets are innumerable orders of magnitude more massive than the water content of the human body and brain, nonetheless transit points along their joint path mark stock market peaks and crashes with panic and crisis ensuing. The last comparable episode was 1929. The recovery lift-off year was 1942. Parallel dates in our era are 2000 and 2013.

No amount of human scrambling will change the inexorability of the dates.

How do I know all this? The same way you do. From observation, intuition, and experience--the same way any invention or new discovery is developed. Warren and John should be (warily) comfortable with Saturn and Neptune as visitors. The duration of the visit is at least 36 years and twice that for the purposes of this article.

Regarding Warren Buffett and John Bogle, they share rich, entrenched similarities in investing that have in the past, and will again, enable them to weather all this current crisis without caving in to the fashionable cry for the need of more government. Both are exemplars of what they believe in, held passionately over a lifetime. It is a shame to see their wise understanding of free markets appear to fade at the finish.

'Copernicus' believes that they, and the 26 other cosigners of The Aspen Institute document, along with the rest of the world, suffer unaware, a temporary but extended, invisible, pathological dysconfidence, the bottom half of a real, physical, universal, long-term confidence cycle in human behavior.

A direct quote from Aspen: “Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work." Supra

That is as logical as penalizing the heart beat for speed (72 bpm) and rewarding the breath rate for slowness (16 bpm) in their relative contributions to the metabolism of the human body.

Conclusion. Anticipate and ameliorate. Not react and regulate, deepen, and delay.**

--'Copernicus'

September 15, 2009

* Notes. Please--withhold trigger judgement momentarily. For many readers in academia and elsewhere, this is a nonsense proposition. I remind you that even as late as 1633, it was worse than nonsense, it was dangerous and suspectedly heretical that the earth moved around the sun, for which public pronouncement, Galileo Galilei was indicted, tried by the Roman Inquisition, and sentenced to house arrest for the rest of his life. The condemnation of his book and Copernicus's book on a similar topic remained official doctrine in Church records till 1835.

The Saturn-Neptune pair is one among 36 synodic periods that characterize the mutually influential behavioral patterns of the solar system. All act continuously and create the aggregate moving context and environment within which each planet and the sun exists and performs. Terrestrial performance includes biological phenomena, of which we are part.

**The mechanism for this is: initial large-scale government action bolsters public confidence. There is evidence of recovery. But then, when it is seen to fail, dysconfidence lapses to lower levels than before.

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