Monday, October 7, 2013

"This Time It's Different"

You can always count on Americans to do the right thing—after they’ve tried everything else. 
                                                                     -Winston Churchill

You know we've got problems when a Russian president sympathizes with an American president.

Here's what President Vladimir Putin said about President Obama's decision to cancel his trip to Asia for Asia-Pacific Economic Cooperation (APEC) summit this week:

Oct 7 (Reuters) - Russian President Vladimir Putin said on Monday he understood U.S. President Barack Obama's decision to cancel his trip to Asia and would have done the same if faced with the same domestic challenges....

"We see what is happening in U.S. domestic politics and this is not an easy situation. I think the fact that the U.S. president did not come here is quite justified," Putin said at APEC.

"I think that if I was in his situation, I would not come either. Any head of state would do that, probably."

Famed investor John Templeton used to say that the four worst words that any investor could say would be "This time it's different".

Templeton's point - echoed by most successful investors - was that "history doesn't repeat but it rhymes" (a Mark Twain quote).  The actual path of events may vary, but ultimately markets react in predictable fashion.  The trick is to have the emotional intelligence to recognize opportunities or risks, and act accordingly.

Most of Wall Street is convinced that the current budget stalemate will be resolved, and that the U.S. will not default on its debt.  I also believe, like Winston Churchill, that Congress and the President will eventually figure out a way to avoid financial catastrophe.

Still, I worry that the investment community is not taking the current situation seriously enough.

As I read the situation, the members of the House that are leading the charge come from districts that are very conservative, and voted heavily against the President last year.  There seems to be little reason for them to compromise, especially since they are aware that any agreement with the Democrats will be used against them in the next election.

But I am not sure what investors should do.  Selling stocks or bonds and heading into cash may offer near-term appeal, but market-timing has always been a fool's errand.  Moreover, the proceeds from any sale have to be reinvested into something - but what?

Yet I think it is possible that matters get worse before they get better.  Here's an excerpt from a good piece in the blog Business Insider:

This year, the stock market has barely been paying attention. Mostly investors are convinced that there will be a deal, and nobody wants to be out of stocks for even one day, lest they miss the "deal" and subsequent rally. Unlike in 2013, when the debt ceiling was on everyone's radar for months, this year, things have only come into view with days to go until the drop-dead date.

But 2013 is scarier for what it says about the whole system.

In 2011, the crisis could be chalked up to the times. We were still (basically) in the middle of a big depression. The deficit was soaring. And there was a "wave" election for the GOP (the 2010 midterms) the likes of which rarely comes along...

So what we know now is that we can't attribute the events of 2011 to some one-off fluke that was the result of bad times. This is how politics is now.

One party takes the maximalist position, and then decides its going to take the country hostage as its prime negotiating tactic. There's no reason to think, if a "deal" is struck this time, that this won't happen again in 2014, 2015, and every other time the debt ceiling comes up.

And blogger Barry Ritholtz writes in the Big Picture that stocks could fall 20% to 30% if no resolution is reached soon:

 “It turns out the market really doesn’t care much if [the shutdown] is a day or a couple of weeks,” says Barry Ritholtz, chief investment officer of Ritholtz Wealth Management. “Where it becomes a concern…is if weeks turn into months. If it goes past three or four weeks, that could take a big chunk off GDP, effect consumer confidence and really have an impact on earnings.”