Private citizen, Alan Greenspan, could
afford to be blunt. “Our choices right now,” he said in early
August 2010, “are not between good and better; they’re between
bad and worse. The problem we now face is the most extraordinary financial
crisis that I have ever seen or read about.”
These comments echo a growing
sentiment that Americans are up against something far different from the
average downturn. Thus far, according to the Pew Economic Policy Group, the
financial crisis has cost the American people $3.4 trillion in lost real
estate wealth; $7.4 trillion in lost stock wealth; and 5.5 million jobs.
Pimco’s Bill Gross calls this change in the national psyche the
“new normal” -- an economic environment marked by reduced
expectations, slow growth. falling incomes and low returns on investment.
The New York Times’ Nelson
Schwartz recently lamented: “The new normal challenges the optimism
that’s been at the root of American success for decades, if not
centuries.” In turn the new normal has spawned a quantum change in the way
Americans view the economy, their future prospects, and how they should
employ their capital. The real question facing Americans -- public policy
makers and citizens/investors alike -- is not what constitutes a positive
attitude, but what constitutes a healthy attitude, one capable of guiding
investors through the next, and perhaps even more dangerous, chapter of the
financial crisis.
When the financial crisis began to
take its toll on the United Kingdom in 2008, Queen Elizabeth at a meeting
with financial analysts asked the logical question: “Why didn’t
anyone see this coming?” Though directed at the London financial
community, it could have just as easily been put to the mainstream media,
academia, the politicians or the regulatory apparatus of the government. The
answer she received would soon become standard fare: “No one saw this
coming.” The implication, of course, was that if no one saw it coming,
then no one reasonably could be held accountable.
For countless private investors on
both sides of the Atlantic Ocean, Queen Elizabeth’s question prompted a
more personalized assessment: “Why,” they asked their financial
advisors, “wasn’t I advised that this might be coming?” For
those completely honest with themselves, the question reduced to “Why
didn’t I see this coming?” After all is said and done, each of us
is responsible for the stewardship of our own portfolios, and to blame anyone
else is pretty much an exercise in both futility and passing the buck.
At the height of the stock bull
market in the late 1990s and early 2000s, too many investors forgot that a
healthy skepticism was part and parcel of a successful approach to the
market. Unfortunately, that loss of focus contributed to millions believing
the utopian mantra that markets and the economy no longer cycled (the
Goldilocks economy), that we were on a one-way street to perpetual prosperity
(the end of history argument), and that the stock market would never falter
again. Such unmitigated positive thinking cost investors trillions during the
subsequent stock market meltdown and credit crisis.
Even a cursory study and understanding
of the financial markets and their history might have prevented, or at least
diluted, those losses. After all, the history of financial cycles in reality
is just as rich in mania, panics, bubbles and crashes as it is in bull market
triumphs, although only a handful on Wall Street would have subscribed to
such anecdotal evidence during the first decade of the 21st century. In the
end, the most damaging result of unmitigated positive thinking is that it set
up its practitioners for failure and allowed others to exploit it to their
own advantage.
In the wake of the financial
meltdown in 2008, Alain de Boton dispensed the following advice in a
Financial Times opinion piece:
Seneca
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It is time to recognise how odd
and counter-productive is the optimism on which we have grown up. For the
last 200 years, despite occasional shocks, the western world has been
dominated by a belief in progress, based on its extraordinary scientific and
entrepreneurial achievements. On a broader perspective, this optimism is a
grave anomaly. Humans have spent most of recorded history drawing a curious
comfort from expecting the worst. In the west, lessons in pessimism have
derived from two sources: Roman Stoic philosophy and Christianity. It may be time
to revisit some of these teachings, not to add to our misery but precisely so
as to alleviate our sorrow.
To focus on the first of these
sources, the philosopher Seneca should be the author of the hour. Living in a
time of financial and political upheaval (Nero was on the Imperial throne),
Seneca interpreted philosophy as a discipline to keep us calm against a
backdrop of continuous danger. His consolation was of the stiffest, darkest
sort:
“You say: ‘I did not
think it would happen.’ Do you think there is anything that will not
happen, when you know that it is possible to happen, when you see that it has
already happened?”
Seneca tried to calm the sense of
injustice in his readers by reminding them -- in AD 62 -- that natural and
man-made disasters will always be a feature of our lives, however
sophisticated and safe we think we have become.”
These are not the thoughts of a
pessimist but of a realist. As the first draft of this essay was written, a
volcano had erupted in Iceland shutting down air traffic in Europe, an oil
well accident in the Gulf Mexico threatened the Louisiana coastline and an
economic crisis in Greece had shaken Europe’s economy to its
foundations. Seneca was correct. In the end, there is as much justification
in preparing for the worst as there is for the best.
Fed chairman, Ben Bernanke, made a
similar point to Seneca’s in a speech before the Council on Foreign
Relations in March, 2009 in the wake of Wall Street’s near collapse in
late 2008:
Financial crises will continue to
occur, as they have around the world for literally hundreds of years. Even
with the sorts of actions I have outlined here today, it is unrealistic to
hope that financial crises can be entirely eliminated, especially while
maintaining a dynamic and innovative financial system.
By this, I do not mean to suggest
that one should live life with a cloud constantly hanging over his or her
head. At the same time, an unwarranted optimism, as both Seneca and de Boton
suggest, can lead to unfortunate results. A well-grounded, realistic attitude
covers the middle ground -- a synthesis between optimism and pessimism -- and
comfortably suits the times in which we live.
Michael J. Kosares
USAGold - Centennial Precious Metals, Inc.
www.USAGold.com
Michael Kosares has over 35 years experience in the
gold business and is the founder/owner of USAGOLD-Centennial Precious Metals.
He is the author of The ABCs of Gold Investing: How to Protect
and Build Your Wealth With Gold as well as numerous magazine and internet articles.
He is frequently interviewed in the financial press and is well-known for his
ongoing commentary on the gold market and its economic, political and
financial underpinnings. For a free subscription to USAGold’s newsletters, please go to the USAGOLD NewsGroup page.
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