This last week of October 6th to 10th was absolutely horrible.
My friend Frank called me on Friday, and wryly commented that it felt like the end of the world. Turns out his clients are calling him as well, and with the whole world collapsing, faith become a big point in his consoling. That faith in the market, in the capitalist way was also on my mind a lot in the last few weeks. The big mess is often described as the symptom of collapse of confidence, of trust. Faith, confidence, trust, hope, turns out the concept captured by these corny nouns have a price, and when that price drop in a hurry it squeezes your heart, blood vessels, in addition to your net worth. You stare at your carefree and happy kids and feel that sense of a kick in your stomach when you know you somehow have failed them despite what you thought was your best effort, your whole generation failed the trust of their generation on that expectation to make it better, and we will be leaving them with a mess.
Frank's family came down on Sunday, Frank would again preach faith and strategy, a job perhaps made easier with the 900 points bounce for Dow on Monday, with the rest of his family taking a day off thanks to Mr. Christopher Columbus and his faith that India was just a few days' sailing west from Madrid. We got together for dinner with the families of two other friends, we talked about what happened to our world and to our employers: Frank is with Merrill and two of the ladies at the table Freddie Mac. And we joked about the new emerging socialism with American characteristics. Mercifully the restaurant has not jacked up the price yet as the other places have done so everybody left with the satisfaction that friendship and good food are still things you can lay your faith on.
Over seven years ago when we watch in horror the crumbling of the WTC towers, we knew that sense of physical security was forever lost, then there were all those chattering on media about duct tape, canned food, my kids' kindergarten to this day still requires that we pack an emergency kit, with pictures of parents and grandparents lest we somehow got separated forever in the chaos after an anthrax attack unleashed by Osama. But there was also the confirmation, faith if you may, that if our way of life is worthy of so much hatred and venom, our mundane daily patterns of job, commute, mortgage, rearing kids, vegetating in front of an NFL game on ESPN, and all that, it must be worth something. So we took up more debt, bought bigger house, so our kids can go to better schools. If security can't be trusted then let's pack more into the theoretically slightly shortened life expectancy.
The world runs on faith, and that faith need constant confirmation and reinforcements. That's why every Sunday around noon you can count on a traffic jam on VA Rt. 7 near McLean Bible Church. Faith gave GOOG shares it's valuation; faith, and of course some 'valuation analysis' that enhanced the faith, led Dodge and Cox fund managers to tell me in their semi-annual 2008 reports that even though the fund did not perform well in 1st half 2008, they loaded up on Fanny Mae and took a position in AIG for the first time, on good valuation. You have to have faith that the whole system works, and trust your peers and counter parties will be there tomorrow to honor the contract or that handshake over burgers and beer.
The world also runs on 'logic'. 'True' logic may not actually exist I must admit, but seemingly valid causal relations substantiated by empirical observations are always constructed with which you can model the world, and with that model you can start a hedge fund. When all 8000 hedge funds deleverage at the same time we see the horror movies of last week. So you start to think you cannot trust anything but cash, and even that is only made plausible by the government's backing all MM funds. But watch out there pardner, these days confidence and trust is only possible by helicopter Ben dropping sacks of shinny new bills on those banks from which trust and faith are the least detectable. You see, logic tells us money buy more trust, because money convey trust that 'somebody', will redeem it later. What the bills really should say is "In Borrowers We Trust", and of course that trust has come under challenge of late.
I have no right to fain naivete, our trust in the 'system' had come under challenge quite a few times already to tell the truth. Growing up in the 1970's China, we believed socialism is good, capitalism bad. In the late 80's we trusted the Chinese government would not open fire on citizens of Beijing. In the US of late 90's we believed the new economy fueled by Internet fully justified the valuation of my AOL stocks. And of course until very recently we all thought the equity in real estate is actually 'real'. These days we trust the governments will be the firewall against the collapsing trust in the financial system, we trust the treasury bills, we trust the US government will not default.
Trust is the fertile ground from where corruption, abuse and incompetence grow, which as a matter of natural law will break that trust at the most inopportune moment. Trust lead us rationally behaving average Jose to test the boundary of logic and start to behave irrationally. Trust will always decay.
This rumbling essay has come to a point where I am supposed to wrap it all up with some heavy or up-lifting pronouncements, some prediction, or at least some cute word twisting. But I can't think of any of that. Faith and trust in the world we live in, like that sense of physical security we sort of lost a short while ago, once broken is hard to rebuild not to mention expensive. What other fundamental elements we are taking for granted today may be challenged and broken in the coming years? I fear we may have to find out about that too soon, and at the most inconvenient time, but it's also inevitable based on past and recent experience. I just hope I can still trust friendship and good food until that day comes. We put our faith in family, friends, God, the capitalist system (or maybe not), and let faith sustain us, until that faith is betrayed, but that's just fine......
My friend Frank called me on Friday, and wryly commented that it felt like the end of the world. Turns out his clients are calling him as well, and with the whole world collapsing, faith become a big point in his consoling. That faith in the market, in the capitalist way was also on my mind a lot in the last few weeks. The big mess is often described as the symptom of collapse of confidence, of trust. Faith, confidence, trust, hope, turns out the concept captured by these corny nouns have a price, and when that price drop in a hurry it squeezes your heart, blood vessels, in addition to your net worth. You stare at your carefree and happy kids and feel that sense of a kick in your stomach when you know you somehow have failed them despite what you thought was your best effort, your whole generation failed the trust of their generation on that expectation to make it better, and we will be leaving them with a mess.
Frank's family came down on Sunday, Frank would again preach faith and strategy, a job perhaps made easier with the 900 points bounce for Dow on Monday, with the rest of his family taking a day off thanks to Mr. Christopher Columbus and his faith that India was just a few days' sailing west from Madrid. We got together for dinner with the families of two other friends, we talked about what happened to our world and to our employers: Frank is with Merrill and two of the ladies at the table Freddie Mac. And we joked about the new emerging socialism with American characteristics. Mercifully the restaurant has not jacked up the price yet as the other places have done so everybody left with the satisfaction that friendship and good food are still things you can lay your faith on.
Over seven years ago when we watch in horror the crumbling of the WTC towers, we knew that sense of physical security was forever lost, then there were all those chattering on media about duct tape, canned food, my kids' kindergarten to this day still requires that we pack an emergency kit, with pictures of parents and grandparents lest we somehow got separated forever in the chaos after an anthrax attack unleashed by Osama. But there was also the confirmation, faith if you may, that if our way of life is worthy of so much hatred and venom, our mundane daily patterns of job, commute, mortgage, rearing kids, vegetating in front of an NFL game on ESPN, and all that, it must be worth something. So we took up more debt, bought bigger house, so our kids can go to better schools. If security can't be trusted then let's pack more into the theoretically slightly shortened life expectancy.
The world runs on faith, and that faith need constant confirmation and reinforcements. That's why every Sunday around noon you can count on a traffic jam on VA Rt. 7 near McLean Bible Church. Faith gave GOOG shares it's valuation; faith, and of course some 'valuation analysis' that enhanced the faith, led Dodge and Cox fund managers to tell me in their semi-annual 2008 reports that even though the fund did not perform well in 1st half 2008, they loaded up on Fanny Mae and took a position in AIG for the first time, on good valuation. You have to have faith that the whole system works, and trust your peers and counter parties will be there tomorrow to honor the contract or that handshake over burgers and beer.
The world also runs on 'logic'. 'True' logic may not actually exist I must admit, but seemingly valid causal relations substantiated by empirical observations are always constructed with which you can model the world, and with that model you can start a hedge fund. When all 8000 hedge funds deleverage at the same time we see the horror movies of last week. So you start to think you cannot trust anything but cash, and even that is only made plausible by the government's backing all MM funds. But watch out there pardner, these days confidence and trust is only possible by helicopter Ben dropping sacks of shinny new bills on those banks from which trust and faith are the least detectable. You see, logic tells us money buy more trust, because money convey trust that 'somebody', will redeem it later. What the bills really should say is "In Borrowers We Trust", and of course that trust has come under challenge of late.
I have no right to fain naivete, our trust in the 'system' had come under challenge quite a few times already to tell the truth. Growing up in the 1970's China, we believed socialism is good, capitalism bad. In the late 80's we trusted the Chinese government would not open fire on citizens of Beijing. In the US of late 90's we believed the new economy fueled by Internet fully justified the valuation of my AOL stocks. And of course until very recently we all thought the equity in real estate is actually 'real'. These days we trust the governments will be the firewall against the collapsing trust in the financial system, we trust the treasury bills, we trust the US government will not default.
Trust is the fertile ground from where corruption, abuse and incompetence grow, which as a matter of natural law will break that trust at the most inopportune moment. Trust lead us rationally behaving average Jose to test the boundary of logic and start to behave irrationally. Trust will always decay.
This rumbling essay has come to a point where I am supposed to wrap it all up with some heavy or up-lifting pronouncements, some prediction, or at least some cute word twisting. But I can't think of any of that. Faith and trust in the world we live in, like that sense of physical security we sort of lost a short while ago, once broken is hard to rebuild not to mention expensive. What other fundamental elements we are taking for granted today may be challenged and broken in the coming years? I fear we may have to find out about that too soon, and at the most inconvenient time, but it's also inevitable based on past and recent experience. I just hope I can still trust friendship and good food until that day comes. We put our faith in family, friends, God, the capitalist system (or maybe not), and let faith sustain us, until that faith is betrayed, but that's just fine......
