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The Cody Blog: Cody on RM: Changes Will Drive Our Future

Tuesday, June 27, 2006

Cody on RM: Changes Will Drive Our Future

Changes Will Drive Our Future
06/27/2006 3:58 PM

I can't remember before '49,
But I know that '48 was there,
My ears let in what I should speak out,
Hmmm, there's something in the air. - The Who

The trashing of the world's financial markets has us all questioning the sustainability of the ongoing bull market and economic boom times. We all look around and wonder if we're about to melt down like we did in 2000. Or maybe we'll crash like we did in 1987, and head into a recession like we did in the early 1990s. Heck, maybe we're doomed to a 1930s style depression.

These are serious issues and matter to all of us as investors, traders, employers, employees and citizens of the global economy. But are things really that bad? Is the world really teetering on the edge and our economy and society really that fragile? The short answer is a resounding no. We must not lose sight of the reality of this economy and society and how bullish both really are for our financial markets.

We often hear commentators say that the current market or economy is similar to the market or economy back at some other time period. They'll argue that 2006 is a lot like 1996, because the Fed's raising rates and the economy's cooling. Or that this time period is parallel to 1933 because the U.S. savings rate, in the way that our bureaucrats report it, has turned negative. Meanwhile, anyone who ever proclaims that it's "different" this time gets filleted for not having learned from the bubble. Well, despite the risks of becoming a piece of sushi, I'm willing to call it like I see it, and I'm here to tell you that it's a very different time, and that difference is a reason to believe that our stock markets, economy, and society are heading to all-time highs.

The fact is that, over time, just about everything does change. Here's a big change that nobody really knows how to reconcile with the past: We got off the gold standard back in the early 1970s, and the implications and ramifications of having a fiat currency are ignored when people make economic comparisons to times past.

And that currency debate is changing today, even though nobody's really writing about how big the change is going to become, because now that Google has rolled out GBuy to compete with eBay's PayPal, the two have created what in some sense could be argued to be a new class of currency. And MasterCard and Visa have made short-term debt freely available to the majority of the population, and we have to wonder how relevant the U.S. fiat currency, currently the world's standard, will be in another 70 years, when some young money manager will be arguing that any parallels to the first few years of the new century are specious at best and silly at worst.

Let's underscore a few more differences to times past.

In the 1930s, less than half the world's population could even read. Today, more than 80% of the world can read. And most of that 80% is in the developed world. And most everyone in the developed world now has access to the Internet in some form or another. And that means they have unfettered access to all the information the world has to offer, and that they can contribute to that information. And as all that information flows around, and lies, corruption, fraud, and other wrongs become increasingly difficult to carry out on any type of a large scale because everyone is watching everyone and can now reach out to everyone else. And that alone is another hugedifference, and yet another one that makes me more optimistic about the future of my stocks and economy.

In his piece yesterday repudiating 10 bullish arguments , Doug Kass wrote that the 1950s were "placid" and that today "is increasingly fraught with continued risks of terrorism, political change and other factors that will weigh on commodity supplies." I completely agree that our time is far different from the 1950s, but I believe we live in a much more placid time, and that placidity makes me more bullish than I would be otherwise because capital and information can continue to flow mostly unfettered during these times of relative peace.

In the 1950s, the southern U.S. was terrorized by the KKK and other terrorist groups who were born and raised right here on this country's soil. Not to mention that the developed world had just lost tens of millions of young, productive men to World War II, which came just a couple decades after the first. I will say that firsthand experience of terrorism weighs on my life and mind, but I don't think it's anywhere near the terror that folks must have felt in those world wars, though such a statement is purely anecdotal and impossible to quantify. More importantly, I think these terrorist concerns do impact the multiples of stocks (and boost the price of oil tremendously), and that as those concerns are alleviated, multiples will expand, driving the stock market in general higher over the coming years and decades.

Both today's, as well as the 1950s' political changes seem to me to be all about rooting out evil and corruption, although today's movements are driven by the fact that there are now billions of us who can report on such political and social evils. That means there's much less violence, death and war in these political changes. I think that the political changes in the world are increasingly positive, driven first and foremost by the aforementioned free information flows. These trends and the technologies driving them are now fully entrenched and aren't going to just disappear tomorrow. Someday, far, far in the future, probably, but not tomorrow.

Doug Kass wrote about the impact the differences in the time periods will have on commodities. I don't know how all of this will weigh on commodity prices, but my best guess is that with more than a billion people who can read, learn and invest in commodities and the incredible capital flow that follows, that the commodity cycles of years past are going to discounted and played out in much quicker time frame. Jim Rogers says 16-18 years is typical. In the modern, connected, literate world I believe that cycle will be cut by at least half. That would be another big change and one that would work to the benefit of all of us, both consumers and enterprises who consume the finished goods in which those commodities go into.

I really do hesitate to write all of this about how different it really is, because I fear the stigma that comes with being overly optimistic. I think that most people who argue against ever saying "it's different this time" are looking at a much broader picture and have their time frames messed up. Indeed, I agree that the economic dominance of the US will at some point be threatened by our endless borrowing and fiat currency. Every fiat currency in the history of the planet has eventually gone worthless, as the political reasons for devaluing a currency in the short run at some point always get the best of those in power. At some point. For all we know, that point could be 300 years in the future. Or thirty years in the future. So in that's sense, yes, I agree that it's "never different this time." But you have to frame that statement with time. And that time frame is mostly irrelevant to the near and intermediate term.

In all seriousness, with things getting so ugly and pessimistic, it's high time that we remind ourselves that we are indeed living in the most wondrous time full of more opportunity for more people in more places in the entire history of the planet. The single most important reason to be excited and bullish about the long-term future: We've got a lot more work ahead of us to keep the changes going. Let's get on it.

P.S. I want to note that I'm using the "mean" vs. "median" in regards to those literacy rates. I could very well use the same argument as Barry Ritholtz made when he grabbed some random report from some bureaucrats somewhere that shows the top income earners are growing richer at a faster pace than those below them. Following that same logic, I could sound the alarm bells about how it's the developed world that's getting a higher percentage of the world's literate population, but, just as it is when discussing incomes, it's not a zero sum game. The point being that we should all cheer for everybody everywhere to get more and learn more. And as most of the world is indeed getting and learning more, I see yet another reason to be excited about the future.

At the time of publication, the firm in which Willard is a partner was net long GOOG, although positions can change at any time and without notice.


Anonymous Anonymous said...

As one of your readers, I couldn't help to check your blog while sitting in an internet sports bar in the Playa Del Carmen,Mexico.Most likely it was probably prompted by the great 70's rock and roll overhead.

In any case, quite a brilliant article. Well said and well written. I believe you were well in the flow on this one. Keep the hits coming...

6/28/2006 01:19:00 PM  
Anonymous Anonymous said...

I have to disagree with your argument. Forget looking back a few decades - look back a few centuries and you see the same fallacies repeated. The history of markets proves that the more things supposedly change (technologically) the more they stay the same (in terms of investment cycles and speculative manias). Edward Chancellor in his excellent book "Devil Take the Hindmost" rebuts your argument completely. He shows that speculative manias always develop when a society experiences a major change in geopolitical leadership as well as new technology. The benefits of the new technology are believed to occur immediately rather than over years and decades.

Your references to information technology and the internet are playing the same tune. It isn't different this time. The market cycle will continue as technology changes our world.

6/28/2006 02:14:00 PM  
Anonymous Anonymous said...

from your understsanding of fiat money, it looks like you have read The Creature From Jekyl Island. The author is extremely bearish of any soceity that adpots such a currency, although your optimism is intriguing to me. I'd love to hear more of your reasoning in the future.

6/28/2006 07:02:00 PM  
Blogger kudlow_fan said...

Wow. That was the most thoughtful and balanced piece I have ever read on this blog. Bravo.

I would note that in tandem with increased world connectivity comes an ever shrinking world map. If we want to invade Iraq, it's not really different from invading Canada.

This poses the gigantic problem of the US becoming overextended in its military adventures. How many more wars can we keep online at once?

If that happens, I think the possibility for financial instability is an order of magnitude greater than anything we have ever seen before.

6/29/2006 12:41:00 PM  
Anonymous Anonymous said...

"History doesn't repeat itself, but it rhymes." This is the first thought that comes to mind everytime someone tries to compare today to any period in the past. Cody, you couldn't have said it any better in your piece (and also K&C) when referring to Rogers' prediction of the current commodity cycle. No one doubts that we're in bullish commodity cycle, but only fools would believe that it will repeat a similar cycle to those in the past. Always great to hear your thoughts.

6/30/2006 12:11:00 PM  

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