In an op-ed piece of October 17’s New York Times world-famous entrepreneur and financier Warren Buffet urged American investors to return to the stock market and bet on the long term future success of the United States. “Buy American,” Buffett’s headline reads. “I am.”
The essay was a vote of confidence from a successful guy at a time when America badly needs a vote of confidence from somewhere, anywhere, for anything.
But is Buffett’s advice valid?
The gist of Buffett’s analysis is that when markets tumble, the best time to buy stocks has historically been before recessionary effects hit the broader economy. As Buffett explains it,
During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Or, if you need a more shorthand rule of thumb: “Be fearful when others are greedy, and be greedy when others are fearful.”
It’s hard not to like Warren Buffett, a guy who admitted openly on a recent televised interview that 1) his clerical staff pays higher income taxes than he does, and 2) that’s not right. No, he’s not out pestering the IRS to accept additional taxes from him as a mea culpa, but he does go out of his way to encourage Americans, to back American businesses, and to responsibly critique U.S. government policies, all the while managing to still enrich Warren Buffett in the process.
If there’s such a thing as an Everyman CEO, Buffett is the guy.
Still, many analysts see hard times ahead for the U.S. for many decades, not just many years. While it’s true that ‘buy low, sell high’ is still a decent way to conduct yourself in regard to the stock market, it’s also true (and Buffett admits it in the NYT essay) that the U.S. could be in for a prolonged decline before we see a Renaissance. What that means is that unless you are young and careful with what you purchase, this might not be a great time to jump into the stock market: Not because America will never come back–of course it will come back eventually–but because you may or may not be around when it does, and you may or may not pick the company that will thrive in whatever nation America is about to become.
Because the America that existed up until this month? That nation is effectively gone now.
What we are witnessing right now is for all intents and purposes the decline of an empire. How far will we fall? The most positive estimates have the U.S. going through a severe recession with a continued drop in housing prices, rising unemployment, and frequent government intervention through 2010 at least and possibly longer. Those are the optimists.
Pessimistic forecasts invoke Mad Max movies and survivalist nightmares.
I think the truth will, as usual, be somewhere in the middle, with the downturn being more severe than predicted in the press but less apocalyptic than predicted by the conspiracy theorists. Will some people find ways to get rich during these difficult times? Yes. Some people always do. The Chinese sign for crisis is also the sign for opportunity (whether it really is or not!) and so on and so forth.
But will most of us prosper?
No.
Most of us will be lucky to hang on to what we have, and any little bit of money left over will probably not be spent on stocks. Not for a long time.
What that means is that, while the stock market may be close to bottoming out at this point (who can say?), and while certain stocks might be worth buying right now for that reason (which stocks, even Buffett isn’t saying), the ability of most people to buy anything is going to go away for a long, long time, starting this Christmas if not sooner.
We are likely to see a stock market bottom, whenever it comes, followed by years of flat-lined market activity. Gains will be modest and unpredictable. Old standbys will go the way of the dinosaur and some surprising start-ups will briefly appear like shooting stars. Good guessers with lots of cash will be rewarded, but most people will just hang on until whomever we are going to be as a nation emerges clearly out of the 2008 smoke and carnage.
Many have made a credible case that the housing bubble was really an extension of the tech bubble and that, by replacing one bubble with another, we only forestalled and worsened the effects of an economic crisis that has been building for decades, not years. Manufacturing is no longer the foundation upon which the American middle class builds its wealth and security. We have been hemorrhaging manufacturing jobs, and a lingering distaste among many for the abuses of the labor movement that led to the disappearance of Jimmy Hoffa and the coronation of Ronald Reagan continues to keep us from doing what we need to do to shore up wages and opportunities. It’s fine to have beliefs, economic or otherwise, but here’s a fact that flies in the face of fiscal dogmatism: People can’t spend money they don’t have.
Not anymore they can’t, anyway. Not with credit markets frozen and jobs disappearing into the October mist like so many spectral visitors from America Past. With Christmas approaching, retail chains where I live are laying off employees.
Anyway you slice it, our “consumer culture” seems to be DOA. A victim of fiscal cardiac arrest.
So what does America do now? We don’t make things. We’ve lost the tech battle to China and India. We’ve tapped out our oil. Our young people are uneducated and unwell. And the final death rattle of a declining culture–rampant consumerism–is about to become a morality tale told to children around the wood stoves of the future by grandparents who lived through The Crash of 2008.
I appreciate Buffett’s encouragement, his faith in American business, and his willingness to step forward as a cheerleader right now. But I submit that the crisis we are facing is not so much a financial or economic one as it is an identity crisis, the biggest identity crisis we have faced as a nation since the Civil War.
Who are we and who do want to become?
The answers to these critical questions will determine our future prosperity.
Let’s hope and pray we get them right.
Related posts:
- Credit Crunch Hits Consumer Credit Cards with American Express’ New Policy
- Why a Culture of Speculation Has Led to the Economic Crisis
- Ford, GM, Chrysler Announce Losses; Can the American Middle Class Survive a Big Three Meltdown?
- 10 American Principles to Ponder
- Scapegoating: The Last American Growth Industry
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The statement that “people can’t spend money they don’t have”
is not supported by any historical data, but rather just the opposite. Our economic health depends on the movement of a currency through the different levels of society, and so far the only solution applied is the “Go now, pay later” fallacy which is in direct opposition to the statement in question. The moral and ethical basis for this fallacy can be a lengthy subject beyond the scope of this publication. For several decades most individuals and organizations from the US Government on down, have been spending money they don’t have, and this is exactly what has brought on the current situation. Instead of joining the growing chorus of criticism of highly visible entities such as Presidents, Governments, Banks etc. who may or may not be partly responsible, the clear responsibility rests squarely on the shoulders of the consumer driven public. We can plead ignorance or apathy and offer all kinds of rationale, but the bottom line is, we must learn and apply the difference between greed and need.
Thank you for your comment J. Ed. Grey. I know you speak for lots of people in saying that “go now, pay later” got us into this mess. That’s a great point.
However I think there are other ways to achieve what you call “…the movement of a currency through the different levels of society,” the most obvious one being a influx of new industry and new jobs all of which offer middle class wages and benefits. Since I don’t see any such development on the horizon right now, it’s my belief the current slowdown will be protracted.
So, investing in American stocks is not a bad idea and is definitely a great thing to say right now with all the negativity in the press these days, but as you point out so well, without new and significant investment in industry or some solid source of jobs and prosperity, the American people will go back to abusing credit, and Wall Street will go back to inflating the few assets that remain (like housing). We’ll see yet another bubble eventually and do it all over again.
When I was young we had a thriving economy with lots of movement of currency, but the use of unsecured credit was frowned upon. HELOC’s were called ’second mortgages’ and came with an element of shame—now they’re marketed as perks for homeowners. But–and this is a big but–back then we also had a thriving middle class. One household member with an industrial job could support everyone under that roof. Now we have households where each adult member has a couple of $8 or $10 an hour jobs and there still isn’t enough money to cover rent, utilities, food and medical care. If credit is available at the end of the month in that scenario, those people will use it–and they do. We haven’t even seen the unsecured credit bubble burst yet–watch for that next. It won’t be pretty.
Thanks again for your thoughts.