Death of the Modern
One can occasionally find deep contradictions in what otherwise would be considered the unadulterated artistic product of Romanticism as a movement, or perhaps, more widely, the brilliantly optimistic trappings of the Enlightenment. Deeper and darker threads, even in works hailed as hallmarks of individualist optimism, present themselves to the meticulous critic after sufficient scrutiny. This is to say, that which appears transparent and plain, rarely is. Be this a consequence of the deep and insatiable lust of curiosity that characterizes our species (more simply, that we are just seeing things), or some actual, tangible darkness in all expression, I'm not sure we know. Suffice it to say that, where the affairs of man are concerned, transparency is an illusion. Always.
Caspar David Friedrich's "Der Wanderer über dem Nebelmeer" ("The Wanderer Above the Sea of Fog," or "The Wanderer Above the Sea of Mist") famously typifies the aspirations and optimism of the movement. Typically, this piece, as most of Friedrich's work, is regarded as classic Romanticism, highlighting personal elevation, reflecting the influence of the Enlightenment on the thinking of the era and its artists, and generally heralded as the triumph of individualism. Some are not so sure the story is this plain.
The piece adorns the cover both of the first edition of Paul Johnson's "Birth of the Modern" and John Lewis Gaddis' "The Landscape of History." The latter introduces his work thus:
A young man stands hatless in a black coat on a high rocky point. His back is turned toward us, and he is bracing himself with a walking stick against the wind that blows his hair in tangles. Before him lies a fog-shrouded landscape in which the fantastic shapes of more distant promontories are only partly visible. The far horizon reveals mountains off to the left, plains to the right, and perhaps very far away- one can't be sure- an ocean. But may it's just more fog, merging imperceptibly into clouds.... The impression it leaves is contradictory, suggesting at once mastery over a landscape and the insignificance of an individual within it. We see no face, so it's impossible to know whether the prospect confronting the young man is exhilarating, or terrifying, or both.
While it might not be balanced to quote the "Dean of the Cold War Historians" as the sole source for criticism of the Romantic, Gaddis' point is well taken: there is always the unknowable.
Peter Lynch is generally credited with the investing adage "Invest in what you know." The corollary to Lynch's Law then is perhaps the quote attributed to Buffett: "Never invest in a business that you don't understand."1 If this is so, then, and at the risk of being pejorative, should anyone be investing in treasuries? The Treasury's balance sheet (not to mention the balance sheet of the Federal Reserve) was never particularly transparent, but the level of opacity at this point is alarmingly foggy looking. To the extent these balance sheets have inherited sludge, and insofar as the likes of Fox Business News has to actually sue the Treasury to get at use of funds data,2 it must be safe to say that opacity is at unprecedented levels.
I am going to take the liberty of making the assertion that the era of Romanticism, even of pre-Modernism in finance has come to a close. We have enjoyed the inflationary fruits of this optimism and the wide ranging inclusion of everyman in this movement for years. We now find it best described as a collective Romanticist ("Dow 20,000") Modernist ("It's different this time!") delusion characterized by the rise of E*Trade and its contemporaries, the hubris that prompted UBS in 2006 to model their worst case housing asset declines at around -2% to -3%,3 and the public to believe that 8% equity returns were a Tenantesque "Slam Dunk." This was a delusion that might have been more thoroughly crushed by the dot-com bust if not for the one-time resilience of the VC supporting California housing market following the crash, and its later use as a model to support real-estate inflation as a nationwide delaying tactic.
The dogged belief that the optimism of individualism extends to the retail investor, the retail real-estate investor (read: homeowner), the individual day-trader has blithely ignored the Sea of Fog below. What follows should, and must, be a post-modern era of finance. An era characterized by the rejection of blind optimism, challenges to unbridled predictions of unending progress, and, above all, careful and relentless deconstructionism.
The current Administration is engaged in a bit of fiction. I have no idea how the reinflation of the housing bubble, or the constant liquidity injections into clearly failing institutions, be they banks or big auto, can tell any other story. Giving them the benefit of the doubt- a practice I am quickly tiring of- it may be that they are not even aware how trapped in yesterday's environment they are. The present reality is this: you have a lot of hard work, not asset appreciation,4 ahead of you if you want returns.
It is no small irony that when Phil Gramm says we have become a nation of whiners, he is right, but not for the reasons he would suppose. I am no fan of Gramm, but the speed and ferocity of his pillorying suggests he might have hit a nerve.
Investing is hard. The simple buoyancy of the human spirit is not sufficient to develop returns in any market except a badly inflated one. Even then, only those quicker than the greater fool and clever enough to stand on the sidelines after exiting stand to escape unscathed.
Certainly, there are those in the coming months who will capitalize on the presence of the largest and greatest pair of fools to date: the Treasury and the Federal Reserve. Before they laugh too loudly, pleased with their own cleverness, however, they might consider that there is another tranche of greater fools still behind these two- a tranche of which they might well be members: The Taxpayers.
- 1. Interestingly, though this quote is widely attributed to Warren Buffett, it does not appear in any of the annual letters I searched (finem respice thanks Shalimar for providing years 1977-2007) and none of the attributions citing him give more detailed pointers to where he might have said it. Berkshire's 2007 letter to shareholders does include this passage, however: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag."
- 2. Fox Business Wins FOIA Lawsuit Against Treasury, Fox Business News, February 20, 2009.
- 3. U.S. Mortgage Backed Securities Market, (1.8 MB .ppt file) UBS, January 29, 2006.
- 4. Case in point.