A Crisis of Confidence

Three points about the current gloom out there.

#1. We’ve been here before. Not fiscally, I mean, but in terms of public frustration. To wit – the old speech below. I took a few liberties to update it, but otherwise you may find it resonates. Tip of the hat to whoever can name the speaker. There is a big hint in point #2.

“I promised you a president who is not isolated from the people, who feels your pain, and who shares your dreams and who draws his strength and his wisdom from you.

During the past three years I’ve spoken to you on many occasions about national concerns, the energy fiscal discipline crisis, reorganizing the government, our nation’s economy, and issues of war and especially peace. But over those years the subjects of the speeches, the talks, and the press conferences have become increasingly narrow, focused more and more on what the isolated world of Washington thinks is important. Gradually, you’ve heard more and more about what the government thinks or what the government should be doing and less and less about our nation’s hopes, our dreams, and our vision of the future.

I know, of course, being president, that government actions and legislation can be very important. That’s why I’ve worked hard to put my campaign promises into law — and I have to admit, with just mixed success. But after listening to the American people I have been reminded again that all the legislation in the world can’t fix what’s wrong with America. So, I want to speak to you first tonight about a subject even more serious than energy fiscal discipline or inflation. I want to talk to you right now about a fundamental threat to American democracy.

I do not mean our political and civil liberties. They will endure. And I do not refer to the outward strength of America, a nation that is at peace tonight everywhere in the world, with unmatched economic power and military might.

The threat is nearly invisible in ordinary ways. It is a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation.

The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.

The confidence that we have always had as a people is not simply some romantic dream or a proverb in a dusty book that we read just on the Fourth of July.

It is the idea which founded our nation and has guided our development as a people. Confidence in the future has supported everything else – public institutions and private enterprise, our own families, and the very Constitution of the United States. Confidence has defined our course and has served as a link between generations. We’ve always believed in something called progress. We’ve always had a faith that the days of our children would be better than our own.

Our people are losing that faith, not only in government itself but in the ability as citizens to serve as the ultimate rulers and shapers of our democracy. As a people we know our past and we are proud of it. Our progress has been part of the living history of America, even the world. We always believed that we were part of a great movement of humanity itself called democracy, involved in the search for freedom, and that belief has always strengthened us in our purpose. But just as we are losing our confidence in the future, we are also beginning to close the door on our past.

In a nation that was proud of hard work, strong families, close-knit communities, and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning. We’ve learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose.

The symptoms of this crisis of the American spirit are all around us. For the first time in the history of our country a majority of our people believe that the next five years will be worse than the past five years. Two-thirds of our people do not even vote. The productivity of American workers is actually dropping, and the willingness of Americans to save for the future has fallen below that of all other people in the Western world.

As you know, there is a growing disrespect for government and for churches and for schools, the news media, and other institutions. This is not a message of happiness or reassurance, but it is the truth and it is a warning.

These changes did not happen overnight. They’ve come upon us gradually over the last generation, years that were filled with shocks and tragedy.

We remember when the phrase “sound as a dollar” was an expression of absolute dependability, until ten years of future inflation began will begin to shrink our dollar and our savings. We believed that our nation’s resources were limitless until 19732008, when we had to face a growing dependence on foreign oil the effects of a stunning lack of fiscal, political and monetary discipline.

These wounds are still very deep. They have never been healed. Looking for a way out of this crisis, our people have turned to the Federal government and found it isolated from the mainstream of our nation’s life. Washington, D.C., has become an island swamp of idiots. The gap between our citizens and our government has never been so wide. The people are looking for honest answers, not easy answers; clear leadership, not false claims and evasiveness and politics as usual.

What you see too often in Washington and elsewhere around the country is a system of government that seems incapable of action. You see a Congress twisted and pulled in every direction by hundreds of well-financed and powerful special interests. You see every extreme position defended to the last vote, almost to the last breath by one unyielding group or another. You often see a balanced and a fair approach that demands sacrifice, a little sacrifice from everyone, abandoned like an orphan without support and without friends.

Often you see paralysis and stagnation and drift. You don’t like it, and neither do I. What can we do?

First of all, we must face the truth, and then we can change our course. We simply must have faith in each other, faith in our ability to govern ourselves, and faith in the future of this nation. Restoring that faith and that confidence to America is now the most important task we face. It is a true challenge of this generation of Americans.

We are at a turning point in our history. There are two paths to choose. One is a path I’ve warned about tonight, the path that leads to fragmentation and self-interest. Down that road lies a mistaken idea of freedom, the right to grasp for ourselves some advantage over others. That path would be one of constant conflict between narrow interests ending in chaos and immobility. It is a certain route to failure.

All the traditions of our past, all the lessons of our heritage, all the promises of our future point to another path, the path of common purpose and the restoration of American values. That path leads to true freedom for our nation and ourselves. We can take the first steps down that path as we begin to solve our energy fiscal discipline problem.

Energy Fiscal discipline will be the immediate test of our ability to unite this nation, and it can also be the standard around which we rally. On the battlefield of energy fiscal discipline we can win for our nation a new confidence, and we can seize control again of our common destiny.

In little more than two decades one decade we’ve gone from a position of energy independence budget surplus to one in which almost half the oil all of the money we spend comes from foreign countries, at prices rates that are going through the roof floor. Our excessive dependence on OPEC debt has already taken a tremendous toll on our economy and our people. This is the direct cause of the long lines political rhetoric which have made millions of you spend aggravating hours waiting for gasoline something good to come on TV. It’s a cause of the increased inflation and unemployment that we now face. This intolerable dependence on foreign oil debt threatens our economic independence and the very security of our nation. This energy fiscal discipline and political leadership crisis is real. It is worldwide. It is a clear and present danger to our nation. These are facts and we simply must face them.”

Point #2. That speech was given here:

Things somehow still worked out okay.

Point #3. Timeless advice from an old coach: “Don’t poison your mind with crap.”

I have zero interest in politics. I am not interested in “trading” this market. There is a lot about both politics and trading that is indistinguishable from cowardice.

I am not in the business of guessing which way the stock market will go this week. I am in the business of buying cheap assets. Two different things – completely. And assets are cheap when things look grim. All else is secondary.

Before buying cheap assets, it’s important to do the work. And it’s always best to start that work assuming that the market has things right. But for a number of reasons – see points 1 and 2 above – this is not one of those times.

When buying, it’s important to know there is one variable that you simply cannot control: how long it will take others to recognize the value of those assets. It could take days. It could take years. Either way, it’s wise to prepare yourself to be very patient. Then being wrong makes you happy. Not so the other way.

So when buying cheap assets, you are making important decisions without knowing one key aspect of the eventual outcome in advance. On Wall Street, this is called “risk.” In my house, though, this is called “being an adult.” Again, two different things. Completely.

And as per my last letter, some words from a coach of a different kind:

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”

Stay thrifty out there.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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One Response to A Crisis of Confidence

  1. alan shouls says:

    Hi Cale,

    I guess that the old chinese curse could be modestly updated as “may you live in volatile times” which in turn must be the blessing for the value investor. I guess the thing is that you buy stocks like my wife buys vegetables. They are not all the same, even in the same pile there are good ones and bad ones and a few that are, if you understand these things, really good – and then once in a while you find that there is an unexpected sale.

    I heard a quote from Guy Spier that tickled me “buy when there is blood on the streets – even if it is your own”.

    I don’t doubt that you made the most of the opportunity.

    Alan