Sunday, April 5, 2009

Animal Spirits

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

John Maynard Keynes, who was the father of fiscal policy wrote those words in his 1937 opus, General Theory of Employment, Interest and Money. Until this weekend I perhaps gave the importance of the animal spirits Keynes referred to short shrift. While accepting that confidence is important, my thinking has been that positive realities such as raising employment and stablizing housing prices would be the impetus to confidence. Maybe it is as much the other way around.

Several recent conversations give me pause. In discussing the recent positive stock market action and the fact that we see some hopeful technical signs, a client expressed her fear that she would lose money if we indeed did begin to take more constructive steps in her investment portfolio. The constant drone of negative economic news and analysis assaulting her each and every day has convinced her of how dire her own plight is. This despite the fact that her investments have been making money for the past six months. There was a severe cognitive disconnect between her participation in the collective mood of the country and her personal situation. Her urge at the moment is strongly toward inaction. A risky proposition.

A second conversation was far more troubling and the thinking more pernicious but understandable. The attitude that, "the fix is in," is one that requires rapid and decisive resolution at the national policy level. Increasingly we are beginning to believe that the institutions of power are in malignant alignment contrary to the common good and that no amount of personal action can succeed against powerful forces. Again, the animal spirits that urge action rather than inaction are absent.

The apparent flailing about in seeking a solution to the banking crisis reinforces the theme of business as usual. With a tweek here and there, a trillion dollars or two or three will once again grease the same wheels of commerce and finance that put us in the current situation. There is a sense that, these things happen and if we slap some paint on the structure all will be forgiven. Once again, the word responsibility is thrown about easily, but the concept of consequence rings hollow.

The theater of the banking industry grows tiresome. That Vikram Pandit of Citigroup can state that his salary will be $1 until Citi returns to profitability is nothing more than sophistry when seen in context of the hundreds of millions Citi paid him when buying his previous hedge fund, or the tens of millions in deferred compensation and retention bonus paid last year.

To millions of investors and the general public this feels like a wink and a smirk amongst the inner circle while so many see personal financial foundations rocked and ruined. Until this smirk is gone mistrust will quell the animal spirits that move the rest of us to take current action for future good.

The forcing from office of CEO Wagner from General Motors this week and the stated inclination of the Obama administration to move GM to bankruptcy may be a shot across the bow of the financial industry.

From the first souk on the Silk Road mankind has found opportunity in risk, persistance and the anticipation of better times ahead. There are new and shifting opportunities for those who both maintain capital and take risk. These two apparent contrary actions require balance but a positive attitude. To cling to cynical despair means "they" have indeed won. Challenges must be met both nationally and personally. Fetal is a tactic, not a strategy. Last year we did some fetal. Now it is time to strategize whether you think it is just a game or not. There is no option to take ones ball and go home.

John Barnyak