What About This Government Shutdown Thing?

cars by nightImagine you’re a teenager who sneaks out one night and takes the family car out for a spin. After showing off or doing whatever it is you wanted to do, you return the car quietly and put the keys exactly where you found them.You’re on tenterhooks all next day, waiting to see if your illegitimate adventure got discovered. After a day or two you realize: I got away with that!

What’s guaranteed to happen next? You tell yourself you got away with it, of course, so why not try it again? And a few nights later you do it again. And get away with it… again. Will that be the end of it? Of course not.

What’s the only thing that will make this behavior stop? Certainly not sanity and telling yourself you were lucky once or twice, quit while you’re ahead. Nooooooooo, any normal teen will keep going until you either get caught (best case) or get injured in an accident (worst case).

There’s something in us that tells us that if we got away with something we’ll get away with it again. And so we keep doing it.

Your American Government

Don’t know about you, but it’s hard for me to be impressed with America’s government, you know, the best government money can buy. Every year, it seems, they have to take Dad’s car out for another wild, mildly unlawful adventure. They never get caught, so they keep doing it and doing it until somebody gets mad and throws them all out of office or riots in the streets. (Don’t laugh, some of us remember turning on the news every night to images of civil unrest, right here in this country.)

In 2009 your government spent trillions of your money to keep fat cat bankers in their million dollar jobs. With some effort I can understand the need to not allow all those banks to fail because they were allowed to become too big. What blows my mind is that the individuals who created this mess weren’t all fired as part of the rescue package. It’s not like they’d starve or anything, and it’s not like those institutions didn’t have capable people to take their places. You remember that old definition of insanity: doing the same thing over again, expecting a different result? Well, the same people are still running those banks, and still collecting more millions in a year that we’ll ever get in our lifetime.

And the same government who left them there is still running your country. They didn’t get caught, so guess what?

Two years later that gummint reached its debt ceiling and decided to make that a big deal. This was by no means something inevitable, because:

  1. Nobody wrote a letter from heaven that all countries need to have debt ceilings. As a matter of fact, Wikipedia tells us there is only one other major country in the world with one (Denmark). So why do you need one, and what good is it having one when all you do is keep raising it all the time?
  2. Because raise it all the time is what you do. America has raised its debt ceiling 74 times in the past 50 years. That’s more than once a year, so it’s not like this is something new and/or traumatic.

However, for some reason unknown to sane man, your government, the best government money can buy, decided to make a big deal of it in 2011. Just take a look below and see how the stock market reacted when the new debt ceiling was signed into law in early August of that year:

S&P 500 for 2011

S&P 500 for 2011

Me

As it happened, we were scheduled to be out of the country (and without internet access) around that time. Knowing that when I leave the country y’all just can’t hold it together, I turned a fair portion of my portfolio into cash before leaving, with standing orders to buy some stocks back at ridiculously low prices, should something crazy happen. All of those orders were filled by the time I got back. As a consequence I lucked into some pretty handsome gains, because the stocks I bought had more dramatic price swings than the market average. Oooo, that felt nice! Took Dad’s car out for a spin and came back with a Big Mac!

I know, I know, here I am, pointing a finger at the government for keeping on taking Dad’s car out for a spin and there I was, doing the same thing. Everyone knows Warren Buffett says don’t do that, don’t gamble on short-term market swings, don’t try and time the market, and all that wise counsel. And I certainly am not advocating that anybody else be that cynical about your government. It’s that old “do what I say, don’t do what I do” thing. But, as it turned out, those purchases ended up putting a return of over 25% in my lap in less than three months.

Could it be that counting on inept government can be profitable? Nobody says so, and I’m not saying so. But, like I said, I got away with it… once. Back then.

Fast Forward

As you probably know by now, my good wife and I dared to leave the country again this year. I say “dared to leave,” because goodness alone knows, with your government’s track record, there’s no telling what they’d think up to make a mess of things while we’re gone. I don’t know if it’s this NSA spying thing, but somehow, some way, word always seems to leak to D.C. when we leave, and that’s when they always take Dad’s car out for a spin.

And sure enough, when we got back, what did we hear? Everyone’s bent out of shape because the government’s going to shut down. I mean, really. This is news? Doesn’t anybody ever learn? It’s not like this is the first time. Back in the Clinton days they did it and nobody even remembers that. They got away with it. If you don’t believe me, look it up.

So… what’s going to happen now?

I don’t know. Nobody knows. And anyone who tells you they know is someone you need to stop listening to. (By the way, one of the guys I follow, Barry Ritholtz, had this lovely take on that topic, on which he — smart man — agrees with me :))

I can’t tell you whether or not you should do something about this government shutdown thing or not. If I believe what I wrote in the previous two posts and their comments, you and I should do nothing.

But “nothing,” my friends, is hard to do, especially for some of us with itchy fingers. It’s not a coincidence that the successful Warren Buffett says his success is due to the fact that he was one of very few people to have mastered “the art of doing nothing.” I know I should do nothing. (In fact, had I followed that advice with my DDD adventure, I would have more than doubled my money by now and be sitting pretty.) But doing nothing is so, so… well, unfulfilling. Somehow it just doesn’t feel good to do nothing.

So, before we left, I got to thinking all these thoughts. It’s like Topol in the old classic movie Fiddler on the Roof: on the one hand doing nothing is what The Master preaches. On the other hand, I got away with it when I went against that advice. On the one  hand, I got lucky in 2011 when I sold part of my portfolio and got it back at nicely reduced prices because the market overreacted. On the other hand, there’s no guarantee a strategy like that would ever work again.

On the one hand, successful investing says you don’t pay attention to your feelings. On the other hand, it feels so good to do something, especially when that something pans out and makes you look smart afterward. (Of course, it also feels poopy when it doesn’t work out and you beat yourself up saying you should have listened, but you never think of that ahead of time, do you?)

Is this over-thinking things? Undoubtedly. I’m reminded of one of my wife’s cousins who used to say when he got the urge to do something crazy, he sat down, poured himself a drink… and waited for the urge to pass. Maybe I should have done that, because I didn’t wait for the urge to pass. What I did was pretty much sell everything before I left, and they’re still sold. Here’s my reasoning: the stock market can either tank a little with the crisis, like in 2011, or the market can blow it off because everyone has become weary of the malfunctioning government. If the market tanks, I can buy back at lower prices like I did a few years ago. If nothing happens, I can still buy back and, worst case, maybe forego a little appreciation because, let’s face it, the market is not going to double in a couple of months.

So there you have it. Do like I say, not like I do. Of course, if this blows up in my face, I’ll have something to write about, something you can have a chuckle over.

Those who can’t, teach… :)

 

 

3 Responses to What About This Government Shutdown Thing?

  1. Debi September 30, 2013 at 7:00 am #

    Can you explain a little why Wall Street is so nervous about (insert the crisis of the day)? Aren’t they supposed to be the experts? Haven’t they seen almost everything that can affect the financial world before? Don’t they have access to the best data collection and analysis tools? Why do they act so stupid most of the time?

    • William September 30, 2013 at 7:17 am #

      Not being a Wall Streeter myself I don’t know that I can speak for them, but my guess is they are extremely short term focused. That being the case, they keep thinking: how will this news affect the other short term traders? The world they live in is dominated not by logic, but by game theory (you can Google that to get a much better explanation than I can offer).

      On the sidewalk before Merrill Lynch’s headquarters is a famous statue of a charging bull. It was originally a symbol of optimism (i.e. bull market), but I look at it as a symbol for “the herd.” It is the herd mentality that makes the Street drive prices too high and too low. Personally, I think that is totally awesome, because that is what gives us a wonderful opportunity to profit in ways they close themselves off to.

      Don’t be fooled, though. The really smart people, like Warren Buffett, are not moved by the government lurching from crisis to self-made crisis. Their view is driven by fundamentals, not technicals. (The next post will deal with that comparison.)

      And finally, here’s an article today on the CNBC website you may find interesting:
      http://www.cnbc.com/id/101072024

  2. Jennifer Rodriguez September 30, 2013 at 9:20 am #

    Hey William,

    Just like you, I remember all the times that the government has threatened to shut down. Always, same as it ever was. At least, it helps us master the “art of doing nothing” as Warren Buffet says we should master:)

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