All This Uncertainty is Making Me More Certain

I am far from bullish on the financial markets, but it is getting harder and harder to stay bearish given the accelerating negative buzz about deflation, double-dips, and, most importantly, all the talk about the uncertainty that is supposedly paralyzing the entire country, preventing business owners from operating the engines of American commerce and preventing consumers from shopping and spending money.

I finally had to vent a bit (in constructive form…of course) after seeing the current cover of Time Magazine amongst my father’s pile of yet-to-read magazines. The current cover features the sobering headline “Rethinking Homeownership.” There is no one hugging a house like the cover in 2005. This time, we see a very lonely house – perhaps looking for a buyer, perhaps waiting for a bank repossession, or maybe even a bulldozer.

THEN

NOW

To Time’s credit, the 2005 issue included an article presenting the case for renting and at least asked readers to consider whether it was time to sell (which of course passes the bag to the eventual victim of the crash). However, this “rethinking” Americans are supposed to do now that so many are saddled with underwater mortgages is the kind of exercise that would have been much more useful sometime between 2004-2006 when prices were soaring to ridiculous levels in many markets.

The contrast in imagery could not be a more apt representation of the reversal in the national psychology. As the economy has failed to deliver the V-recovery that too many bulls expected as they continued to pooh-pooh unemployment numbers as “lagging indicators”, there is a growing sense that we are doomed. The structural problems of the economy cannot be solved in a year or even two, but our political discourse has failed to set the proper expectations. Economists add confusion when they look at the exact same data and come up with entirely different conclusions about the health of the economy. The business media is full of interviews with pundits, CEOs, and analysts who insist that “uncertainty” is dissolving the country while failing to acknowledge that pursuing major changes must incur uncertainty. Major change cannot happen overnight, and it must come with a lot of debate, wrangling, and contention. This is not a reason for inaction. I imagine that if Republicans were in control and Democrats were blocking and stalling their initiatives to fix our economic problems, the environment would be just as uncertain as it is now. So, incessantly talking about “uncertainty” is really a code word for opposition to the kind of change underway. (For example, I heard Senator Chris Dodd claim that passing Financial Regulation would END uncertainty because the legislation would become law – I do not think this is what most people who are mired in uncertainty had in mind). Ironically, the certainty of the expiration of Bush’s tax cuts has now become uncertain, and this uncertainty is thrown into the mosh pit.

Oh, and the results of the November elections are adding to our uncertainty. Never mind that there is absolutely no guarantee that any result can realistically increase certainty any time soon.

The doom and gloom has become so thick that even esteemed money manager John Maudlin had to take a brief break from his weekly delivery of bad news to say to provide his readers some words of encouragement in “How We Get Through This Mess” (August 20, 2010):

“…I’m like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over.

I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like.

The ’70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long.

Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges…Embrace the challenge!

…[This] is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won’t make it. But most of us will!”

Hidden between the lines is a key point: the businesses and individuals and families who press on while others are stuck in concrete are the ones who will seize the opportunities that exist and slowly but surely appear. All this uncertainty is making it more certain that great business and financial opportunities are going unnoticed or untapped.

The CNBC video clip below is one example of many of the sometimes surreal nature of this near panic about uncertainty: “Keeping Entrepreneurial Spirit Alive“. CNBC has been interviewing owners of small businesses to let them air their complaints in this era of uncertainty. This particular interview features three small business owners – Rick Shindell of Zyn Systems, Michael Fleischer of Bogen Communications, and Heidi Jacobus of Cybernet Systems – and Karen Mills from the U.S. Small Business Administration (SBA).

In this discussion, the government gets a lot of blame, but the government also turns out to be the solution as a major provider of contracts and benefits for small businesses. I hear many claims that if the government would just get out of the way, all would be well and certain. Yet, this interview revealed how many small businesses depend on government ACTION not inaction.

Fleischer frowns that he is not hiring any workers because “the people in Washington have changed the risk/reward relationship of…taking on the obligations of hiring people.” He refuses to hire anyone until that relationship changes. When Mark Haines asks him what he will do if business picks up, Fleischer insists he will try to do without hiring. Fleischer’s main concern is that the government is increasing the non-wage components of hiring workers as it seeks to increase tax revenues (strangely enough, he had never heard of the employment cost index before).

Jacobus tells the audience that her company is hiring, but, ironically enough, only because they are getting government contracts (Department of Defense) that are long-term. The rate of contracting and acquisition has decreased and slowed the hiring she would like to do. She had a particular complaint about the cancellation of the Ground Combat Vehicle.

Shindell snapped that his company is not hiring, and he had the most ironic commentary of all. He explained that he is a small company advocate and hears from many small tech companies around the country who are not hiring because the government is in a state of flux where there is too much uncertainty regarding congressional budgets for various agencies. He also complained that the Small Business Administration’s budget had been cut for seven years in a row. The last “few” years have been somewhat of an exception.

In other words, the government needs to ACT and SPEND more to resolve some of these uncertainties. I wish Fleischer had a chance to respond. He could not possibly be happy with all this talk about increasing government spending and speeding up government activism.

Mills, Administrator of the SBA, described how the government is trying to help small businesses:

1. For 2010, almost $2 billion in health care tax credits available for 4 million qualifying small businesses (2/3 of all small businesses in the country). Given this is only $500 per business if all 4 million apply and qualify could the solution possibly be to spend more…or do small businesses not need this health care relief? Fleischer should welcome it.
2. A hiring tax credit included in the Recovery Act and more coming in the jobs bill being debated in Congress and awaiting approval in the Senate.

Schindell responded by acknowledging that some of what Mills had to say should be helpful, but he then quickly went into a critique of the healthcare bill as hurting physicians and small businesses because of 1099 filing requirements.

I mention all this only to assert that much of this fury and panic about uncertainty is essentially a red herring. Yes, times are tough, and there is on-going disagreement and pitched battles about what to do about it. Some of this disagreement is slowing down potential solutions. But let us not mislabel opposition as uncertainty.

Historically bad economic conditions must be uncertain because there is no playbook that magically lines everyone up behind a single, common solution. Yet, there are businesses, individuals, and families who are pressing on….like the throngs of people I saw in the local mall on Saturday happily shopping and eating with kids in tow; like the cash-rich companies that are going about acquiring other businesses; like the people and investors that are placing bids on homes going through short sales and foreclosures; like the job-seekers such as myself that finally land employment and project opportunities after many months of hitting the pavement (I wrote about becoming a “lagging indicator” last year). In the stock market, psychological burdens over uncertainty may increase volatility, providing traders with more opportunities to short and buy. Put sellers may get higher premiums for their strategies. For those who can quantify uncertainty, models of DECISION can be created from statements like Mohamed El-Erian’s that claim there is a 25% chance of a double-dip. The list goes on and on.

All this uncertainty makes me more certain that this too shall pass.

Related articles from the New York Times – all within the last two weeks:
Policy Options Dwindle as Economic Fears Grow
Widespread Fear Freezes Housing Market
Debts Rise, and Go Unpaid, as Bust Erodes Home Equity
In Defense of Home Ownership (no hard data – but I include it as a small counter-balance)

Be careful out there!

Full disclosure: no positions