2008 will seem as minor

I was on a plane going from New York to Bermuda and had been lucky enough to be upgraded to first class. It was 1998, just a few days after the resolution of the Long-Term Capital Management crisis. The markets had seen a rather harrowing time.


Photo by skys the limit2
Photo by skys the limit2

The gentleman who was seated next to me ordered Scotch as soon as the wheels were up and basically indicated to the stewardess to keep them coming. You could see that he was emotionally shaken.

I engaged him in conversation after a few drinks, and when he found out that I was allied with the hedge fund business and coming from New York, he assumed I knew a lot more about the world than I did. It turns out that he was the vice-chairman of one of the largest banking conglomerates of the time.

We all know the name.

What the abyss looks like

He began to relate to me the deep background story of what had gone on for the past few weeks, culminating in that famous meeting called by the New York Federal Reserve, where the president of the New York Fed told everybody in the room to play nice in the sandbox. And to whip out their checkbooks.

This gentleman had been in the meeting and knew the whole story. I knew I was hearing something special, so I just sat and listened and made sure the flight attendant kept bringing Scotches for him. He seemed to open up more with the downing of each one.

Finally, he turned and looked me in the eye and said, “Son, we went to the edge of the abyss, and we looked over. And it was a long way down. It scared every one of us to the depths of our soul.” And then he ordered another Scotch and laid his head back and tried to rest.

2008 will seem as minor

As I look back on that 1998 crisis—which we all thought was so huge at the time—it brings a smile. We were talking hundreds of millions that had to be ponied up by each of the big banks, several billions of dollars total. It was manageable within the private system.

Just 10 years later, in the 2008 crisis triggered by the housing bubble, we were talking hundreds of billions if not trillions in losses. The private system was simply not capable of dealing with it.

If we don’t handle our debt problem, the crisis into which we’ll plunge will resolve the debt in one way or another. And the ensuing turmoil will make 2008 look as minor as 1998 does today.

I do not want to my children to wake up in a world where we are frog-marched to the edge of the abyss and forced to look over. We still have the opportunity to secure the future for our children, but only if we seize the moment. If we don’t, it will be every man for himself.

But we can handle it

With all the current and emerging challenges we face, investing will still be difficult even if we deal with our debt issue. But those challenges will be far more agreeable than the extraordinarily difficult choices we’ll be left with if we don’t handle the debt.

With the tools and strategies that we have available to us today and with even more powerful tools being developed for the future, I think investors who are properly prepared can figure out what to do in either scenario.

But for average investors who are expecting the future to look somewhat like the past, it will be bad. They’re going to be severely damaged. Their retirement futures are going to be ripped from them. And they are going to be profoundly unhappy.

None of that has to be, of course. Things might turn out just fine. But I have a strong suspicion that the massive move we are seeing from active management to passive management strategies in the past year is going to turn out to be one of the all-time worst decisions by the herd.