March 31, 2010
April of 1970 was an amazing time in American history: Richard Nixon was President, American Motors introduced the Gremlin, the Beatles officially disbanded, China launched its first satellite on the back of a Long March rocket, and the U.S. invaded Cambodia, inciting waves of protests throughout the country.
It was also almost forty years ago that an amazing dialogue took place between Astronaut Jack Swigert of Apollo 13 and mission control: In Mission Control, capcom Joe Kerwin asked, “Have you guys completed your income tax?” For Jack Swigert, the question brought a sudden pang of apprehension. From space came the words, “How do I apply for an extension?”
“Things happened real fast down there,” Swigert continued, “and I do need an extension.”
Kerwin tried to control his laughter, but Swigert wasn’t laughing. “I didn’t get mine filed,” he told Kerwin. “I’m really serious. I may be spending time in a another quarantine besides the one they were planning for me,” Swigert said, referring to the post-mission period of medical confinement. But just then, Flight Director Glynn Lunney offered words of reassurance:
“American citizens out of the country get a 60-day extension on filing,” Lunney radioed, and added wryly, “I assume this applies to you.” (Source: http://www.space.com with special thanks to Chicago’s Adler Planetarium, America’s oldest planetarium.)
It wasn’t until later in the famous flight that Swigert said, “Houston, we’ve had a problem,” which would come to symbolize NASA at its heroic, stoic best. An oxygen tank exploded in their spacecraft, ripping portions of it to shreds. Suddenly, their plans to walk on the moon became a fight for survival while returning to Earth. One of the most interesting aspects of the Apollo 13 rescue was the way that Houston and the astronauts had to scrape together and reuse a random assortment of spacecraft systems, parts, and even battery charges to get back to Earth alive. The movie included some wonderful footage, showing everyone involved using duct tape to piece together the various and sundry spaceship parts necessary to keep the astronauts alive long enough to return home.
There is a feeling in the air that America is in chaos. It’s as if we invented chaos, mistrust of government, huge, seemingly irretrievable schisms between the left and right, the rich and the poor, and the capitalist and the unionist.
The period surrounding 1970 was a time of extraordinary social stress. Rioting took place in urban neighborhoods, American soldiers deployed to kill and be killed in the Vietnam War, police and anti-war protestors exchanged bullets, and the famously anti-communist President Richard Nixon desperately tried to keep the whole thing from blowing apart.
Whether you were over or under thirty in 1970, I suspect you thought the world was coming to an end. My mother claims that in the late sixties she took me on the roof of our building to watch the bright lights caused by burning Chicago neighborhoods. In truth, I don’t remember. Things do seem irreparably chaotic right now, but they did then too. And it wasn’t the first time by any stretch of the imagination. An honest accounting of U.S. history shows that America has always been full of internal strife. Yet, despite it all, we somehow emerged with our battletested ideal of the dignity of the individual sufficiently intact to get the train back onto the rails.
Chaotic times seem to produce inflation, which may be our long-term destiny too but probably not in the short-term. Despite the inflationary effects of trillion dollar deficits, huge trade imbalances, and foreign wars, we aren’t necessarily on the brink of inflation. Housing has gotten cheaper and food prices don’t appear to be increasing mercilessly (an interesting conversation). Additionally, we are awash in unexpectedly cheap natural gas, driving down the value of coal and other major home heating and electricity generation inputs. As long as we don’t have a major oil shock, we might dodge the inflationary bullet for the near-term. In fact, over the next year or two, there are people who are seriously worried about a stalled deflationary scenario or even a Jimmy Carter-esque stagflation, if you throw in runaway oil prices.
Given that labor has become one of the most expensive economic inputs in the American economy, it is also easy to believe that American companies using American labor have become more competitive over the past few years relative to many other developed countries. Productivity is defined as something like the ratio of economic output measured in dollars per unit of human employment input measured in time. Based on this definition, it is easy to intuit that American productivity has soared over the past few years. This should ultimately return us to economic growth, at least in the areas of our economy which have not been overly lawyered.
Some of the trends that are the most nervous-making are also the most critical. For example, the rise of the developing world and immigration are two of the most important factors in America’s long-term strength. The developing countries will clearly grow the fastest. Albeit from a relatively small base, the developing world — as demonstrated by its platinum selling rock stars India and China—is going to continue to put annualized GDP growth numbers north of five percent on the scoreboard for a long time. The middle class in India is about as big as the entire population of the United States. And only one-in-six citizens of the planet is from India! As long as one doesn’t put too much stock in the published numbers, those nations are virtually guaranteed to produce more and more consumers for the goods and services America is best at producing: Energy, protein-rich diets, health care, and entertainment. But like investing in the United States a century ago, there are vast fortunes available to those that can pick the winners—but the devil will take the hindmost.
Immigration is the other factor that is going to save us. Immigration is the phenomenon where people leave their lives behind to come to America to work, receive an education, survive, or obtain a better family life. Millions of people even risk their lives and liberties to come to this country in order to participate in our economy, often working the hardest and most unpleasant jobs our economy has to offer. Could this country function without immigrants? No. Not now and not ever. Without new immigrants our low birth rate would put us in line to be the next Russia, Japan, or even Italy; countries that are failing to sufficiently replenish their populations.
Despite the bad press, developing nations and immigration are the best long-term prospects for the United States’ economy. The developing world is hard at work creating economic participants. Further, immigration into the U.S. is creating a younger generation capable of taking care of an aging America in its dotage.
To a wealthy American eager to balance capital protection, current income, and growth, it is more important than ever to have “true” diversification. By this we mean taking advantage of the enormous growth opportunities available throughout the world, while maintaining a portfolio of assets that will not travel in “lockstep” during booms and busts. A portfolio which is truly diversified will attempt to balance total return (total return = unrealized gains in valuation + cash flows), risk of loss, liquidity, and correlation. Thus, true diversification also means looking at a world of investments that is much broader than merely stocks and bonds, which have proven to be much too correlated as the world’s economies and markets grow together. The world may seem like it’s falling apart, but it isn’t the first time and it won’t be the last. Apollo 13 is an apt metaphor for 1970s America and may also apply to America in 2010; they held it together and so can we.
Apollo 13 is one of most gripping stories of heroism and bravery in the history of human space exploration. And while one must marvel at the creativity and backbone of the men and women in the ship and those guiding them back on Earth, one must never forget the ultimate lesson of Apollo 13: Never, ever, go anywhere without duct tape.
Eric Wanger, JD, CFA