David R. Kotok
Chairman and Chief Investment Officer
January 2, 2011
“We’d like to thank you, Herbert Hoover” sang the full chorus in ”Annie.”
(Lyrics available here).
“A Hooverville was the popular name for shantytowns built by homeless people during the Great Depression. They were named after the President of the United States at the time, Herbert Hoover, because he allegedly let the nation slide into depression. The term was coined by Charles Michelson, publicity chief of the Democratic National Committee. The name Hooverville has also been used to describe the tent cities commonly found in modern-day America.” Source: Wikipedia.
Open up the Sarasota Herald Tribune (December 19-20) and there is a two-part front-page story on a shantytown in Venice, Florida. (If you have a problem with the newspaper’s site, search for “Pirates Cove,” the name of the homeless community in Venice, Fl.)
2011 is the year of contrast in America.
In Venice, off route 41, near Jacaranda Blvd, behind the CVS and near the library, one can find a shantytown that is three times the size it was a few years ago. The newspaper states the homeless population of Southwest Florida has tripled since the beginning of 2008. Stories of evicted and foreclosed families abound. The Herald Tribune tells a number of them. The journalists and photographers translate the statistics into human form. We will not take space to repeat them here; readers are invited to spend a few minutes with the Herald Tribune.
Twenty miles north of Venice, in Sarasota, one of the 232 charities featured in the “Charity Register” edition of Sarasota magazine, is the All Faiths Food Bank, 941-379-6333, allfaithsfoodbank.org. Its mission is to “Feed those in need, reduce food waste and educate the community about hunger and nutrition.” All Faiths is the charity supplier of food to Trinity Church in Venice. Trinity Church is the main supporter of the hungry and homeless in Pirates Cove. The growth in the homeless and hungry population has pressured the supply of food through the charitable distribution chain. The Herald Tribune reports that church volunteers now have to “buy food at local grocery stores to supplement the supply.”
We enter 2011 with the unemployment rate at about 10%. The underemployment rate is 17%. The Pirates Cove story is repeated throughout the US. The resources of Trinity Church and hundreds like it are stretched to the limits. Many forecasts suggest more foreclosures and a rough housing year ahead. The Fed’s policy of lowering the home mortgage rate by targeting a lower interest rate on the ten-year Treasury note has backfired, and housing affordability has suffered a setback from higher, not lower, home mortgage rates. All this suggests that the population of Pirates Cove is headed higher, not lower, in 2011.
In Washington, the class warfare imbedded in our political system just gets worse. The congressional party of Rachel Maddow has been replaced with the champions of Rush Limbaugh. Each party is so cocksure of itself. Each proclaims it knows “the American way.” Each waves the flag in its own form of perverse jingoism. And the media sponsors of each celebrate their ratings and continue to polarize. Our expectations for the new Congress are as minimalist as one can imagine. Some argue that is a good thing. Maybe so, if you were attending, let’s say, an art festival in Sarasota. I suspect it might feel different out in Pirates Cove.
We enter 2011 with more uncertainty than in recent memory. Professionally, we have to manage portfolio investment in this climate and do it with the conflicting data that arrives with each new release. In 2011 we will read another pile of hundreds of research reports. They are only as good as their assumptions. These days, assumption differences are huge.
In 2011, we will deliver another round of speeches and hold a few hundred client meetings and host hundreds of conference calls. In the back of our minds is a burning question: How do we really know what we know? How colored are the conclusions one draws from these problematic assumptions? What is the epistemological answer? And if we can find it, how do we know the conclusions are correct? Nassim Taleb made it very clear in his book: black swans exist. He reminds us of what we already knew: that the bell-shaped curve has its flaws. We affirmed it in the last three years. The risks are most severe in the tails.
At Cumberland we were lucky and have minimal scars. We avoided the mortgage paper. We brought the stock market to a fully invested position in early 2009 and stayed the course though all of 2010.
Why were we so fortunate? The decisions involved a large component of judgment; they were not just based on an algorithm. They were colored by experience, caution, self-doubt, and continuous reexamination of the assumptions.
But how do we know what we know? Epistemology is a difficult thing to study. The questions are profound.
Perhaps even more so in 2011, in Sarasota and in Pirates Cove.
David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com