By Daniel A. Barnes, CFA

Last week (8/30/2011), a strange confluence of events caused me to see some things differently.
We will start with some words I penned on July 22nd: in response to the EU discourse of the week.

Fiscal Union in the EU is coming. Many people think that the Euro is in danger. Poppycock! The problem is that politically, the people of the different countries are not ready to accept a fiscal union in the EU. Some people, even many people think that Yesterday the EU commission released the 6th plan to solve the insolvency problem in the EU. Unfortunately, the “haircut, that Greek debt holders will receive is just half of the expected “haircut” which is at least necessary in order to achieve a lasting resolution to the debt problem.”

I penned those words 35 day ago. In the past month we’ve had several ups and downs — mostly downs. The economy appears to be headed for a recession. Oil has fallen $40. And the stock market fell 1900 points. Gold rose $200 dollars an ounce; Gold fell $200 dollars, then rose back up another $120. The Libyan rebels beat Gaddafi; Hurricane Irene shut down the Big Apple.

Uncertainty reigns supreme for September 2011. Ten years ago, some things weren’t so different. The economy had slipped into a recession (but no one knew it yet). Then 9/11 hit. The U.S. responded strongly. Yet, despite the distractions of two undeclared wars and a trillion dollars of extra spending in reaction to 9/11, a housing boom and then a bust not too much changed in the last decade. It has been said that once 9/11 hit, everything was different. But, if I analyze the facts of how our economy was structured, how people led their lives, and how much things cost, 9/11 didn’t really change much, at least by my reckoning.

To recap, we headed into September 2001 without seeing a lot of uncertainty; however, we were presented with catastrophic events, which changed very little in the structural paradigm operating in that day.

Heading into 2011, we see only uncertainty. Yet this time, I think the stage is set for some real transformative change. I believe the paradigm has shifted. Political discourse is actually focusing on our real issues. How refreshing!

Paradigm Shifts
Paradigm shifts are curious things; they’re uncomfortable and yet exhilarating at the same time.
I recently had travel plans fall apart. Or at least I thought they had (perceptional differences). They were big plans and, accordingly, included significant sunk costs. But because of the travel plans seemingly going awry, I realized that I was going to get to places that had eluded me for 25 years. The sunk costs, the blown-up plans, and the terrific uncertainty of the moment all energized my mind to consider Plan B, even Plan C! John Maynard Keynes, when asked why he changed his position, once said “When the facts change, Madam, so do I. What do you do?”

Behavioral Finance
Behavioral finance discusses how people often underreact to new information.
Awareness of uncertainty puts us on edge and excites the cryptons of our gray matter. When the change happens, we are ready to think, adapt, imagine, react. We’re forced to use precisely those skills of analytical decision-making and problem-solving and adaptation. This great uncertainty opens up a whole new world of opportunities to learn, explore, adapt and exploit. That’s what’s human beings are best at!
What if today’s recognized uncertainty is exactly what’s needed to open up the minds of the electorate to the hard political compromises that are so necessary to recrafting the social contract between the young and the old, the rich and the poor.

I think that today’s uncertainty is critical as a 1st and second step to preparing the way for elective and legislative change, including forming new poltical consensuses. The European Union, the existing contract between labor and Capital, and the Asian mercantilist model are all teetering. It is precisely in this fertile environment that the political and cultural consensus will slowly (or less slowly) develop, in order to forge new agreements and frameworks, consistent with the facts of today.

I’m changing my view as the facts have changed.

Wouldn’t you?

Barnes Capital LLC is a Registered Investment Advisor. We manage trusts and retirement income portfolios. Financial planning is an integral part of our process. We protect client capital using municipal bonds, highest quality dividend companies and precious metals, which have protected wealth in every epoch spanning five millennia of bankruptcies, inflation and other forms of attrition. Call 925-284-3503.

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Monday, September 5th, 2011 at 4:12 am and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.