Moving On

A Game Changer

In an interview on October 10, Ken Fisher, the founder and CEO of Fisher Investments, recalled another October that shaped investors' attitudes toward investing. "Do you remember 1987?" he asks, referring to the October 19, 1987, crash, known as Black Monday, when the Dow fell 508 points in one day, losing 22.6% of its value. "Remember, for years after 1987 people still framed everything in relation to 1987," recalls Fisher. "It took the 1990 bear market and recession to get people thinking about anything else," he argues. Ironically, that was the recession that stemmed, at least in part, from the savings and loan industry collapse. "That's the way it's going to be with this; it's going to be a game changer," Fisher predicts. "Coming out of this, the weak are going to get killed, and the strong are going to pick up market share." Acquisitions of advisory firms will be on hold for a while, too, predicts Fisher, saying, "If I'm an investment bank or a Putnam Lovell, it's an ugly world in the short term." Firms like Berkshire Capital or Cambridge Partners that do smaller acquisitions of firms, says Fisher, "that well will run dry." Private equity firms, the banks, even firms like his own will pull back as well from the acquisition path. "We've told our people," he says of his M&A operation, "you've got to come up with a new structure–firms that we will look at will need to take a little bit of cash, a note that they'll carry, and swap some of their equity for some of ours. You can't do it on an all-cash basis or an all-note basis." (For more on Fisher's opinions about the crisis and the reaction in Washington, see page 24. For more on the M&A world, and how to build value in your firm prior to putting it up for sale, see page 50).

An Historical Perspective

To get the longer-term view of where these troubling weeks fits into the history of Wall St. and investing, we spoke to Ron Altman, who has logged 40 years in the investment research and money management business and currently runs the Aston/MB Enhanced Equity Income Fund.

"You look at all the bear markets we've gone through since World War II, and they all have the same characteristics. It always revolves around either a financial crisis or a significant overbuilding of some kind that results in a capacity utilization problem and pricing pressure, problems with profitability, and so on. Sixty-two was all about the beginning of the electronics era, a lot of money was thrown at it, and it was probably just as cuckoo as the late '90s, with the valuations that were out of proportion. What always seems to happen is that you either get an excess valuation in the marketplace like we did in the early '60s or the late '90s, or you get a financial crisis–one of the two–that tends to lead to a bear market.

"When you understand what the crisis is," says Altman, "it's over. We can read it about on the front pages of the newspapers, or listen to the talking heads on television, and learn about everything that went wrong, but the market is a discounting mechanism. It doesn't look backward; the commentators look backward, the market looks forward." Is there another issue, Altman wonders, that "we haven't read about or heard about that is going to hit us between the eyes and create another period of paranoia? I don't think so. It's always something that comes out of the blue, but now that you have the Fed, Congress, and everybody else addressing these issues, these things get solved."

For his part, Altman thinks the 1970s "were a lot worse than what we're going through now, because we had an inflationary problem that was circularly reinforcing. It started with commodities and ended up with wage inflation, and it took some really nasty medicine to fix. We ended up with interest rates going up to 18%; 13% on long governments." That was when Paul Volcker was brought into the Federal Reserve "and he said, 'We're going to break the back of inflation.'"

What Altman does worry about is the "other side of that problem, and that is the possibility of deflation, which is just as nasty as runaway inflation. Europe is sitting there worrying about the Weimar republic, and we're sitting here worrying about the '30s. Europe has come around to recognizing that it's not the Weimar republic, but it is the 1930s. They're talking about lowering rates, which I think is very good [The interview took place on October 3; European and other central banks, including the Fed, did cut rates in a coordinated move on October 6].

"In my opinion," says Altman, "deflation is really the big problem–that's when you get a collapse of credit, an implosion in the financial systems. You get to the point that no matter how much the Fed pumps liquidity, nobody uses it, because they're deferring consumption. I don't think we're going to go through that; I think we'll stop it before we go over the cliff. Bernanke did all his academic work on the Depression, so he understands that period as well as anybody."