Optimism: The Only Reality 
 

Since October 9, the Dow Jones Industrial Average has risen from 7285 to 8579.  That’s 17.7% in just 37 days. During this period, we have seen headlines dealing with snipers, a sweeping Republican victory,  a United Nations resolution on Iraq, a half point reduction in the Fed Funds rate, and a renewed terrorist threat even today.  And yet the markets move along.  Now we would not suggest that there is no effect from these current events on the economy or the stock markets. Nor would we predict that the markets have turned north for good.  Our crystal ball remains broken.  However, we would suggest that there is something greater than all of us can fully comprehend at work which is great cause for optimism - a phenomenon that Abraham Lincoln, Theodore Roosevelt, and Ronald Reagan all understood as they possessed undying faith in the people and ideals of this country. Free markets work.  

 

Adam Smith discovered this upon analyzing the reasons behind the wealth of his nation – England in the late 1700’s.  His book, The Wealth of Nations, titled after his research, is perhaps the single greatest tome of economics ever written. Since that time others, among them men like F.A. Hayek and Harry Markowitz all taught us a very important truth: Capitalism which promotes the free setting of prices based on the decisions and values of the entire economy, is the reason our way of life and thus our economy have always ultimately prevailed.  There are hundreds of millions of factors at work at any time. Individuals and business entities make continuous decisions all affecting the system in different ways – some good, some bad.  But the system works.  Not just for Americans with our indomitable pioneer spirit, but in other cultures as well. To prove this, one would need only to examine two of the most profound economic experiments of the last 60 years.  They are: West Germany vs. East Germany and mainland China vs. Hong Kong. In these examples we see a stark contrast between what government intervention in the form of regulation of prices, both for goods and markets can do vs. what allowing the markets to find their own way in setting prices can do.  This non-intervention provides opportunities for individuals which ultimately drive economic growth.

 

Will we have difficult markets again as we have experienced in the last 3 years?  Count on it.  Is this bear market finished?  Who knows?  And furthermore who cares?  As long as we have the system that allows prices to seek their own way, then economic growth will occur.  As Nick Murray said recently, “We should be most afraid of not being in the market when it goes to 15,000 rather than being in the market if it goes down to 5000.” You see one is inevitable, the other is not.

 

No nation or economic system has ever existed like the one we are blessed to be a part of. So deal with the events as they come – but never lose faith in the greatest economic achievement in history – capitalism - where optimism is the only reality.

 

Posted November 15, 2002

 

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