Monday, February 23, 2009

Hidden Crisis

It's pretty bad now. I don't want to rub any salt into the wounds. But I'm quite surprised that all talks of current crisis miss out one critical component of it.

Structural crisis. All by itself it's not that scary. Often goes on unnoticed. Actually, after World War II we live in a permanent structural crisis. Just look how many new industries emerged, how many old ones died or changed completely, how completely life changed in the last 60 years. And it was the time of the fastest growth of economy in the known history. But bad things happened when structural crisis consides with financial one.

There are only two crises in US history which could be compared with the current one. It's Great Depression of 1930s and maybe even greater depression of 1873-1876. And both of those two crises had two things in common: structural crisis combined with financial one. In 1873 structural crisis was caused by railroad build up, which changed business radically and also overextended credit markets of the country and also overbuilt railroads. But it probably wouldn't be that bad without coinage act of 1873 which essentially introduced Gold Standard in the country and caused a severe deflation.

Great Depression is closer, there were a lot ob books written about it, but not many people point to structural crisis behind it. Yes, there was a huge financial crisis, caused by credit destruction and some political errors. But structural crisis was there as well, caused by shift from horse to automobile in transportation and to tractor in agriculture. This crisis was bigger than that of 1873, because structural change behind it literally changed everybody's life in developed world.

Current structural crisis is a little bit different. It has two causes: the Internet and globalization. And they should be taken together, because some aspects of globalization are impossible without the Internet. As with previous structural crises, you can't undo it's causes. It's impossible to shut down the Internet, and it's equally impossible to stop globalization. Those who think that protectionism is possible now just don't understand how tightly our world is interconnected now. Take apart any piece of more or less complex machinery made anywhere in the world, and you'll find parts from at least five countries in it. Railroads were here to stay in 1873, cars and tractors were here to stay in 1929, Internet and globalization are here to stay now.

The lesson from previous structural crises is simple: it takes time to get through it. No matter what measures anybody is taking, we need time to work it out. Political decisions can make crisis longer or shorter, they can make it much worse or soften its effects, but they can't magically make it go away. In time we will get through.

From investment perspective, structural crises can create huge opportunities. So far not that many businesses take full advantage of the Internet. We have very successful ones, like Google (GOOG) and Amazon (AMZN), not very successful but viable Yahoo (YHOO) and very promising Netflix (NFLX). There are some travel and niche retail businesses, but I expect many more to emerge soon. Our task as investors is to find winners.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned, considering buying AMZN and NFLX on weakness. Positions can change any time.

Seeking Alpha Certified

No comments: