Finance

Forthcoming Darden Conference: Reset or Recovery? The Macro-economy and Value Investing

By Bob Bruner-

Reset (ri:’set). V trans. To set again.

I.1. a To replace (esp. gems) in a (former or new) setting…

       b. Surg. To set (a broken limb) again…

2. To plant again, replant…

3. To set again in a different way or position…

4. To put a new edge on; to sharpen again…

5. Typog. To set up (type) again; to recompose…

6. To set up or fix in proper order again…

7. a. To cause (a device) to return to a former state, esp. a condition of readiness…

    b. Computers. To set (a binary cell) to zero; to return (a counting device) to a specified value,

8. To set (hair) again…

II. 9. … b. of a device: to return to an initial state.

Oxford English Dictionary (1998) Vol. XIII page 704

 

On October 28-29, 2010, the Darden School of Business—in partnership with the McIntire School of Commerce—will host the Third Annual Virginia Value Investing Conference. The theme of this forthcoming conference considers the dilemma investors face today: are we experiencing a permanent downward adjustment in the economy, or can we look forward to a cyclical recovery? The conference will feature major figures in the field of investment management and will be open to investors, the University Community, and the public. As in years past, the conference has attracted investment professionals to network, exchange investment ideas, and reflect on major developments in the field. To reserve a place at the conference, please register at the conference web site.

In 2010 we stand at the aftermath of a great crisis and global contraction. The mission of this conference is to examine the economic narrative prevalent today as a basis for investment decision-making.

The narrative of “reset” took root in the depths of the financial crisis in 2008. In September 2008, French President Nicolas Sarkozy asserted that “Laissez-Faire is dead….The all-powerful market that always knows best is dead.” On November 6, 2008, Jeffrey Immelt, the CEO of General Electric, the largest industrial corporation in the world, asserted that "This economic crisis doesn’t represent a cycle. It represents a reset. It’s an emotional, social, economic reset."

At his inauguration as President on January 20, 2009, Barak Obama declared that:

“we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet. These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land — a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights. Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time.”

In February 2009, Steven Ballmer, CEO of Microsoft told the U.S. House of Representatives Democratic Caucus Retreat, “The bubble has burst…We believe this is a once-in-a-lifetime economic event…In my view what we now have will be a fundamental economic reset. The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.”

In May, 2009, Mohamed El-Erian, Co-CEO of PIMCO, one of the largest investment management firms, wrote:

“the notion of a new normal is increasingly resonating in policy circles and among market practitioners. This reflects a growing realization that some of the recent abrupt changes to markets, households, institutions, and government policies are unlikely to be reversed in the next few years. Global growth will be subdued for a while and unemployment high; a heavy hand of government will be evident in several sectors; the core of the global system will be less cohesive and, with the magnet of the Anglo-Saxon model in retreat, finance will no longer be accorded a preeminent role in post-industrial economies. Moreover, the balance of risk will tilt over time toward higher sovereign risk, growing inflationary expectations and stagflation…. This potent cocktail – a self-reinforcing mix of De-leveraging, De-globalization, and Re-regulation – inevitably entails economic and political forces that disrupt the normal functioning of markets and the global economy. Together, these factors constituted a strong unanticipated blow to the gut of virtually every economy.”

A year later, he said that 2010 is the start of an “economic reset… a paradigm shift that will take many years to put in place”.

And in 2010 Professor Richard Florida published The Great Reset, an exploration of the post-reset world that seemed likely to prevail. He wrote, that resets are “generation-spanning events, which require deep changes in economic, institutional, and spatial structures.”

Business journalists referred to a discontinuity, in respect to finance, capitalism, and markets. The columnist, David Wessel of The Wall Street Journal, wrote, “Reversing a 30-year trend, the pendulum has swung against trust in business and in markets. Like it or not, the public and their elected politicians have concluded that banks, business and unfettered markets got us into this mess. The response is more rules and more regulation.” Nelson Schwartz of the New York Times wrote, “The ‘new normal’ as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector. Stocks and bonds yield paltry return, with better opportunities available for investors overseas…The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries.” The Economist declared, “Economic liberty is under attack…Capitalism is at bay, but those who believe in it must fight for it."

In a fairly brief frame of time, the concept of a discontinuous change, a “reset”, a “new normal,” took root within the business community, financial community, government, the media, and academia. Is “reset” an idea whose time has come? What is a “reset” anyway? Are all resets the same, or do they differ in some way, such as intensity? If so, how should we measure the differences? Two years onward, are the emerging facts consistent with a reset? If so, is history any guide for what we are experiencing and likely to experience? And what are the implications of a reset for corporate managers and investment executives? On the other hand, are there any reasons why we might view the concept of reset with caution? Consideration of these questions is vitally important, given that the medium and long-term outlook for the economy and society hugely influence real and financial decisions from the loftiest executive to the humblest consumer.

The forthcoming conference, “Reset or Recovery? The Macroeconomy and Value Investing” will address these questions and more. The conference will touch on many trends highlighted by the growing discussion of reset:

  • De-leveraging: the reduction of the debt overload incurred by households, businesses, and governments.
  • China and the emerging economies—they are growing; we aren’t. Rise of Neo-mercantilism/the end of neo-liberalism.
  • Loss of American hegemony: wars and terrorism.
  • Re-regulation of major sectors of the U.S. economy, particularly health care and financial services.
  • High uncertainty arising from concerns about the supply of natural resources and the possible costs imposed by climate change legislation.
  • Unemployment that is “sticky” and relatively unresponsive to government interventions.

Investment professionals especially are invited to participate in the conference for learning, reflection, networking, and the exchange of investment ideas. The CFA Institute has agreed to grant continuing education credit to CFA charter holders who participate in the conference.

Seating is limited. To reserve a place at the conference, please register at the web site.