What drives US markets?
Over the years the stock market in the US has generated significant real returns – better than most other markets around the world. Since 1994, US equity markets have returned 5.4% above inflation, while the rest of the world has averaged only 2.3%. Why?
One reason has to do with the way we treat failure. The US has a very liberal bankruptcy regime. When companies can’t pay their debts, we allow them to stay payments to their creditors and reorganize. Sometimes that means that the company continues, like the Chicago Tribune. That paper keeps coming out, despite going through Chapter 11 bankruptcy proceedings in 2007. By contrast, after Lehman Brothers collapsed, its assets were sold and the company was liquidated.
In both cases, managers were fired and unproductive assets were freed to be put to use in a more productive way. This includes buildings and equipment, but it especially includes people. When people are stuck working for “zombie companies” that have been propped up through subsidized loans, they can’t work to their fullest potential. Japan’s business sector is famous for having “company men” who draw a salary for doing nothing more than show up and read the paper. What a waste!
Failure isn’t truly failure if we learn from it and put our time and efforts to more productive use. That’s why the startup culture in Silicon Valley rewards folks who are on their third or fourth attempt. Winston Churchill put it best: “Success is not final, failure is not fatal: it is the courage to continue that counts.”
Douglas R. Tengdin, CFA
Chief Investment Officer