A Case for Rational Optimism: A Parallel of Two Decades - Alaska Permanent Capital Management

Blog

A Case for Rational Optimism: A Parallel of Two Decades

twitterlinkedin

This summer, I had the opportunity to speak at Accelerate: Alaska, a conference focused on the opportunities, challenges, and future of Alaska. There were a number of speakers at the conference who spoke on a wide range of topics, from behavioral finance to infrastructure. I chose to speak on the case for rational optimism for Alaska, and to put the current state of our state into historical context and to provide advice for how to invest in Alaska today.

A positive business environment and investor optimism are critical components for start-up firms to succeed and become mature companies. We as Alaskans have been inundated with negative news headlines and constant talk about how bad the business environment is. Human behavior lends us to have negative thoughts and we focus on these perceived negatives.

Let’s look at some headlines that have appeared in the news below. There is certainly ground for these headlines to stand on.

What are the first thoughts that come to mind after reading the headlines?  Sound familiar?

A sound investment environment, including macro-economic factors and investor sentiment, are so important to the investment process. Our eyes and minds construct a lens through which we see the world of investing, as well as our lives. If we see bad through our lens, then we will likely run away. However, if we see good, we are likely to stay.

I am reminded frequently at home when my wife asks what we are going to do with the sheet wall cracks from the November earthquake. When I first got home after the earthquake and saw the cracks first-hand , they looked terrifying a foot away and the most negative feelings set in about what is next. Now, with some time and distance from the November event, the cracks do not look as daunting as I sit on the couch. A question that remains is, “will those cracks bring the house down?”

When I look at the sentiment surrounding Alaska, it leads me to believe that the house/investment environment is falling.

We are in a tough spot, there is no doubt about it. Alaska GDP was down 12.1% from 2012-2016.  As of December 2018, GDP is 54.01 billion which is below the previous peak of 57.67 billion. Unemployment at 6.6% still remains 3% higher than the nation average. Total bankruptcies (business and personal) averaged 460 the last 5 years. Do I need to say anything on the perceived political uncertainty at the state, federal, and world levels? I believe that government officials are trying their best to solve issues within the game of democracy. Democracy was not formed to be efficient or speedy but I will take our political process and our laws over others.

There are certainly challenges facing Alaska. Let’s take a step back in time and revisit the mid 80s. Below are the headlines from Alaska newspapers.  Yes, you read them at the beginning. These headlines from the 80s are remarkably similar to what we are experiencing now including one, which I thought was ironic, on earthquake damages.

Economic Conditions

Many of these headlines we talk about today, from recession and the permanent fund, to people leaving the state, and earthquakes. We have been here before, and I would argue that the 80s were a touch worse.

In mid-80s 7-8 financial institutions collapsed, and unemployment spiked. One story I cannot even fathom has people walking into the bank and handing over the keys to their house and leaving. There are further stories of people packing what they could in the middle of the night, taping their house keys to the bank’s door, and driving out of the state.  The situation seemed so hopeless.

Alaska GDP dropped 28% from 1985 to 1986 and it took 15 years to recover. Alaska averaged a 9.5% unemployment in the 80s. The economy lost 20,000 jobs in 1986 and 1987 in Alaska on a population of 550K vs. a current population well over 700K. To put in another light, the Anchorage Economic Development Corporation is sighting a net loss of 700 Anchorage jobs in 2019 and expects a loss of another 1,000 jobs in 2020.

There were well over a 1,000 bankruptcies, in a smaller less diversified economy, 2.5 times more than today. Today’s Alaska economy is larger and more diversified. Even though oil tax revenue is still the driver of State revenue, the broader measures of the economy are more diverse. Our local governments have had to make tough choices and they continue to do well.  The Federal government is alive and well. Our banking system is in a much better place than any time before. Native corporations bring an economic power to our communities all over the State.

And YES, they had political uncertainty at the State and Federal levels. Still, I would rather take a “Trade War” over the Cold War.

Macroeconomic Headwinds

The 1980’s economy also had to face three macroeconomic headwinds: 1.) Inflation in the mid 80s averaged 5.6% and peaked at 14.8% compared to a current CPI of 1.7% year-over-year. 2.) Mortgage rates averaged 12.8% over the decade and topped 18.6%.  Many of us under the age of 55 have not experienced those type of rates on our mortgages. Low mortgage rates will help provide stability to home prices. 3.) In 1986, the price of oil dropped to $9 per barrel for North Slope Crude. Recently it has been range bound at $60-65. Think about the psychological effect if oil dropped below $20 for an extended period.

These are tough times that we are experiencing not to make light of the environment…the landscape is challenging, but I am rationally optimistic.

Case for Optimism

I believe the macroeconomic factors today are better than they were in the 80s. We have some work to do with investment sentiment. Numerous people have never experienced what the business and political leaders experienced in the 80s. I do not think we would want to.

I started my career with APCM in 2002 and wouldn’t have had a chance with the experience and credentialing that I had, but someone took a chance on me. This approach/culture is still true of APCM today. We currently employ Alaskans who came back because this is home, as well as recent graduates and interns who want to stay here. They help us in various aspects of our Firm, from client relations, to portfolio management, to trading, to operations.   

Alaskan ingenuity is my case for rational optimism. I get to talk with clients all over the state who are solving problems and asking tough questions. Little bit by little bit I see progress.

The younger generations are more technology savvy they look at the world in a different way. Not in a bad way but different. Now I know how my parents must have felt raising me. When you put a different lens on a problem you will get a different solution.

How to Invest Today

When we think about how to invest in Alaska, I recommend finding a person, opportunity, or project. Give that person and an opportunity, time, and energy. Bet on that person. Be thankful for the opportunities that arise and do not let it go to waste. Believe in the project and see it through. 

People, opportunities and optimism are ultimately the source of innovation. This will be the foundation for the next leg of growth in Alaska – and that’s something worth investing in.

Bill Lierman, CFA®
Chief Investment Officer, Fixed Income

 

Sources Cited:

“1900s Fairbanks Daily News Miner Newspaper Archives by Year.” Fairbanks Daily News Miner Newspaper, fairbanks-daily-news-miner.newspaperarchive.com/historical-events/.

“9th Circuit Annual Total Bankruptcy Filings for 1985-2018.” American Bankruptcy Institute, American Bankruptcy Institute, 31 Jan. 2019, www.abi.org/.

“Anchorage Daily News Archives.” Anchorage Daily News Archives, adn.newsbank.com/.

Bloomberg Finance L.P

Cohn, Scott. “Alaska, Shackled with a ‘Grave’ Budget Crisis, Is America’s Worst State for Business.” CNBC, CNBC, 11 July 2018, www.cnbc.com/2018/06/29/alaska-is-americas-worst-state-for-business-in-2018.html.

“Mortgage Rates – Freddie Mac.” Jump – Freddie Mac, 8 Aug. 2019, www.freddiemac.com/pmms/.

“Office of Management and Budget.” State of Alaska Office of Management and Budget, omb.alaska.gov/.

“Research and Analysis Home Page- Department of Labor and Workforce Development.” Research and Analysis Department of Labor and Workforce Development, State of Alaska Department of Labor and Workforce Development, laborstats.alaska.gov/.

Williams, Tess, et al. “Alaska News, Politics, Outdoors, Science and Events.” Anchorage Daily News, Anchorage Daily News, www.adn.com/.

 

Share This