I want you to picture a man playing checkers. He has the board on an old barrel. He’s in the shade of a big oak tree. He’s studying his next move. You can tell he’s been playing checkers a long time, and he understands the game. After deliberation, he moves his piece. Suddenly BAM! A knight chess piece appears and takes his checker piece. He jumps back, “What the heck just happened?” His opponent looks at him with a steely gaze: “It’s a different game now: we were playing checkers, now we’re playing chess.”
Now I want you to imagine if you can, 1971. (If you were born well after that, imagine your parents or grandparents in 1971.) Richard Nixon is president, Charles Manson is convicted, the Vietnam War is raging and Lt. Calley is convicted of war crimes. Walt Disney World opens in Orlando, Jim Morrison is found dead in a bathtub (I know, what a surprise, a rock and roll singer dying prematurely), and Intel introduced the world’s first microprocessor, the 4004. Imagine a computer in 1971: a huge machine in a large room, surrounded by peripherals. It looked something like this:
Now envision a 15 year old kid. A bit stocky, black curly hair. National Honor Society, first chair trumpet player, one of the smart kids (or nerds). He’s laboring over a card machine, trying to write a program. He writes some code for his program, then puts a set of punched cards in front and in back of it and takes it across the street to the School District Headquarters where the big room with the computer is. He drops off the long box of cards (like a drawer full), and leaves them to be processed. The next day, he gets the result on a long sheet of paper with green and white stripes. He looks at it, frustrated and tosses it down. What is he doing?
It’s young Leon LaBrecque, trying to program a 1401 mainframe to play chess. In 1971, to put things in perspective, there were virtually no hand-held calculators (anyone remember slide rules?), no internet (of course), no computer spreadsheets, in fact no display screens. Anything you wanted processed, you processed yourself with paper and pencil, or a big crank calculating machine, or you used a mainframe. To use a mainframe, you needed to write a program, and translate the program into machine language. You then ‘debugged’ the program, which meant finding the errors, which could be anything from your own mistake in the actual program to a typo. Long and tedious. I didn’t know how daunting the chess program would be. What happened is I started the program with the first move. Easy enough, there are 20. After that move, there are 400. Not too bad, even for a clunky computer. Then it gets hairy. The third move goes to about 5,362, and goes up from there. There are about 140 million logical moves, but the estimate of the number of possible games of chess appears to be 10 to the 120th power. That’s a 1, with 121 zeros after it. Write it out for fun. Now you can see my problem. Chess is complicated.
Now imagine checkers. Simpler by a long shot. All pieces move the same way. There are 7 possible opening moves. The total number of possible moves is about 5 times ten to the 26th power. Huge number (more than all the grains of sand on earth), but still WAY smaller than chess. In fact, there are computers, like Watson or Deep Blue that can beat some human players (but not always) in chess. There is a computer named Chinook that is unbeatable in checkers. It has the game figured out.
So chess is more complex than checkers…so what? Until 2016 rolled around, the globe was playing economics like checkers. You have a slowdown, you ease the money supply. You have open trade and open borders. You have low or negative inflation. You buy your own bonds, even if it results in negative interest rates. You raise taxes to provide programs. You regulate to protect the public. You do all of this until your voting populace decides you don’t.
Then your electorate decides you need to get out of the European Union. Or that a billionaire with a populist message seems better than the establishment. Or that an Italian Prime Minister should step down. And in a blink of an eye, as Malcolm Gladwell puts it, you reach a ‘tipping point’, and the game flips over. You were playing checkers, and the new game is chess. You are moving a checker piece and WHAM, a knight takes it. The New Ordered World is a different game. Taxes will probably change. Government will change. Trade policy will change. Military position will change. Inflation will change. In fact, the only certainty for 2017 is that things will change.
In chess, you can simply react, or you can plan. Sometimes you sacrifice a pawn, or a bigger piece. You try to control the center of the board: you think ahead. Great players think quite a bit ahead. We are thinking ahead. We need to plan taxes, plan our investing strategy, plan for inflation, plan to pay for health care, plan for longevity. The game has changed, and a plan is essential. That’s not to say one size fits all. Like in chess, the plan changes as the game progresses.
Going into 2017, spend some time thinking about how you will make your moves. How much cash should you have? Should you look at your debt situation? What will change with regard to funding kids or grandkids educations? What will new tax laws do to you or your portfolios? We recalculated tax returns to see what moves could be made immediately. We found that there are tax planning opportunities in many cases both now and after a change. We also determined that depending on changes, the whole strategy for taxes will change as new laws are enacted. We’re trying to look ahead to the next move.
The game has changed. It will be exciting. How it will change, we don’t know – no one does. As Janet Yellen said after the last Fed meeting, “We are operating under a cloud of uncertainty at the moment.” But we will plan as we see the new situation emerge. We will be proactive.
Have a wonderful holiday and happy new year!
PS: I gave up trying to program the 1401 box to play chess. Later, I found out better minds than mine had done the same. The 1401 had 4K of memory, an amount so small it’s not worth comparing even to a Fitbit. I eventually decided to try to decipher the tax code instead of computer code (too bad, my birthday was squarely between Bill Gates and Steve Jobs, I might have been a computer whiz). In law school, I endeavored to master another game, Monopoly. I went pretty much undefeated, not winning every game, but not losing. I used to write contracts on the back of $1 bills to swap rents or do joint ventures with other players. If you own part of the board, you are diversifying. It’s smart investing.