“We’re Going Down”

With limited information we make the best decisions we can, and for most people, most of the time, these decisions are based primarily on emotions. We do it because life is busy and we often have little time to gather sufficient facts to make more logical, and most often better, decisions.

As this briefing is typically focused on economics and markets, you most likely, and somewhat logically, assumed the title presaged a drop in the capital markets. But if you are a regular reader of the Friday Brief you know we don’t predict markets. So what are you to think?

Today’s title refers to an alleged announcement to passengers by the pilot of Wednesday’s Southwest Airlines Flight 3426 from Tampa to Raleigh who meant in fact to inform only the flight attendants that he was going to descend earlier and faster than usual to deal with a depressurization in the plane’s cabin. Unfortunately the message went out on the public address system and passengers were left to assume the worst.

According to reports from those on the plane, people began calling and texting loved ones and preparing for the worst. Atlanta Journal-Constitution reported that Phyllis Westerman told WSB Radio that she saw flight attendants panicking when oxygen masks would not deploy. “My husband and I heard a flight attendant panicking and yelling into the cockpit, ‘Manually deploy them!’ and nothing was happening. That is when the pilot came on the PA system [saying] that we’re going down.”

One of our local stations, WTVD-TV was first to report the incident, quoting Shelley Wills, as saying pilot said “‘we’re going down.’ And everyone is looking around like, ‘Is this a joke? Is he serious?’ And then you felt the nosedive.” Passenger Grace Stroud told CNN “At first it sounded like someone was coming over the PA to talk. Then it sounded like shots through the cabin, twice, back to back. Seconds later, the panicked captain said, ‘We’re in trouble; we’re going down.'”

In response spokeswoman Whitney Eichinger of Southwest told CNN that “Our pilot said he was descending to 10,000 feet. The WTVD report was not accurate. We landed safely.”

But a later email sent to CNN acknowledged  that “As the captain was communicating his plan with the flight attendants, he inadvertently activated the PA system in the cabin,” the e-mail said. “We sincerely regret any confusion caused by the relay of the information.”

Emotions Can Quickly Overwhelm Us

The extreme of the emotion of fear is panic. And one extreme of panic is chaotic, irrational behavior while the other to freeze and do nothing. Neither condition is conducive to good decision-making or action.

In the movie Apollo 13 Astronaut Jim Lovell was asked about crises he had experienced during his flying career. He told a story of an incident during the Korean war when he was returning from a mission in his Banshee to his carrier in the Sea of Japan. It was at night during combat conditions with all the lights out on the carrier were out.

During his return, he realized that the radio channel designated as the homing beacon for the carrier was also being broadcast from Japan, pulling him away from the carrier. When he flipped on his chart light to check his position, all his cockpit lights shorted out.

Engulfed completely by the dark he could have panicked and frozen or flown about in chaotic patterns hoping to luck upon the carrier. Instead he assessed his situation looking skyward for stars and then down at the sea for altitude. When he did, he spotted a long bright stream in the otherwise black ocean. It was the wake the giant carrier which stirred up oxygen in the water and caused the bio-luminescent bacteria, ever present in seawater, to glow.

Had his lights remained on in his cockpit, he may never have found the carrier. He concluded his story by saying “things always have a way of working out to get you home.” He was being humble. ‘Things had a way of working out’ for Jim Lovell because he was prepared for crises through planning, he confronted them confidently with logic, and he kept his panic at bay.

The Markets Ahead

Many are convinced that the stock and the Treasury markets will tumble when the Federal Reserve begins tapering its bond-buying program known as QE3. They may be right, but at least we have recent history to gain a clue. On June 19th, Ben Bernanke hinted that the days of extreme easing were coming to a close.

The Total Market Index as measured by our VTI (in blue below) fell 5% in a couple of days, the FTSE All-World (VEU in green) fell 6% and the 7-10 Year Treasury Index (IEF in red) fell 3%. The stock indices rallied in the days that followed while the Treasuries remained somewhat depressed. Investors were reassured by the Fed that they were referring only to the bond-buying program, not interest rates. They expected to keep rates low for the foreseeable future.


The 7-10 year Treasury index has remained at its lows largely because investors know the Fed will soon begin scaling back their unprecedented program of buying 45 billion dollars worth of Treasuries each month. It is, therefore, likely that much of the speculative premium that was present before June has been washed out of Treasury prices.

It is also most likely the Fed will wait until the Congress passes its deadlines for budget talks and debt ceilings in March before announcing their taper plans. The markets know the announcement is coming and pricing is, to some extent, already discounted in anticipation of it. Notice above what markets did in May before Mr. Bernanke’s announcement.

These are indeed the times when emotions can cost investors not just returns, but lifestyle. Some delay decisions to invest because the coming drop. Others pile in to avoid missing completely the stock market rally. These are investors who significantly under-perform the actual returns of the capital markets because of their emotions.

What if the stock and the Treasury markets have it right? What if the US economy is on the verge of strong growth? What if the Congress finds a way in the new year to compromise and avoid yet another policy/monetary crisis? Are you ready for such a scenario? Are you ready if the reverse happens?

You, our clients, are indeed ready for either outcome. We have created and continue to refine a plan that reflects your ideals and priorities. We continually stress test that plan through all kinds of market crises, just like Jim Lovell and the pilot of Southwest flight 3426 have been subjected to hundreds of simulated crises, and we have placed you in a portfolio that is carefully designed to both withstand the worst and shine in the best of markets.

Planning and logic, not emotion, are the only ways to confidently ensure the best financial future possible. If emotion has a bigger hold on you right now than usual, please give us a call. We will bring you home safely.