The Shinnecock Reservation In Southampton And The Risk Of A Stock Market Crash

This week, I visited the Shinnecock Reservation in Southampton with a woman who leads Hamptons Community Outreach, a grassroots organization I've written about before. HCO does a lot of work on the Reservation supporting kids and renovating and rebuilding the housing. Many houses are in awful condition, asthma traps with lots of black mold.

It costs about $50,000 to renovate a house and about $100,000 to build a new one. No mortgages available because banks can't foreclose on the Reservation. Obvious contrast with the mansions nearby. 

I met and talked to a number of the Shinnecock residents who struck me with their tenacity and spirituality about their traditions. One woman in particular had so much to say about her family––17 grandchildren and great-grandchildren––and her desire to fight for the Reservation with the town of Southampton, and the history of her family.

Her house was built from the debris washed ashore from the 1938 hurricane that destroyed most of the mansions built close to the ocean. 

Before we left, the woman led us in a prayer. The three of us held hands. I closed my eyes as she blessed us first in English and then in the Shinnecock language. I was all-in to the moment. No stray thoughts. Just listening to her voice.

The obvious thing to write about now is the contrast between life on the Reservation and life in Southampton just outside, with all the cliches you'd expect. 

But I spent 90 minutes on the Reservation and I feel fraudulent in writing with any authority about the lives of the people who live there. It would feel like "poverty tourism." And my mind is still swirling with impressions that have yet to settle. 

The Reservation and the stock market

I’ve also been thinking about the risks of a stock market crash. The people I met on the Reservation very likely do not own stocks. But the stock market is relevant to them.

The last time the market crashed was sixteen years ago in 2008 during the Great Financial Crisis. In response to that crash, I cut expenses because it seemed like the right thing to do. The cutting of expenses is called the wealth effect. People tend to spend less when they feel less wealthy.

We are now 16 years past 2008 and stocks have reached one high after another. I’m not predicting a crash and I’m not suggesting that owning stocks isn’t the best long term strategy for investors.

I am suggesting, however, that a crash is a risk ¹ not only to the owners of stocks but to many who don’t own stocks.

A crash would affect the real economy not just through the wealth effect as people cut their spending. It would also be bad news for jobs and for income and for people who are struggling the most financially, like many on the Reservation. They would be among the first to suffer job loss or underemployment. The help provided by Hamptons Community Outreach would be needed even more.

When people see their wealth go down and think about which expenses to cut, they look at expenses that they view as discretionary or optional. They also consider which expenses might affect their own standard of living.

Charitable spending is discretionary and affects other people’s standard of living. So it’s no surprise that when stocks fall, so does giving.

 In 2022, the stock market declined about 20% but then in 2023 recovered most of those losses. The chart below (all numbers adjusted for inflation) shows that charitable giving fell in 2022 as you’d expect because stocks were going down. But when stocks went back up in 2023, charitable giving failed to follow. That’s worrisome.

I’m guessing that cuts in charitable giving tend to be felt most keenly by smaller, grass roots organizations that rely on a few key donors and tend to spend all the donations they receive because they have a great immediate use for every dollar they get. So they don’t build up reserves.

That’s a good description of the organizations we support. Hamptons Community Outreach is one of them.

So we’re locking more money away in our donor-advised fund,² which can be used only for contributions to charities. That way, we reduce the temptation to cut our contributions if a crash happens. It’s in times of financial stress when our giving would be most needed.

It’s contingency planning to save ourselves from less than noble impulses.

Band-Aids vs. Real Impact

Last week, a reader asked if our giving was “teaching a man to fish or merely giving him a fish.” In other words, are the organizations we support giving out band-aids or are they fundamentally changing lives?

If we enable Hamptons Community Outreach to renovate an unsafe house so that children living there stop breathing the spores from black mold, that’s not “teaching a man to fish.” The renovation alone is not going to change a child’s or a family’s life trajectory.

But what life chances does a child have living in a mold and otherwise infested and unsafe home? How likely are they to excel at school or avoid addiction to the drugs that are so prevalent on the Reservation?  What chance does that child have of growing up healthy?

Often you have to be satisfied with playing defense, that you’re helping to create the conditions whereby a kid at least has a shot to grow up to be an “A” student, get a full scholarship at a college, and then get a job in a lucrative career. And that gives them a shot to be a generational game-changer for their family on the Reservation.

And no child in a country as rich as America, whether in Southampton or any other place, should be living in an unsafe, unhealthy, mold-infested home. It’s immoral.

---

1. There’s a way to think about whether stocks are cheap or expensive called the “Buffet Indicator” named after Warren Buffet who once called it the best gauge of whether stock market valuations are cheap or expensive. It’s the ratio of the value of stocks to GDP––the annual output of the American economy.

In the chart below I’ve made it the ratio of (a) the value of both private and public equities (as tracked by the Federal Reserve) to (b) GDP. Historically, that ratio is near all-time highs and you can see what happened around 1999-2000 and 2008-09––declines of about 50% in the stock market. Recessions in the real economy are marked by the gray bars. Both sides of the ratio––the value of corporate equities and GDP–– are in nominal dollars, meaning not adjusted for inflation.

As I wrote above, I’m not warning of an imminent crash and I’m not suggesting that owning stocks isn’t the best long term strategy for investors. In fact Warren Buffet would advise people to buy and hold stocks if they have the timeframe and discipline to ride out a crash and benefit from an eventual recovery.

But if you believe in the Buffet indicator, or believe that financial ratios tend to revert to their long term averages, or believe that a recession is a risk, then it’s hard not to think of a crash as a risk.

2. A donor-advised fund (DAF) is similar to a foundation but without all the legal paperwork and expense. DAFs are available to a broad group of givers. For example, there’s no minimum to open a Fidelity DAF, the minimum donation to a charity is $50, and annual fees are $100.