Past
Commentaries
10/22/2020
Current Commentary
To My Clients, Friends & Observers:
Among friends and in good company there are very good reasons why politics and religion are not discussed. They are deeply personal and emotional subjects. To a certain extent people are hard-wired to their inclinations and beliefs. For these reasons, peoples' convictions are unlikely to change and such conversations are likely to turn to arguments, discord and hurt feelings – without anyone changing their minds or beliefs. Gentle people prefer harmony.
Recently I read with interest the remarks of Senator Ben Sasse of Nebraska in the Wall Street Journal op-ed page, differentiating between civics and politics.
"Civics is the stuff we're all supposed to agree on regardless of our policy view differences. Civics is another way we talk about the rules of the road. Civics 101 is the stuff like Congress writes laws, the executive branch enforces laws, courts apply them."
"None of that stuff should be different if you're a Republican or a Democrat or a Libertarian or a Green Party member. This is basic civics. Civics is the stuff that all Americans should agree on like religious liberty is essential."
"People should be able to fire the folks who write the laws and the voters can't fire the judges. Judges should be impartial. This is just Civics 101."
"Politics is different. Politics is the stuff that happens underneath civics. Civics is the overarching stuff we as Americans agree in common. Politics is the subordinate, less important stuff that we differ about."
"Civics doesn't change every 18-24 months because the electoral winds change and because polling changes."
For the greater part of my adult life I've found politics annoying at best. Not to say that politics aren't important. I appreciate what politicians do: they represent their constituents. After being elected it's understandable that their #1 priority is to get re-elected, so they cater to the voters' interests that will re-elect them. That should not relieve them of their civic responsibilities.
What is particularly disturbing today is that politics is overwhelming civics, chipping away at orderly government in ways that promote social unrest, if not chaos, and economic decay.
Cicero, criticizing self-indulgence, said (2100 years ago) that it's easier to conquer people who surrender to pleasure. He was a politician committed to the first principles of a Roman republic which once eroded were replaced by a series of dictators who oversaw the apex and decline of the empire.
It used to be taught in grade school civics class that the Constitution authorizes Congress – and only Congress – to do the nation's spending and budgeting. Congress has effectively abrogated this fiscal duty for political expedience. It is commonly asserted by members of Congress that "the Fed is in charge of the economy." And the Fed appears to oblige by expanding the money supply without limit to accommodate Congressional spending. By the Federal Reserve Bank's original charter, it was authorized to purchase nothing but sovereign U.S. debt – Treasuries, but since 2008 it now purchases mortgage backed securities - including a lot of the junk that was packaged prior to the financial crisis. It also purchases corporate debt and some analysts predict that it will eventually start buying stocks. This is dangerous.
Congressional authorities in the House of Representatives have embraced Modern Monetary Theory, articulated and popularized by Dr. Stephanie Kelton, a former professor of economics at University of Missouri Kansas City. Her thesis is that deficits mean nothing as long as we can print sovereign dollars, the world's reserve currency, to "pay" for them. Giving Congress a license to spend without limit is great politics but bad civics. In 2014 Dr. Kelton was designated Chief Economist for the Democrat Minority Staff of the Senate Budget Committee until 2016 when she became an economic advisor to Bernie Sanders' campaign.
Total U.S. federal debt is over $26 trillion in 2020. At these levels even tiny increases in interest rates have significant impact. A common rationale for investing in the stock market is the low interest (discount) rate, making future corporate earnings more valuable. A retired professor from University of California San Francisco, William Wang, makes the point that as the discount rate approaches zero the present value approaches infinity. At a capitalization/discount rate of zero the present value of a penny a year is infinite, making the market rationale irrational.
Economist John Mauldin makes a case that the Federal debt will be $50 Trillion by 2030. Add to it the state and municipal debt. This is not unreal.
Recently I watched an interview that Ray Dalio gave Bloomberg News back in June. Dalio runs Bridgewater Associates, the world's largest hedge fund. Calmly and deliberately he outlined a financial system that is fragmenting or going off the rails. He made the obvious points that nobody has ever spent themselves to prosperity and that debt is not wealth, debt is debt that must be repaid. And that led him to discuss the greatest threat to our financial prosperity (as I have ): the demise of the dollar as the world reserve currency.
Dalio perceives the same conditions for the dollar that history has recorded for the Dutch Gilder and the Pound Sterling. Where then, he asked, can we find a reliable store of value? He suggested it may be found in the ownership of ongoing, productive enterprises.
At some point, not if but when, holders of U.S. sovereign debt in Asia and Europe will question its value and may conclude that it is not worth holding. They may question the value, the purchasing power, of the trillions of dollars traded for their goods and services. The U.S. has not had a trade surplus since 1975.
The Austrian economist Ludwig von Mises said, "There is no means of avoiding the final collapse of a boom brought about by a credit expansion."
The Baby Boomers
One of the worst canards I have heard uttered by politicians and pundits about public debt is that it's not a problem because "this is a debt we owe to ourselves." Of course, it is not. It is money paid to ourselves now, to be repaid in the future by somebody else.
The baby boom generation is fading away. They have indentured the next several generations - a monstrous immorality. This election may be their last hurrah at the polls. They will soon be outnumbered by Gens X, Y, Z and the Millennials – who appear to me to be furious at their circumstances (and rightly so) and deeply resentful of the old, bumbling, vain, patronizing, lying, leaders in Washington.
Regardless of the election results, techs should continue to outperform. They would welcome any political softening towards China which could help their earnings, if not American domestic prospects. Trans-national corporations are soulless. Can they be "stores of value" if the dollars they generate for investors collapse in value? I can't answer the question. But I'm concerned about an economy supported by one temporary prop after another by a Federal Reserve covering up for the fiscal irresponsibility of Congress. I'm concerned about an economy eventually drifting toward entropy.
I believe we have prepared for the possibility of some post-election chaos over the ballot count. Politics over civics again. The effect on the market during the Bush-Gore debacle was a drop of 8 1/2 %. We have raised a lot of cash in almost all portfolios in anticipation. If you have concerns, please call.
Kind regards,
Dennis M. O’Connor
