A collection of today’s economic, market, political, geo-political, and human-interest news, thoughts, and analysis.

 In This Month’s edition:

  • Bulls, Bears, Black Swans, and Bubbles
  • Growth Remains Elusive
  • Up Is Down and Down Is Up
  • S. Household Incomes Rise 5.2% in 2015
  • Battle Royale
  • Random Thoughts
  • Critics Corner

Bulls, Bears, Black Swans, and Bubbles

For the first time in years, the 10 prominent industry strategists consulted semiannually by Barron’s are displaying dissension as they opine on U.S stocks. Their average year-end projection for the S&P 500 is 2138 or 1% below recent levels and well off their forecasts for 2016 the last time they came together.

In their collective opinion, U.S. and global growth is off the table at this time. They are forecasting 2016 ending with a 1.7% GDP growth rate and about the same for 2017. On the stock market, 4 are bearish, 3 are bulls, and 3 are neutral.

The bulls defend their position by citing a combination of global central bank easy-money policies, improved earnings-per-share growth in the second half, and investors continuing to stretch for yield. These should result in further gains going into year-end. The bears believe election uncertainty, the Fed’s apparent bias to raise rates, and high P/E ratios could be a drag on the markets in the coming months.

They do find consensus on a number of fronts:

  • Hillary will win the election.
  • The Fed will raise rates in December.
  • Oil prices have stabilized.
  • Chinese growth worries are dissipating.
  • S. stocks are the place to be…no surprise there I guess.
  • Increasing probabilities of a sizeable correction occurring.
  • Following six consecutive quarters of decline, corporate earnings will stop going down.

Black Swan investor Mark Spitznagel appeared on CNBC’s “Power Lunch” recently saying that the Central Banks have created a bubble in the stock market which will come down across the board “very, very hard.”

“There is one big bet out there. So diversification isn’t really going to work. Timing this is not going to work. These low rates and this high valuation means that they’re extraordinarily sensitive to changes in rates, extraordinarily sensitive to risk premiums and growth.” While this wouldn’t necessarily qualify as a Black Swan event which has to be unpredictable or unforeseen, it could be as devastating.

His philosophy rhymes with our own where he specializes in protecting investors against sharp market declines. He invests with “extreme asymmetric payoffs, which means very infrequently I want them to have a huge payout, and most of the time I want to just kind of bob around…” He calls it “insurance-like protection.”

Two well-respected experts in our industry, Dennis Gartman and Mark Yusko, have offered a few interesting prognostications (thanks to FA Magazine for this story):

  1. A recession is coming (of course, as soon as the last one ends, the next one is always coming.)
  2. Oil prices will tank.
  3. Other commodities will boom.

Gartman believes we’ve seen the end of the bull market in crude and believes it will be very difficult for the price of oil to hold any value above $50 per barrel in the years to come barring some sort of shock. His thinking reflects sentiment that is becoming more popular of late. Essentially, the evolution of hydraulic fracturing (fracking) as a drilling technique has made the starting up and shutting down of vast oil reserves around the world relatively quick and cost efficient.

The ability to access these oil and gas reserves has positioned the U.S. to be virtually energy independent sitting on the world’s largest energy reserves. Now introduce the rules of supply and demand. Prices near $50 per barrel allow today’s drilling operations to become profitable. As prices near this level, oil production starts to ramp up injecting more supply into the equation.

A likely repeatable cycle will look something like the following. As demand causes supplies to dwindle, prices will begin to move up reflecting lower supplies. As prices rise, they begin to move into the profitability range where drilling operations begin to open up temporarily capped wells and start dormant fracking sites. This will cause the supply to increase which will follow with a decline in prices reflecting the increasing supply. As prices fall, wells will be capped and fracking sites will again shut down forcing the supplies to fall and forcing prices to rise and the cycle begins again.

In addition to the above supply and demand cycle, more efficient use of fossil fuels and the inevitable increasing market share of renewable energy will place a ceiling on the price of oil. As such, experts are now saying that the price of oil should bounce around between $40 and $50 per barrel. OPEC still produces a large enough share of the world’s oil supply that manipulative moves on production could push prices outside these boundaries, but the impact is expected to be temporary as other production sources react.

Gartman points out that, the recent decision to reduce production notwithstanding, the Saudis will be highly incented to aggressively produce supplies of oil in the coming years due to it becoming a wasting asset. They have about two-decades before renewable energy sources will make oil worth far, far less than it is today.

For those expecting wholesale price drops at the pump, don’t hold your breath. Refining capacity in the United States has not increased since the 1970s. Combine that with seasonal blend changes required by many states and prices will remain artificially high relative to the underlying price of crude.

Regarding other commodities, Gartman believes that the commodity super-cycle is not over. Most of the recent negative pricing impact was due to a slowing in China. That appears to be turning around as China seems willing to engage in a ramping up of the debt cycle to stimulate consumer growth in country. On top of that, demand for food will continue to rise as populations in the developing world are rapidly growing thus increasing demand for a broad range of commodities related to food and housing.

Yusko focused on what he sees as the looming recession. “The U.S. stock market is the most vulnerable it’s been since 2000. We will have a recession sometime in the next 12 months. And when that happens, stocks will go down a lot in the U.S…” He cited both Warren Buffet and George Soros when he went on to say, “The best investors in the world who manage their own money have huge amounts of cash. Why? Because valuations in the United States are stupid, and stupid things end.”

Gartman added that he believes we have been in a global bear market for the last 16 – 17 months as we have watched “wild” fluctuations in indices. This type of activity is generally associated with market tops. He agreed with Yusko about expecting a recession in the next 12 months and said, “I think you’re going to be better off sitting in cash, being very quiet, being patient, and if you have to own something, hedge it up.”

Yusko believes that keeping interest rates low is just delaying the inevitable. “When the cost of capital is zero, the return on capital goes to zero. It’s axiomatic, if you give people free money, they do stupid stuff.”

I recently sat through a fascinating discussion led by Yale professor Vikram Mansharamani who is an expert in spotting bubbles before they burst. He has studied bubbles of all shapes and sizes and probably understands them as well as anyone. Once he identifies them, he works to assign probabilities of outcome. Sound familiar? He attempts to view potential bubbles through five different lenses:

  1. Price action: when higher prices create more demand, it often signals a bubble.
  2. Misallocation of capital: excessive leverage generally signals some stage of a bubble.
  3. Overconfidence: believing it’s different this time almost always accompanies a bubble.
  4. Political manipulation: creates distortions that often lead to a bubble.
  5. Popular sentiment: the herd mentality. When everyone believes one thing, something else will occur.

He introduced some fascinating anecdotal evidence in support of his research. For example, there is the Skyscraper Effect. Every time through history that a new world’s tallest skyscraper was built, an economic bubble burst in that region or nation within 12 months of completion. The characteristics exhibited in the world’s tallest building competition through time were overconfidence and misallocated capital which proved to be extremely speculative. As we speak, Saudi Arabia is in the process of building what will be the world’s tallest building upon completion.

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Mansharamani also offered Art Prices as an accurate predictor of economic overconfidence. If you overlay stock market charts with world art prices, one quickly sees a direct correlation of art prices and stock market bubbles. This action again demonstrates overconfidence and a misallocation of capital. Today we are in the midst of another world record run on what is being paid for various types of art. Interestingly enough, those record prices are being paid by extremely wealthy individuals and companies in one part of the world. Where you might ask…it’s Saudi Arabia. Ruh Roh!

So, does the Skyscraper Effect and record art prices portray a looming economic bubble on the brink of bursting in Saudi Arabia? One could make a very strong argument for this case especially when you introduce the possibility of depressed long term oil prices.

How might Saudi Arabia respond to the bursting of an economic bubble? On one hand they could cease oil production in an attempt to jack up oil prices in the hopes to eventually right their economy. On the other hand, they may open the dam and flood the markets with oil in order to quickly inject capital into a failing economy. Either way, the action will create energy chaos and be very disruptive to the rest of the world. The Middle East will become further destabilized as a result and migration into Europe will increase to unimaginable levels forcing sovereign preservation that will include more nations leaving the EU.

How does the U.S. look when viewed through Vikram’s 5 lenses?

  1. Price Action: Equity and fixed income markets remain near all-time highs. Higher prices have been greeted with stable demand. Maybe not a bubble but definitely signaling an overvalued status.
  2. Misallocation of Capital: We have seen a tremendous misallocation of funding by central bank policy. Government stimulus has had little positive economic impact. We have record domestic and global debt levels.
  3. Overconfidence: Record market highs signal overconfidence. The belief that 1%-2% growth signals a strong economy can only be misplaced confidence. Debt bubbles exist in many sensitive spaces (e.g. autos, education). Complacency is growing.
  4. Political Manipulation: A 50-year bubble and expanding…creating massive debt, unfunded entitlement obligations, onerous tax levels, and regulatory burdens with no hope of efficient reversals.
  5. Popular Sentiment: The herd has been in motion for some time. The lemmings are gathering at the edge of the cliff. Complacency is growing.

Anyone see things differently?

Growth Remains Elusive

Positive economic news is not promising as the presidential election nears. This is not the type of news either Clinton or Obama would have hoped for as too many Americans continue to struggle. Expect Trump to continue to hammer on the slow/no growth environment we have suffered through leading to the worst economic recovery in the post war era.

Annual GDP growth has averaged about 1% over the last three quarters hovering just above recessionary levels. Q1 GDP generated an annual growth rate of 0.8% followed by Q2 at 1.1%. The Q2 number was recently revised slightly upwards. Over the last 10 quarters (2.5 years), GDP growth has been less than 2%. Now economists have cut their estimates for Q3 to 2.8% which would result in the 8th straight quarter of sub 3% growth. Healthy economic growth has always been pegged at 3% or better. Anything less is problematic.

A recent WSJ business roundtable of corporate CEOs was polled about future gains. Little enthusiasm was evident and the majority believe we’re in a new normal where the U.S. economy is “stuck in neutral.” Both hiring and business investment expectations are being reduced.

What little growth we have seen has been almost entirely achieved on the backs of the consumer (70% of our economy) over the last three quarters. Consumer spending has increased at an average annual rate of 2.7% over that period. Business and government spending is at -5.1% and 0.3% respectively.

However, retail sales fell by 0.3% in August hinting that the consumer may now be pulling back. This could be a blip, but if the consumer is backing away, watch out below.

Up Is Down and Down Is Up

The economy is stagnant and the markets teeter on Fed action. Good news is bad; bad news is good. Good economic data results in market prices going down and bad reports see the market strongly rallying. Seems a bit counterintuitive, right?

No one wants to be Alice following the white rabbit down the rabbit hole. Remembering Jefferson Airplane’s famous lyrics, “One pill makes you larger. And one pill makes you small.” For a long time, the markets have been in a mode where they ignore everything but Fed action or inaction. “The ones that mother gives you don’t do anything at all.” Fundamental and technical warnings are ignored as the increasingly volatile market continued undeterred. “And if you go chasing rabbits and you know you’re going to fall…” It’s probably best to just step aside. “Logic and proportion” appear to be missing. It just goes to show how weird things are out there and how sensitive the markets are to potential Fed action.

The consensus expectation is that the equity and fixed income markets will be punished as interest rates rise. As a result, any news that suggests that the Fed will delay increasing interest rates encourages investors that accommodative forces will continue to benefit the markets. Conversely, positive economic news increases the likelihood that the fed will raise rates ahead of increasing inflation or overheated economic conditions. With good news, the market goes down in anticipation of increasing odds that the Fed will hike.

As such, I find the whole process disconcerting.  The heightened levels of unpredictable cause and effect introduce even more uncertainties on top of traditional domestic markets that have almost no place to go but down from current levels. That doesn’t mean that they will, but this is a game of probabilities, and successful investors consistently place the probability of success on their side.  At some point, the equity market place will turn away from the Fed influence and reconcile itself with everything else. There is almost no telling how that will evolve. It’s those uncertainties that keep me up at night.

U.S. Household Incomes Rise 5.2% in 2015

The results of an annual Census Bureau report that surveyed 95,000 households found that the U.S. economy remained remarkably resilient producing the largest annual gain in average income since 1967 representing an average increase of $2,798 to $56,516. While any increase is good, one can only wonder where we would have been had we experienced a typical recovery following a recession.

It was thought that the cause was mostly due to a tightening within what has become a much smaller workforce. Increased demand within a universe of fewer workers forces labor costs (income) up…simple supply and demand. This was accomplished in spite of a plethora of new tax and regulatory policies that created a tremendous headwind to growth.

However, we still have not recovered the losses from the recessions during the previous decade with wages remaining 1.6% below the 2007 level and 2.4% below the all-time high in 1999. More full-time jobs, longer hours, and higher wages contributed to 2015’s increase, but we have seen little follow through in 2016. The average work week sits at 34.3 hours.

Interestingly, the largest 2015 increases came from the bottom fifth of the income spectrum. You don’t see that published anywhere in the mainstream media. It doesn’t support their agenda.

So what else did this study tell us?

  • The official poverty rate fell to 13.5% (43.1 million people) in 2015 but remained up from the 11.3% rate in 2000. The current poverty level was $24,257 for a family of four.
  • Here are some interesting facts about poverty that may surprise you:
    • Poor households reported spending about $2.40 for every dollar of income they earn.
    • The average poor American lives in a house or apartment that is in good repair and has more living space than the average poor person in France, Germany, or England.
    • 85% of poor households have air conditioning.
    • Almost 75% have a car or truck, and 31% have two or more vehicles.
    • Two thirds have cable or satellite TV.
    • 50% have a personal computer and 43% have internet access.
    • 66% have a DVD player.
    • Over half have a video game system.
    • One third has a wide-screen plasma or LCD TV.
  • We had a record low gender wage gap. Female earnings as a share of male earnings was about 80%. Among all full-time workers, women saw substantially larger earnings gains than men up 2.7% vs 1.5%.
  • Median incomes for non-citizen households rose 10.5% versus the 4.4% for citizen households.
  • 1% of Americans (29 million) remained without health insurance in 2015 versus 10.4% (33 million) in 2014.

Obama immediately took credit in a campaign speech for Hillary. He sounded like he was campaigning for himself as he shouted, “Thanks Obama”. Unfortunately, the Labor Participation Rate has sunk to levels not seen since the Carter era, the majority of new jobs have been low paying part-time jobs, minority unemployment levels are higher since he became president, and average income remains below where it was when he took office. Thanks Obama.

If wage inflation picks up momentum, watch for wage increases to eventually stall as employable adults re-enter the workforce and compete for jobs. There is a lot of slack that must be absorbed. My guess is that when we look back in ten years, we still will not have made acceptable wage progress relative to where we were in 2000. This will be mostly due to chronically increasing tax and regulatory burdens placing growth restraints on our economy.

Battle Royale

One down and two to go. How unfortunate that the most watched debate in history found the two least popular candidates ever go at it like a couple of school kids. The result befitted the participants.  The viewers who are among those who go to a hockey game just to see the fights were probably not disappointed. No solid punches were landed and neither candidate committed a fatal error. Clinton won on points, but she failed to discredit Trump as a candidate or offer any credible reasons why voters should elect her. In that sense, Trump was the winner. Since then he seems determined to discredit himself.

Over all I believe Hillary performed about as well as she could and Trump missed a tremendous opportunity to hammer home policy differences that would probably resonate with many undecided voters. Trump will never be accused of being a silver tongued politician and often struggles with eloquence as you might expect from a non-politician. He must now defend all the words and actions from his non-political past which are collectively soaking up all the oxygen in the room. America keeps pleading for change, but the nation seems incapable of producing a viable change agent.

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For many, this was the first opportunity to hear the candidates tell the nation about their plans for our country and how they would accomplish their goals. Both failed miserably and what ensued was a petty adolescent argument that focused on anything except the critical issues facing America today. If you weren’t paying attention before, you are probably not much better informed today. Nothing of substance was discussed.

While Hillary proved to be a better debater, I’m not sure any minds were changed. It is possible, however, that some undecideds may have been swayed. The debate was much like the election as a whole. It’s more about who will lose this election and not about who will pull off a winning campaign. Trump won the first 30 minutes, but Hillary stuck to her game plan and eventually wore down her opponent. He tried but was not able to go on the offensive during the second half of the debate. The first debate was more about Trump snatching defeat from the jaws of victory.

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Neither candidate demonstrated much in the way of economic literacy. Hillary referenced the 2008-09 Great Recession and attributed its primary cause to tax policy that slashed taxes on the wealthy, failed to focus on the middle class, and enabled Wall Street. Really? Tax policy was the primary cause? She conveniently ignores government involvement as the chief enabler and encourager. Tax policy had nothing to do with the Great Recession. The well informed know that it was the subprime quotas required by Clinton’s Community Reinvestment Act (CRA) that destroyed mortgage credit standards and flooded the market with 31 million subprime-like mortgages.

Trump, on the other hand, continued his rhetoric that raises concerns of potential trade wars. He fails to recognize that foreign trade isn’t the primary enemy of jobs at home and that the very competition introduced by foreign trade keeps prices down for everyone. Free trade is healthy and increasing trade deficits actually are a sign of economic growth at home. In this case, the real enemy is bad tax policy accompanied by a burdensome regulatory environment.

Trump was combative and Hillary was well rehearsed and almost robotic. Hillary eventually controlled the time clock and dialogue by successfully putting Trump on the defensive. Trump jabbed while bobbing and weaving but failed to even throw what could have been several crippling left hooks. His political inexperience showed as he took the bait time and time again wasting precious time unnecessarily defending himself.

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Not surprisingly, Hillary supporters thought she pulled off a stunning victory and crushed Trump. Those on the right were calling it a draw which is probably code for losing. Flash polls indicated little advantage for either, but Hillary did receive a small bounce in subsequent polls. Her running mate, Tim Kaine, didn’t help her much by arguably becoming one of the rudest debate participants I have ever witnessed. Mike Pence remained calm and collected as he demonstrated how he will help reign in a potentially undisciplined Trump.

One of Hillary’s biggest problems lies in the fact that she is offering nothing new in what has been characterized as a “change election.” Forget for a moment her scandalous background, her platform consists of the same old stuff that has led us to the frustrating state of affairs that we face today. It defines status quo. She has been involved in the process for 30 years with nothing to show for it. However, if you like what the last 8 years has brought, you’ll probably be thrilled with a Hillary presidency. Actually, if you like the tax and regulatory creep of the last 50 years coupled with the secularization and unraveling of our nation’s moral compass as we have continued to “define deviancy down”, you should sign up for Hillary and never look back.

I continue to be disappointed with the content and format in the presidential debate structure. Moderators as a whole underwhelm, demonstrate obvious bias with their questioning, and all too often the real issues go unexplored while inconsequential and petty topics are used to bait. Lester Holt was no exception.

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His bias was glaring as he directly challenged Trump no fewer than 6 times while Clinton was given a complete pass never being challenged at all. He failed to ask about critical matters like immigration, the federal debt, national security, etc. Trump was asked about potentially devastating issues like his position on the birther issue. He was challenged about his perilous global balance of power opinion that Hillary did not look like a president. However, Hillary was not queried about weightier topics such as Benghazi where Americans including our Ambassador died, her email scandal where laws were probably broken and national security potentially compromised, or the Clinton Foundation’s possible conflicts of interest and pay to play accusations.

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The real question remains whether or not it’s the moderator’s responsibility to insert themselves and argue with a candidate. What they should NOT do is ask the question and then go on to debate the answer. They should ask tough, pertinent questions and then shut up and let the candidates debate.

As I listened to people around me in the aftermath of the debate, I was surprised to hear many judging Trump by how he looks or how he sounds. It seems that a large segment of society too often bases their decision on superficial factors instead of the major policy differences and what they would mean for America.

In my mind, the policy comparisons are simple. Everything comes back to what will allow America to operate from a position of confidence and strength. The foundation of achieving this position will come from economic growth, stability, and sustainability. Without that, nothing else will matter. So let’s examine the two sides.

Hillary’s solution for achieving economic strength is centered on the admirable goal of making the middle class strong. Since both candidates wish for that, the devil is, of course, in the details. She argues that she can accomplish this by raising taxes on the wealthy, making post-secondary education free for all Americans, increasing the minimum wage, and further complicating regulations on corporate America. Trump, on the other hand, advocates a policy that will reduce taxes on almost all Americans, cut corporate taxes by more than half, and dramatically reduces corporate regulations. The decision we have to make as voters is which approach will ultimately lead to a stronger American economy and which will benefit the greatest number of Americans. If you can answer those questions, you will know how to vote. I’ll give you my thoughts in a minute.

To further clarify the differences between the candidates, I went to both websites and summarized their stated positions on the major issues below.

The Economy and Taxes:

  • Trump:
  • Sweeping policy reforms with a pro-growth tax plan (tax cuts), a modernized regulatory framework (reduce anti-growth regulations), an American first policy, a plan to repatriate trillions of dollars held overseas, and an unleashed energy plan that focuses on all forms of energy.
  • Reduce individual tax rates by 3%-35% with the biggest cuts going to the middle income levels. Three rates: 12%, 25%, 33%. Reduce corporate tax rates from 35% to 15% in order to keep jobs in America. Impose a 10% repatriation tax as opposed to the current 35% rate to bring back trillions of corporate dollars that will be reinvested in the U.S.
  • Major infrastructure plan to rebuild bridges, highways, etc. creating new jobs.
  • Allow business to fully expense plant and equipment costs.
  • Plan provides a childcare deduction up to 13 years of age for child care.
  • Eliminate estate taxes.
  • Moratorium on new federal regulations and charge agency and department heads to identify needless, job-killing regulations that can be removed.
  • Renegotiate trade deals to assure that they will have a positive impact on our GDP.
  • Implement a U.S. energy independent policy creating millions of jobs and protecting clean air and water. Eliminate unnecessary restrictions. Unleash all energy resources to create unprecedented wealth.
  • Reduce non-defense, non-safety related government spending by 1% per year for the next 10 years with the goal of reducing federal spending by $1 trillion per year without touching defense or entitlements.

 

  • Clinton:
  • Implement a surcharge on multi-million dollar incomes over and above what the Alternative Minimum Tax (ATM) already captures. Ensure those earning over $1 million per year pay an effective tax rate of at 30%.
  • Eliminate the step up in basis rule for assets passing from one generation to the next upon death.
  • Restore the estate tax to 2009 levels with a top rate of 65%, eliminate current estate planning protection techniques.
  • Introduce a risk fee (tax) on financial institutions.
  • Major infrastructure plan to rebuild bridges, highways, etc. creating new jobs.
  • Make debt free college available to all Americans.
  • Rewrite rules so more companies share profits with employees and fewer ship profits and jobs overseas.
  • Raise the minimum wage to a living wage.
  • Strengthen Wall Street reform.
  • Increase clean air emission standards, focus on clean air energy sources and penalize fossil fuel sources including reducing leasing on public lands. Cut subsidies to oil and gas companies.
  • Provide relief from the rising costs of child care.

Immigration:

  • Trump:
  • Promotes a robust immigration policy that selects immigrants based on their likelihood of success and ability to be financially self-sufficient.
  • Will build an impenetrable wall on our southern border to reduce illegal drug trafficking, the flow of illegal immigrants, and unrestricted entry for potential terrorists.
  • Immigration laws will be enforced.
  • Clinton:
  • In a nutshell, calls for a comprehensive immigration reform package with a pathway to citizenship for all current and future illegal immigrants.

National Defense:

  • Trump:
  • Rebuild our depleted military and repeal the defense sequester.
  • The army is at its smallest since WWII and the Navy since WWI. Rebuild the Army to 550,000, Navy to 350 ships, and add 1200 fighters to the Airforce.
  • Invest in serious missile defense and cyber warfare.
  • Clinton:
    • Create a defense budget that reflects good stewardship of taxpayer dollars (more defense spending cuts).

Healthcare:

  • Trump:
  • Repeal and replace Obamacare with Health Savings Accounts and a system that promotes choice, quality, and affordability and the ability to purchase plans across state lines creating a competitive 50 state program.
  • Clinton:
  • Defend and expand the Affordable Care Act. Expand coverage to illegal immigrants.

Each website covers more subject matter. Hillary has a tax credit or policy proposal for just about any special interest you can think of. The list I scrolled through was seemingly endless. I chose to focus on those issues where there are significant differences and those that are material in nature.

I promised my thoughts. Let’s first step back and look at how our nation evolved into the strongest, most economically successful nation in the history of the world. We are a nation where more people have emerged from poverty and oppression than at any time in human history. We were founded under the principals of self-governance, property rights, and the rule of law that protected us from an over-reaching government.

These principles unleashed the natural entrepreneurial spirit embodied in most individuals where they instinctively desire to be responsible and accountable for themselves and not dependent on any other person or entity. Our founding was also centered on a moral compass that was able to largely overcome the evil temptations brought on by greed.

That entrepreneurial instinct led many to take big risks to start and grow businesses in order to profit from the freedoms provided in our unique form of government. Pouring out of that was commerce, job opportunities for the masses, and a vibrant economy that continued to grow and prosper. The result was a free market, capitalistic society that had no bounds other than those that are self-imposed.

Innovation and technological advances continued to advance our society and grow our economy geometrically and people’s lives improved at amazing rates. The definition of poverty was evolving on a relative basis where poverty in the United States would be luxurious lifestyles in many parts of the world. As broad based middle class, self-sufficient lifestyles became the norm, we evolved into complacency.

Out of that complacency, we slowly ceded more control to a government that introduced ideologically based social agendas that began to erode the engine that had taken us so far. It was tough to slow down that economic momentum fueled by technological advances until the meddlesome re-engineering of an overreaching government began to change the equation. The slow down began in the 70s and 80s. The economy was re-energized with the Reagan administration which gave birth to one of the greatest economic growth periods this nation ever saw.

As if almost on cue, things changed at the turn of the century. The economic growth locomotive plowed forward with a five-year recovery following the bursting of the technology bubble until we crashed head on into a credit collapse that almost paralyzed our entire financial system. All along the time continuum, the federal government continued to claim more and more control over our daily lives introducing layer upon layer of regulations and taxes. Government meddling was largely responsible for the near financial collapse, and government then used the tragic event to seize even more control.

The cumulative effect and unintended consequences of re-engineered fiscal and monetary policy served to blunt the tip of the continuing technological advances and created tremendous headwinds to the entrepreneurial spirit that drove the business start-up and job creation engine. We are now seeing the impact of decades of bad policy that has caused that entrepreneurial engine to seize up. Growth is nowhere to be found. We’re in dire need of a new direction.

With that set up, let’s now look at the two candidates. Which one offers the best solutions for the coming generations? Both are flawed messengers, but only one in my mind represents the opportunity to reset and possibly restart that dormant entrepreneurial engine of growth that will positively impact the most people in the most efficient ways. The other promises a continuation of government policy that has derailed the growth engine and will likely drive our economy into the abyss.

Only one candidate offers a plan that will stimulate businesses to reinvest and expand. Only one will create an environment that encourages future entrepreneurs to risk everything to start businesses that will create job opportunities for the most people.

All one needs to do is apply some common sense. Will higher taxes and more regulation be pro-growth or anti-growth? Will increasing the minimum wage result in more jobs or less? Will a robust economy at lower tax rates yield more dollars to the U.S. Treasury than a stagnant economy strangled by higher rates?

Neither website or the debate addressed the elephant in the room and that is the Supreme Court. Which candidate is more likely to appoint strict constitutionalists and which will likely appoint revisionists? Do you wish to preserve the expressed and implied intentions of our founders or do you think it’s appropriate to apply progressive thought that reflects today’s cultural values with no regard to our foundation or the certainty that today’s norms will too change someday?

All the rest are over-politicized issues that will either take care of themselves in a vibrant, growing economy or become malignant if the economic issues plaguing our nation cannot be resolved. Once you can answer the above questions, you will have likely found your candidate.

If all you care about is the stock market…in the short term anyway…then you’ll probably want Hillary to win. With her comes predictability and a likely Republican House of Representatives that will blunt even a moderately progressive agenda. The markets will worry about Trump’s attitude toward trade which could be disruptive. The market doesn’t like uncertainty or disruption. Of course, these are both short term expectations.

If your view tends towards the longer end of the spectrum, probabilities suggest that the candidates will have the opposite impact. Trump’s policies should accrue to higher markets over the longer term. Clinton’s policies promise to continue stagnant growth and markets struggling to find justification to seek higher ground.

The markets have not priced in a Trump victory. If the election starts moving towards Trump over the final few weeks, watch pressure building against the market. If Trump is ultimately elected, expect a downward bias for weeks perhaps months to come.

As of now, Hillary may have a lot of things working against her, but she has some pretty solid advantages leading up to November including a strong ground game, the natural bias of an electoral tilt in her direction, and demographic support of the growing youth population which is very diverse and multi-cultural. Her biggest advantage appears to be an undisciplined opponent. I thought Gregory Valliere of Horizon Investments encapsulated her headwinds well at a recent IMCA conference:

  • Only once since Harry Truman has a party retained the White House for three consecutive terms (Reagan, Reagan, Bush).
  • Sanders successfully painted Hillary as the candidate of Wall Street.
  • Bill Clinton’s negatives outweigh his positives…going off message and sexual indiscretions.
  • Over 50% of the voters have a negative opinion of her and 2 out of 3 don’t trust her.
  • Her scandals won’t go away and investigations will continue up to and after the elections.
  • A likelihood of terror events between now and the election will be a drag on her numbers.
  • Large 2017 Healthcare price increases resulting from Obamacare will be announced in October which will not be well received.
  • Her health will be closely scrutinized. She can ill afford another episode.
  • The press does not like her and is becoming less likely to tolerate her deceptive treatment.
  • The next two debates can only get worse…she did the best she could have in the first.
  • There is a high probability of significant new harmful email releases from WikiLeaks.
  • The continued lack of truly positive economic data will wear thin on voters.

Valliere also pointed out that “the market hates uncertainty and Trump is the mother of uncertainty.” Those concerns lie over potential trade wars especially with China. Additionally, he is likely to have a very contentious relationship with the Federal Reserve. This makes him more of a market adversary than a friend. Additionally, one poorly structured phrase on his part can drive all of Hillary’s negatives into the background.

Both he and Clinton will be plagued by the question of how will they possibly pay for everything they want to do.  The only thing that Trump has going for his policy platform is a well-established precedent that a business friendly, tax cutting, deregulation approach to the economy has produced economic booms that eventually led to more tax revenues. Hillary’s proposed policies of increasing taxes and regulation carry a high likelihood of reducing tax revenues over the long run. Higher taxes on slower growth can only lead to reduced tax revenues.

The good news is that virtually none of Hillary’s tax proposals will survive Congress where Republicans control the House. If Hillary is elected, she will have to follow Obama’s leadership style that has centered on executive orders and heightened regulatory policies at all levels of government…exactly what the popular sentiment is railing against.

Valliere concluded by listing what he believed to be the three most critical issues facing America today:

  • The ballooning heroin epidemic moving across the nation.
  • A Middle East arms war that risks escalating nuclear proliferation.
  • The U.S. has made promises to her citizens that she cannot possibly keep and remains poised to spend dramatically more using borrowed money.

He does not see a path for the House to switch control and believes the balance in the Senate will be 50/50 or 49/51 but is uncertain as to who it will favor. A 50/50 split will give control to the party in the White House. While he doesn’t believe that Johnson or Stein will end up with much of the vote, what they do receive will come more from Hillary than Trump. He recognized how both parties are fervently divided which he believes brings the real possibility of them fracturing into four parties…two left of center and two to the right.

In that were the case, he posed an interesting question. What would happen if nobody receives 270 electoral votes in future elections? The law states that the House of Representatives would elect the next president from the three candidates receiving the most Electoral votes. Each state delegation has one vote. The Vice President would be elected by the Senate from the top 2 Electoral vote getters. It is possible in that scenario that the president and vice president could be from two different parties.

If nothing else, the next few weeks will be very entertaining. Judging from what I see on social media, Trump is hitting a nerve. The anti-Trump rhetoric is getting more amplified and hysterical by the day which suggests that there is a real fear on the left that he will win. I’m not seeing anything close to the volume of chatter from people on the right. Of course you never do.

Random Thoughts

 Civic illiteracy is a huge problem. The staggering lack of knowledge on the subjects of the U.S. Constitution, how our government works, and our nation’s history by college graduates suggests that the brilliant framework authored 229 years ago may have trouble surviving another century. 70% were not able to identify our founders while 90% thought Judge Judy was a U.S. Supreme Court justice. Benjamin Franklin, Thomas Jefferson, and Alexander Hamilton were all prophetic as they correctly warned that the survival of our republic will be dependent on citizens understanding the nation’s laws, history, and government structure. Today, that urgency has disappeared being replaced by institutional apathy. Only 18% of colleges and universities require even a basic course in American history or government. U.S. News & World Report published their annual list of the top colleges and universities in the nation. Only 4 of the top 25 required a U.S. history course even of those electing history as their major.

Reminiscent of the ‘Dust Bowl’ era when millions of unemployed workers and impoverished families descended upon California, we now find the Golden State with the highest rate of poverty in the nation. The reasons why are night and day different, but the condition exists. When do we finally turn away from failed policies and get back to basics?

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Critics Corner

I’m a sucker for movies based on true stories even with the editorial license occasionally taken by Hollywood scriptwriters and directors. I have recently seen two such creations and can whole heartedly recommend both.

The first is Sully which recreates the heroic water landing US Air flight 1549 into the Hudson River and the back story that took place during the investigation to follow. The second is Deepwater Horizon which recounts the series of events leading up to and during the 4/20/2010 massive explosion on the Deepwater Horizon drilling rig in the Gulf of Mexico and the incredible efforts of the crew during the tragic event. Both movies are packed with emotion and do a great job at setting up and telling the story. Both will leave you drained and in your seats as the credits roll showing photos of the real life characters that lived through the unimaginable. Enjoy!

Have a great month,

 

Bruce Anderson,

Managing Partner

South Georgia Capital, LLC

2135 City Gate Lane, Suite 460

Naperville, IL 60563

630-447-2760    bwa@sgcim.com    www.sgcim.com

 

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