Commentary: September 30, 2015

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


In This Month’s edition:

  • Which Investment Would You Choose?
  • Liberty Square – We The People
  • The GROWTH Debate
  • Republican Debate, Part II
  • Random Thoughts


Which Investment Would You Choose?

Let’s say that you had six investments to choose from where each of those strategies have averaged an 8% return per year for the last five years. Better yet, let’s say that I could assure you that they would each also be able to average an 8% return over the next five years.

Armed with that knowledge, would it really matter in which investment strategy you chose to invest your capital? Most investors, even many of the most savvy, would say no. Worse yet, most investment advisors routinely point to historical averages to justify an investment they may be recommending regardless of a far more important and generally ignored simple detail. Most people will tend to believe that they will end up in the same place and most professionals do nothing to discourage that innocent assumption. They either are not aware of it themselves or just don’t care. The truth, and dirty little secret, is that it matters very much which investment strategy you should choose.

You see, the path an investment takes to achieve their average will ultimately determine how much money you have at the end of the day. Of course, no one knows what future returns will bring, but by using historical data, we get a clue as to how investment strategies might behave. Here’s a hint…volatility is a wealth killer. Consider the Slow and Steady slide below. In it, I have compared the amount of wealth created by six different investments where each has generated the same 8% average return over the last 5 years. The end result may surprise you. It’s just math. You can check my work very easily.

As you can see, there is no combination of returns that results in an 8% average annual ROI over 5 years where you end with a higher ending value than getting 8% each and every year. In the end, don’t waste time trying to find an investment that can yield the same return year end year out. They don’t exist. The main take away is that compounding works and a slow and steady, lower volatility approach will build to a better result than any roller coaster ride you might experience.

Slow and Steady

So why would you want to endure the thrill of victory and the agony of defeat? Why do you accept open ended risk when you don’t have to? Boring is good. Slow and steady wins the race. Interesting factoid: you only need to earn about 4 basis points (0.0004%) per day to grow an investment 10% a year.

 Liberty Square – We The People

Earlier this month Sue and I had the opportunity to attend a wedding in downtown Philadelphia. The ceremony and reception were held directly across the street from Independence Hall…the birthplace of American democracy. Being that close to a site of historic reverance always puts me into a deeply reflective state that includes a high measure of awe.

During some free time we wandered over to Liberty Square…a park that sits in front of Independence Hall. Almost immediately we became overwhelmed by the sense of history surrounding us. It was here that the Second Continental Congress met, wrote and signed the Declaration of Independence beginning a 12 year period that resulted in a storybook fight for freedom and culminated with the ratification of the United States Constitution. This was the official beginning of the greatest and most successful experiment in self-goverance the world has ever seen. For a brief moment I tried to imagine what the Constitution might look like if it were written by today’s political leaders. A wave of nausea quickly pushed that horrifying thought from my mind.

Finding a bench facing this great historic landmark, we spent about 30 minutes observing the people and casually reflecting on the incredible conversations and acts that took place several hundred years earlier within just a few feet of our perch. Some of the greatest and bravest men and women in our country’s brief history strolled nearby the very spot where we sat.

Take a minute and think about it. Only 239 short years earlier, a group of brilliant and brave patriots representing the 13 colonies (technically 12 as Georgia only decided to send delegates after the Declaration was signed) came together and created a document that would forever change the world…for the better. The fact that I’ve been alive for more than a quarter of the subsequent time period amazes me as I realized how little time has really passed. Measured by today’s life expectancies, these incredible events occurred a mere three lifetimes ago.

The contrast between lives in colonial times and our existence today was fully on display. Advancements that we literally take for granted would have been inconceivable to even the greatest visionary of the time in 1776. Cars and trucks paraded down the preserved cobblestone streets as jet planes flew overhead. Independence Hall was dwarfed by surrounding skyscapers. Smart phones and computers have taken the place of newspapers, books, letters and whispered conversations. Indoor plumbing, electricity, air conditioning and furnaces fueled by natural gas would have been mind blowing to them. The speed of travel and comunication would be dizzying to a people who waited weeks to get a response to a simple query or to travel a few hundred miles.

However, none of the advancements brought on by several industrial, transportation, and technological revolutions that occurred in the brief passage of time to the present can compare to the importance and scope of the decisions and governing structures resulting from so few armed with so little. In what amounts to a milisecond in historical terms, our founders began with placing freedom ahead of personal survival and ended with the creation of the grandest of governing structures the world has ever seen before or since.

Only a few generations later, that very structure is under assault and crumbling at its foundation. This amounts to a different sort of change that our founders would never have allowed themselves to foresee. As much as the advances experienced in areas of industry, engineering, science, and technology would have amazed them, the destruction of the very framework of government they painstakingly designed would have saddened them to an equal extent.

A few short years ago, a few ordinary citizens formed a representative republic founded on the principles of personal freedoms, responsibilities and accountability. It has evolved into a bureaucracy of dependency where a government consisting of career power brokers instead of ordinary citizens decides instead what is best for us. The individual is deemed unable to make decisions for themselves. No longer is this country’s citizenry an informed and driven force but a divided mass armed with divisive ignorance and a long list of grievances.

The simplicity of life a few hundred years ago can at times seem oddly compelling. However, I doubt any of us would swap our current lifestyle for other than a momentary experiential vacation from the present. I wonder what the next 239 years will bring. In many ways I hope the pendulum swings back in a way that is more reflective of what our founders envisioned while at the same time allowing for continued progress defying the wildest imaginations of those alive today.

For now, I fear, we’ll have to be content with a new American way of life as outlined by John Tabb. Imagine what Adams, Jefferson, and Franklin, would think about the new American way of life:

A New Way Of Life

If we could only harness the energy produced by the founders spinning in their graves. Hopefully, common sense and practicalities will lead to a day where they can again rest in peace basking in the greatness of what they created…where we take care of those truly in need and everyone else assumes responsibility and accountability for themselves.

The GROWTH Debate

If you remember one word as you view the world of politics, economics, and life in general, it’s GROWTH. Economic growth is good and very contagious. Faster growth than the 2% per year rate we have witnessed since the Great Recession is essential in order to solve the biggest problems we face as a nation and as a society today. Strong economic growth brings more people back into the workforce, reduces poverty, and increases tax revenues to feed our ravenous government spending problem.

Pro-growth government policies will release the free markets and the private sector to do what no government initiative or entitlement could ever hope to achieve. There are two primary actions by government that will destroy growth: 1) Onerous Taxation and 2) Over Regulation

While we need both in a civilized and orderly society, too much of either will strangle the economic growth engine that fosters the most good for the most people. The tax and regulation pendulums have swung much too far into the anti-growth range of outcome. We need those pendulums to not only swing back into balance but probably over-correct into an aggressive pro-growth position to kick start the economic engine like we saw in the late 80s that in turn led to one of the greatest growth periods in our nation’s history. Don’t be swayed by those who will say that only the wealthy benefited. Everyone who was willing to work benefited in major ways and many more became wealthy who otherwise would have never had the opportunity.

The easiest way to stimulate growth is through tax reform. It works every time. Tax reform is essential if we ever hope to see another energized economy where the majority will benefit. The most effective tax reform will include significantly lower rates and a vastly simplified tax code….I mean idiot proof the damn thing. I do not wish to minimize the importance of also simplifying the stifling regulatory burden that businesses and individuals face today. However, for the purposes of this essay, I want to focus primarily on tax reform.

All Republican candidates give lip service to the need for tax reform. I wish I could believe that any of them would actually do anything about it. History isn’t on their side. They pound their chest and promise the world only do the opposite or at best nothing at all. Jeb is the first to give a detailed tax plan which I found quite compelling. For the most part his plan lowers rates, reduces deductions, and significantly simplifies the code. The key points are as follows:

  • A sharp reduction in the top personal rate from over 40% to 28%.
  • Reduce the top corporate rate from 35% to 20%.
  • Move to a territorial corporate tax system that most other developed countries follow where companies pay taxes in the country where the income is earned.
  • Charge a one-time 8.75% tax (payable over 10 years) on $2.1 trillion in income companies currently shelter and reinvest overseas to avoid our onerous tax rates. This allows for the repatriation these funds fostering reinvestment at home.
  • Double the standard deduction for individuals.
  • Eliminate the ability to write off state and local income taxes on federal tax returns.
  • Preserve the charitable deduction but cap all other deductions at 2% of an individual’s adjusted gross income.
  • Eliminate the deduction for business interest expense.
  • Allow companies to write off 100% of new investment in their business during the tax year in which it occurred.
  • Eliminate the lower tax rate for hedge-fund carried interest.

Trump also issued his tax plan which I found compelling. The details of his plan are as follows:

  • Reduce tax brackets to four: 0%, 10%, 20%, and 25%.
  • No tax for individuals earning less than $25,000 or couples filing jointly earning less than $50,000.
  • 31 million households now paying taxes would no longer be required to pay federal income taxes.
  • 10% tax on U.S. corporation overseas profits that now can be deferred.
  • Eliminate the marriage penalty, the Alternative Minimum Tax (AMT), and the federal estate tax (death Tax).
  • With exception of charitable contributions and mortgage interest, eliminate deductions and loop holes available to special interest groups and the very rich.
  • Eliminate the carried interest reduced tax benefit.

I like it. So what would these plans accomplish? They would create a huge incentive for businesses to invest in their growth and allow individuals to keep and spend/save more of their hard earned money. Opponents will make the same tired criticism of tax cuts that we can’t afford them and only the wealthy benefit. History has taught us that both are wrong, but it makes for great political theater. The reality is that more people will be put to work as companies invest in and grow their businesses. The competition for workers will drive up wages. As employment and income grows, more taxes get paid albeit at a reduced rate, but resulting revenues are greater than under more burdensome tax policies. As history has proven, it works every time.

Both plans sound like Reagan’s tax reform plan that stimulated one of the longest and largest growth eras the United States had ever experienced. Like Reagan, the wealthy will end up paying a larger share of the total federal income tax burden. In my opinion, both plans are still too complicated, but this would be a great start.

The rate cuts are significant and would create a large incentive for people to work and companies to invest. The Reagan reform of 1986 cut the top rate from 50% to 28% (it was 70% when he entered office) which continued the 80s economic boom and set the stage for record growth in the 90s. The corporate tax cut would move the U.S. from the highest to below the median. Business spending would be energized with the ability to deduct 100% of the cost in the tax year it is spent instead of having to endure the complex process of depreciating those costs over many years.

The plans eliminate many favorite loopholes. No longer being able to deduct state and local taxes will mean that low tax states will no longer subsidize high tax states. Most taxpayers would not itemize under this plan given the doubling of the standard deduction and 2% cap on other deductions. Killing deductions for business interest will help reduce a problem where the current tax code favors debt over equity. For those who still believe that the wealthy (who pay over 90% of current income taxes) do not pay enough, either plan should make you happy…the wealthy pay an even bigger share of the total tax burden given the limits on deductions.

Here’s a thought. Should there be a 0% tax bracket? Sure, we would all love to pay no taxes, but that’s not realistic in a democracy where the government must provide a strong defense and pay for an efficient infrastructure. Maybe everyone should pay tax no matter how minimal. At 0%, people are incented to stay there. They allow the tax tail wag the dog where they do not strive to get to the next earnings level for fear of paying more in taxes. Shouldn’t everyone have skin in the game? Wouldn’t paying taxes tend to have those people pay more attention to how those taxes are spent? Right now half of the adult population doesn’t care since they don’t pay taxes. As a result they fail to understand the cause and effect of an overly burdensome tax and spend system that holds everyone back.

Anyway, tax reform is a terrific alternate and vast improvement to the last six years of higher taxes and redistribution policies that have led to less growth and more inequality. I would like to thank and acknowledge the Wall Street Journal editorial group that addressed both plans and offered much of the above content. They said “The only way to raise American wages and lift the poor and middle class is with faster economic growth, which requires unleashing the pent-up productive capacity of American workers and business.”

Conservatives and progressives alike wish to lift everyone up. The paths they wish to take in achieving this are very different. The average voter should apply the test of common sense. Which of the two plans shown below would have a better chance of improving the lives of the most people in the lower and middle classes:

  • Raise taxes, increase regulatory policies and spending, and redistribute wealth from one class to another, or
  • Reduce taxes, remove regulatory roadblocks, reduce government spending and create more jobs.

Once you can answer that question, you’ll know how to vote. Either way, your choice will probably disappoint you but that doesn’t mean that you do not exercise one of our most important personal freedoms and obligations with the hope of creating a better nation going forward. We elect individuals to represent us. We need to hold them accountable. They work for us…not us for them.

Republican Debate – Part 2

My winner:      Carly Fiorina

The Loser:       CNN

 That Face

CNN conducted one of the worst debate formats I have ever seen. The entire evening was oriented around questions that attempted to taunt the candidates into fights with each other. It seemed to me that instead of trying to get into the significant issues of the day, the moderators were consumed with trying to make the various candidates look bad and goad them into making a mistake.

Gotcha Questions

Overall, I thought that all the candidates performed well. It was obvious that Trump has forced the narrative to move to the fiscal right. They all sounded like real conservatives and focused on truly setting themselves apart from progressive ideals. In my opinion, this is a good thing. Some of you may not agree…that’s okay.

Trump was Trump and he continued to amuse me while saying things that need to be said and are hard to disagree with on the substance. However, he continues to find a way to make you cringe as he says them, and I’m not comfortable with his personal attacks. That said, he alone is establishing the playing field and defining the campaign focus. I thought Fiorina, Rubio and Christie had the best performances of the night leaving me with a feeling of confidence that each could be a strong leader. However Fiorina impressed me more than any other except maybe Rubio with her grasp of the issues along with the facts and her ability to articulate her position. With that established, their platforms must now be vetted in the coming months.

Bush and Huckabee probably helped themselves a little bit. Walker, Cruz, and Kasich didn’t hurt or help themselves, and Walker apparently saw an impossible road ahead so he dropped out. This was probably mostly an economic decision on his part. Cruz was a little stiff and Kasich appeared antsy and frustrated. Relatively speaking, the Ohio governor was the only bleeding heart on the stage. Carson came off as too easy going. He needs to develop an edge to be sustainable. Lastly, Rand Paul probably should have been seated at the kids table in the earlier debate. He shouldn’t have been there. Again, Trump said it right (in his opening response he questioned why Paul was even on the stage saying he didn’t belong there) but in a way that would make most people a little uncomfortable. I think that’s what is attracting so many discontented voters to his style. They don’t want an establishment candidate with the same old story.

It’s still very early in the vetting process. Early leaders tend to fade and so much depends on how well the candidates are organized and the strength of their ground game once the primaries and caucuses begin. Two thirds of potential voters say it’s too soon to make up their mind. With all that said, it’s not too early for me to come to some logical conclusions knowing what we know today. Trump and Bush have the highest name recognition by far and most people have already made up their minds about those two. It will be tough for either to make huge gains from current levels. You either already like them or you don’t. The building anger in America against a government that continues to get nothing done to stimulate economic growth will become a sustainable force supporting candidate Trump deep into the primary calendar. Bush…not so much.


As other candidates begin to drop out, those non-Trump followers will probably align themselves with one of the other non-Trump candidates. My guess is that Fiorina, Rubio, Cruz and Christie will benefit the most, but don’t count Bush and his overflowing war chest out quite yet.

Carson will continue to ride the anti-politician wave for a while, but the economics will probably eventually work against him and my guess is that his support will go to Fiorina (the other non-Trump, anti-politician candidate) when he eventually is forced to drop. Huckabee and Kasich can still make a run, but my guess is they will fizzle and their support will go to establishment like candidates (Rubio, Christie, Cruz, and Bush). Huckabee will probably be the next big name to go.

In the end, I believe the public will eventually become tired of the abrasive Trump’s bluster, bravado, and vagaries. If I had to vote today, Fiorina would be my candidate. Watch her numbers rise as her name recognition builds and the impact of the last debate starts influencing the polls. She will steal anti-politician support from Trump and Carson as well as get a portion of the more establishment like candidate’s support as they drop out. Her Achilles heel is her questionable track record at HP and Lucent. Upon close inspection, I find those experiences to be very formative years where she demonstrated strong leadership skills during severely adverse times. In my mind, never having held public office is a resume enhancer, and we find the top three polling candidates all sporting that very background. It is very possible that we find ourselves at a time in this nation’s history where we need a private sector business person in charge…not another politician.

Conservative voters are angry. Progressives remain unhappy even with their own man in office. Of course, it seems as if unhappy is a pre-requisite for being a progressive no matter who is in office. For many, the anger borders on rage. So frustrated are people on both sides that they will support anyone who demonstrates a willingness to blow up the status quo. As Daniel Henninger recently reminded us, we saw this story play out in the movie ‘Network’ when anchorman Howard Beale shouted to his audience, “I’m mad as hell, and I’m not going to take it anymore”.

It seems Americans have reached that tipping point. The top three Republican candidates (polling 50%-60% collectively) have never held elective office. Mild mannered Dr. Ben Carson is running neck and neck with Trump in some polls even though the flamboyant, multi-billionaire has received 60 times more press coverage. Fiorina has climbed into the upper echelon based on her strong debate performances. The Republican race for the nomination will be very interesting to follow and will suck up all the oxygen in the room leaving little left for the Democrats…at least until after the conventions. Hillary’s scandals will be the focus on the Democrat side for now

The ‘base’ for both parties is changing. Americans are tired of elite politicians promising change during the campaign and then ignoring what they said when elected. It is a government no longer of, by, and for the people. It’s a government that exists in spite of the people, and Americans on both sides of the aisle are tired of it and are looking for an alternative. Hence, we have a businessman, a businesswoman, a surgeon, and an aging hippie communist leading their respective party’s primary race in many polls. Viva La Change.

The Race

Quite honestly, seven of the remaining Republican candidates seem viable and I would not be disappointed with any as the nominee. That’s pretty amazing and speaks to the depth of the Republican bench. The opposite is true for the Democrats. Their team is pretty thin. Eventually, voters will begin to seriously focus on who is qualified to be president as opposed to the most interesting or unique personality. No matter who the Republican nominee is, I believe that individual will be the odds on favorite of becoming the next President. While I do not believe that Hillary will get the Democrat nomination, I doubt she would be a very formidable opponent in her current state. Knowing what we know today, I would be more fearful of a Biden candidacy which isn’t saying much. For now, my ideal Republican ticket will have a top and bottom consisting of candidates whose last names both end in a vowel. Buckle up. It’s going to get ugly.

Random Thoughts

Apparently our economy isn’t strong enough to withstand a mere 0.25% increase in the overnight lending rate. However, the real story here isn’t about the strength of our economy. It’s more about the ineffectiveness and waste of trillions of dollars of fiscal and monetary stimulus. After seven years of the most aggressive economic stimulus efforts ever seen on top of zero percent interest rates, our economy has failed to achieve even normal growth levels…forget historic recovery levels that we should have been enjoying. So our leaders in Washington have overseen massive injections of capital into the economy along with zero cost of capital while at the same time raising taxes and creating layers and layers of new regulatory roadblocks. The outcome is a slow/no growth economy with fewer jobs paying less than before the recession hit. Here is an idiot test for the powers that be: Looking up at the underlined words above, which of the four major policy decisions listed should maybe be re-thought and probably reversed if we really want our economy to grow and create more and higher paying jobs than we had before? I’m sure most of the readers of this monthly offering will apply simple common sense to reach the correct answer. Unfortunately, the dopes inside the beltway can’t seem to understand. Even worse, they do understand but choose the path that is best for them as opposed to what’s best for the country.

5 million people have left California over the last decade. During that same period, 3.9 million moved into the Golden State for a net population loss of 1 million. About 600,000 went to Texas where job creation has been strong and the cost of living reasonable absent heavy handed governmental influences that drive costs up. It’s not rocket science. The greatest opportunity for the most people typically exist where there is a business friendly environment that is supported by lower taxes and less regulatory roadblocks (e.g. Texas).

Still standing by my year old prediction that Hillary will not get the Democrat nomination…However, if Biden doesn’t run, the party may have no choice but to jump on her band wagon. I still don’t believe that a socialist (Bernie Sanders) has much of a chance in what is still a capitalistic society (for now anyway), but we are becoming more like Europe, so anything is possible. If the Clinton Teflon can deflect her many scandals long enough for her to get the nomination, she will be a formidable but wounded candidate in the general.


Wicked Witch HillaryDemocrat Bench

Another elephant in the room is the student debt bubble. Over 7 million college loans are in default having gone at least a year without a payment being posted. The default rate is 17% which is unheard of in any other debt circles. There is more college debt than credit card debt or automobile loans. Too many of those in default were sold a bill of goods and they didn’t get what they paid for. They were not prepared to compete in the real world. This will get much worse before it gets better as it is taking on the shape of a balloon set to burst. Don’t worry…it’s only another policy mess that the tax payer gets to clean up.

Yogi Berra

Yankee great Yogi Berra passed away at age 90. His story again shows what a great country this is and how anyone with very little can accomplish great things if they are willing to work for it…only in America. His extraordinary accomplishments are fairytale-like. It can be argued that Yogi’s career was the greatest in the history of major league baseball and will never be duplicated or surpassed. He began his major league baseball career began in 1947 making $90 a month. He never earned more than $65,000 in any season, yet his overall accomplishments dwarf those who today earn tens of millions of dollars each year. He was the son of immigrants who joined the Navy in WWII and ended up serving in D-Day. That alone would have left a meaningful legacy. He returned from war and spent 18 seasons as the Yankee’s catcher, appeared in 14 World Series of which the Yankees won 10 with much of the credit going to Yogi. He was a 15 time All-Star and was named League MVP three times. He eventually went on to manage his beloved Yankees. He was humble and unassuming attributing his accomplishments to being lucky. We should all work as hard as he did at making our own luck. Probably best known for his Yogi-isms, many were more brilliant than he gets credit for. One of his more famous quips was, “If you come to a fork in the road, take it.” Most do not know the back story to that quote. You see, to get to his home, one would come to a fork in the road leading to his house. No matter which way you took, it led right to his home. In that context, the quote makes perfect sense. Of course, everyone is left scratching their head when hearing, “Baseball is 90 percent mental. The other half is physical.” Of course there was, “It ain’t over ‘til it’s over.” While his life on this earth may be over, he lives on in the minds of millions. R.I.P. Yogi! A few more of his famous quotes are shown below:

  • You can observe a lot by just watching.
  • It’s like déjà vu all over again.
  • No one goes there nowadays, it’s too crowded.
  • A nickel ain’t worth a dime anymore.
  • Always go to other people’s funerals, otherwise they won’t come to yours.
  • Congratulations. I knew the record would stand until it was broken.
  • You better cut the pizza in four pieces because I’m not hungry enough to eat six.
  • You wouldn’t have won if we’d beaten you.
  • I usually take a two-hour nap from one to four.
  • Never answer an anonymous letter.
  • Pair up in threes.

Speaking of growth, one of the greatest areas of growth that occurs as presidential campaigns heat up is the number and quality of political cartoons. I’m guessing there will be lots to pass along in the coming months. Enjoy the few displayed on the next couple of pages.

Wolf In Iranian RobesCarley Punches TrumpMedia Spin

Biggest ThreatsLawsSlow ChildrenBiggest Threats IIThe $10 Bill$15 Minimum Wage

Not sure what will be the focus of next month’s piece. However, I’m fairly sure the progress of the presidential race will be woven into the selected economic themes. I sometimes wish I could eliminate political and geo-political subject matter, but they are so intertwined with economic cause and effect that they cannot be ignored.

Have a nice month.



Bruce Anderson

Managing Partner

South Georgia Capital, LLC

2135 City Gate Lane, SUITE 460

Naperville, IL 60563


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