politics

Peace and Prosperity: What We Hope for in the Long Run
photo shows a pink and purple and blue sunrise over rolling hills

Nearly 150 years ago, Jules Verne wrote about the colorful adventures of an ambitious globetrotter in Around the World in Eighty Days. During the American leg of his journey, the traveler Phileas Fogg is attacked when he is caught in a riot that breaks out between two competing political rallies.

The punchline of the story comes when Fogg asks one of the locals what office the opposing politicians are running for. Was it a very important position? The answer: “No, sir; justice of the peace.”

Like many of the episodes in Verne’s book, the local color is exaggerated for dramatic effect. But it still makes one thing clear: American politics have a longstanding reputation for rowdiness.

We have the good fortune to be living in relatively peaceful times. When riots and protests broke out in cities across the country over the summer, it was alarming to many of us—but not unprecedented. We have been here before, even within many of our lifetimes. Adjusted for inflation, the damage surrounding the riots reacting to George Floyd’s death was roughly similar on a per capita basis to the 1992 riots over the Rodney King incident.

Such violence is tragic. It was regrettable then, and it is regrettable now. At some point in the future it will happen again, and it will be regrettable in the future too. Do not mistake our comparisons here as explanations for or resignation to violence. We offer the comparisons to seek some perspective.

Generally, we think of ourselves as optimists. We look forward to better things for our children and grandchildren than we had for ourselves. But healthy optimists move in a real world. We can hope that we will know less unrest in the future, but it will never be gone entirely.

In six years, our nation will celebrate its 250th birthday. In two-and-a-half centuries of existence it has seen civil war, two world wars, droughts, famines, and many pandemics. Every year it sees wildfires and hurricanes far more damaging than any riot in our history. It has seen the sun set on imperialism, defeated fascism, and outlasted communism. Come what may, it’s poised to survive the next presidential term, and the next, and the next.

We look forward to 2026 and celebrating the U.S. Semiquincentennial. Our crystal ball is a little fuzzier further out, but we still think the Republic will be here in 2076 for the Tricentennial, too.

And who knows? Maybe we have a chance to provide writers from around the world more uplifting episodes to write about.

Clients, when you have any thoughts or questions, please give us a call.

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What To Do With Your Election Portfolio
photo shows U.S> Capitol surrounded by fall trees

Elections matter, they say. People wonder what effect the outcome will have on their finances. We are getting questions and hearing concerns about this election. Perspective is needed, both from history and about our current situation.

For each president since Bill Clinton, one person or another has urgently expressed to us the need to sell all of their investments because of the ruination that was sure to follow. Folks told us that Bill Clinton, George Bush, Barack Obama, Donald Trump were all, in turn, going to herald the end of prosperity.

Yet the markets have persisted, never failing to manifest an upward trend over extended periods—with ups and downs along the way. (For perspective, the Dow Jones Industrial Average is about eight times what it was the day Clinton was elected.)

The past is no guarantee of the future, of course. But many millions of people who wake up every day and go to work in their businesses or jobs seem to have a bigger impact than the one person works as president.

We understand and appreciate government that is supportive of private enterprise, reasonable regulation, and taxes that are not excessive. Many people feel we have that in the current administration; some worry about the erosion of these things. Three points are worthy of mention right now:

  • Individual income taxes may go up no matter who wins. This was baked into the Trump tax reductions, which were written to go away after 2025. Even before the virus hit, we had record deficit spending and an unprecedented debt binge. Then programs to counter the virus increased the deficit. No matter who is president, our national finances may require fresh attention.
  • Tariffs and other trade restrictions generally depress economic growth. We have many trade restrictions now, as we did in the Depression years of the 1930s. Policy changes in this arena would likely be beneficial to our future prosperity.
  • Immigrants and the children of immigrants founded more than 40% of the Fortune 500 companies and have long been a wellspring of American vitality and prosperity. Currently, legal immigration is sharply restricted compared to past years. Restoring America to more of a destination for the best and brightest people in the world would probably be good for the economy.

Bottom line: elections seem to matter less than we think in the course of the American economy and markets. And any outcome in the current election is a mixed bag—some things will be better, some will be worse, no matter who wins. So what do we do now, to prep our portfolios?

Keep the faith; stay the course.

Clients, if you would like to talk about your holdings and the election, or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

A MORE PERFECT UNION

picture of a roll of red and white "I VOTED" stickers

“We the People of the United States, in Order to form a more perfect Union…”

So reads the Preamble to the Constitution, which frames the purpose of one of our nation’s fundamental documents.

The authors didn’t necessarily mean the plan was “flawless.” We’re not constitutional scholars, but a quick search will reveal that the word “perfect,” at the time, used this way, might have suggested something more like complete, confident, or whole.

In an election year, it can be hard to appreciate that idea. Party leaders insist on playing “spot the difference,” so our attention is often spent on divisions and comparisons.

Some people anticipate elections with anxiety about their holdings. They wonder how to “election-proof” their portfolio. History has some uplifting news for us here too. Again, it only takes a quick search to reveal that the outlook is generally okay immediately following a presidential election. Not “perfect” results or glorious returns, but generally okay.

No guarantees. Clients, we talk a lot about the long haul, and it is not measured in election cycles.

We are looking forward to an election season in which each of us can use our voices and exercise our rights, all in the name of improving this grand experiment, together.

We’ll see you on the other side, but in the meantime, call or write whenever you’d like to chat.

 

A Dangerous Fairy Tale

© Can Stock Photo / andreykuzmin

We have written about the power of narrative—stories—before. Stories help us understand and organize the world, and our lives. But not every narrative is helpful, or positive, or improves things.

Much of our political discourse today revolves around a central narrative that does not stand up to examination. We strive to be nonpolitical at 228 Main. Our clients come from every walk of life, and you run from one end of the political spectrum to the other. But the false narrative going around today has the potential for great mischief in our economy and markets. We therefore must address it.

The general theme is that other countries, both allies and enemies, have sorely abused the United States by crafting trade agreements that our leaders were stupid to sign. This has supposedly gone on for decades, because nobody until now has cared about the working person.

We are “losing” hundreds of billions of dollars every year, the story goes. Our factories and jobs have been stolen. And meanwhile we donate to and defend these countries that have mistreated us so. NAFTA, the World Trade Organization, and other international agreements are allegedly at the heart of our misery.

The mischief rests in the remedies proposed to right these wrongs. Trade deficits will be cut by simply eliminating trade. Retalitory tariffs will straighten out the bad behavior. Students of history or economics know how this ends up: it is the story of the Great Depression.

Here is a competing narrative. The whole world and the U.S. have enjoyed decades of progress and prosperity unparalleled in history. A billion people have been lifted from extreme poverty, more people than ever before are working in America for more money than ever before, unemployment is at a forty year low.2

Trade has helped to make us all richer and our lives better, on the whole. We have been fairly free to purchase the goods and services we want, without regard to origin. Our choices, yours and mine, are what determines the volume of trade between countries.

We have a global system of relatively free trade because enlightened leaders HAVE cared about American workers and American prosperity. Let’s examine some facts:

1. NAFTA hurts us terribly? The United States Gross Domestic Product (GDP) per person is 24% higher than Canada’s, and 205% higher than Mexico. 2 We have added 40 million jobs since NAFTA was signed.1 If they are killing us, why aren’t they richer than us?

2. Our companies can hardly do business in Europe? We sold $501 billion in goods and services there in 2017. Our GDP per person is 19% higher than Germany, 36% higher than France, and 57% higher than Italy. They supposedly have been taking advantage of us for decades, yet we do a lot more business than they do?

3. China is a special case, and the U.S. has legitimate grievances. Although its per person GDP is lower even than Mexico, piracy and lack of protection for patents and trademarks are serious issues. These need to be addressed. But a trade war, or mounting a new regime of tariffs, is the wrong approach. There are other means and mechanisms.

Millions of people in the US and virtually all of our farmers are dependent on exports. Our Fortune 500 companies do about half their business overseas. Retaliatory tariffs, trade embargoes or restrictions will hurt them—and all of us.

Clients, if you would like to discuss this or anything else at greater length, please email us or call. We aren’t looking for political arguments. We do believe we will all be better off if we stop believing harmful fairy tales.

1Federal Reserve Bank of St. Louis.

2All GDP numbers derived from the World Factbook at cia.gov.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Coming Boom?

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We wrote more than a year ago about the steady if slow growth of the economy. Just as a slow-burning fire might last longer than a raging conflagration, we expected that the economic expansion would persist longer than some commentators believed.

Another way to say it is, a bust is less likely without a boom first. The excesses that build in boom times usually contribute to the bust that follows.

For the first time in a decade, conditions may be ripe for a boom. The improvement in small business sentiment and increased money flowing into the equity markets had us on the lookout for signs of a boom. Then the tax law passed.

The tax law has pro-cyclical features that may strongly encourage economic growth now, but plants the seeds for a later slowdown. There may be political aspects that contribute to this syndrome, too.

Businesses investing in long-lived capital investments will be able to deduct the full cost up front, instead of taking smaller depreciation deductions over many years. This increases the financial attractiveness of projects; capital spending is likely to rise. A dramatically lower tax rate on corporate income, combined with a feature to bring overseas money back to the US, are further inducements for more business activity.

For two administrations in a row, the signature achievement of each has been done on a partisan, party line vote. When the minority party becomes the majority party, that achievement gets attacked and the unwinding begins. We’ve seen it with the Affordable Care Act; some Democrats are pledging to undo the tax law as soon as they are able.

So the favorable treatment of capital spending begins to phase out in a few years, and corporations may ‘get while the getting is good’ before the law gets weakened or unwound. These conditions might begin to affect things precisely when excesses from the boom have created more potential for a slowdown.

Boom, then bust. We know how this works. Clients, we will continue to monitor all of this, and work to take advantage of our thinking. No guarantees.

If you would like to discuss any of this in more detail, or have something else on your agenda, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing, including stocks, involves risk including loss of principal.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

Review and Outlook: Perception and Reality

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The gap between perception and reality is a key concept for us, as contrarian investors.

Year-end is a logical time to stand back and assess the year just ending, our current situation, and prospects for the next year. Many others ably describe the facts and statistics and the major themes. We will look at a pair of critically important things that may have fallen into the gap.

We believe the president has a flawed understanding of global trade. He recently spoke again of disastrous trade deals, massive profits to other nations, and millions of American jobs lost. The reality is, trade lets us get more for everything we produce, and pay less for everything we consume. It enriches America and the world.

We aren’t here to argue politics. But we are here to understand economics and markets as best we can, for your benefit and ours. The markets may be underestimating the potential for damage to the economy, corporate profits, employment, and stock prices if the president’s rhetoric ever translates into actual policy.

The second concern is about Congress, and a problem to which both parties have contributed (in my opinion.) The American system of governance historically produced major legislation through a bipartisan process. The Civil Rights Act, Social Security, Medicare, and the Tax Reform Act of 1986 were all products of give and take between members of both parties. All of these endured.

Without debating the merits of either, the Affordable Care Act and the recent tax legislation are the products of a partisan process. Both featured closed-door negotiations by small groups, deal-making that benefitted narrow groups to win votes, and straight party-line votes that produced less-than-perfect outcomes.

The ACA has been under attack since it was passed, and is now being unraveled by the opposition. The same thing could happen in the years ahead to the tax legislation. Uncertainty about tax policy may create problems for companies and the economy.

The short version of all this is that we are optimistic—as always. But our eyes are wide open. We will continue to diversify into sectors that may be less affected (or unaffected) by these issues. This is consistent with our core principles of seeking the best bargains and avoiding stampedes.

Clients, if you would like to discuss these issues further, or have anything else on your agenda, please write or call. In the meantime, we are enjoying the results of 2017 and hopeful about what will happen in 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Political Risk Rising

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Long time readers know we are fairly neutral about the impact of politics on investing. Our American system of checks and balances has served us well through the decades. The worst fears of those who let politics govern their investments may have not come about.

At the root, however, politics can affect policy that has an impact on the economy and markets. We prefer public policy that enables the greatest number of people to engage in the greatest amount of productive endeavor and enjoy prosperity. This is not always what we get.

There are two things being talked about in Washington that are problematic, in our view. Checks and balances may see us through, or we may end up with policies that hurt our economy.

In theory, trade lets us get more for things we produce and pay less for things we use. America and the rest of the world are potentially better off for it. But there is a political desire to put tariffs in place against major trading partners, we believe primarily for the sake of putting tariffs in place. A narrow slice of people and companies might benefit, but the economy may be hurt overall.

If trade volumes are materially restricted, average family incomes and corporate earnings are likely to decline, and the economy and the stock market may not do as well as they could.

Another thing: if you have ancestors that came from Germany, Ireland, England, Italy, Poland, France, India, Scotland, Norway, or anywhere else, some people that were already here were opposed to those immigrant ancestors of yours. But we believe that America is more prosperous today, with higher average incomes, because of the legacy your ancestors and others left.

But on top of the desire to fix our immigration laws so they make sense and are enforced, there is a desire to cut the volume of legal immigration, possibly up to one half from recent levels1. In our mind there is little doubt that our future wealth, prosperity, and standing in the world will be impaired if this comes to pass. We’ve been enriched by the immigrant scientists, doctors, entrepreneurs and others who have come to America in accordance with immigration rules.

You can etch this in stone: we are firmly against cutting our nose off to spite our face. Those who advocate for less trade and less legal immigration are doing just that, in our opinion. We are optimistic that sooner or later, we will end up with good policy—we always have. But there could be some unnecessary turmoil before we get there.

We aren’t suggesting that big changes need to be made in portfolios to reflect the political threats. But we are looking for opportunities that are less sensitive to how these policies work out. Clients, if you would like to discuss these or any other pertinent issues, please email us or call.

1New York Times, https://www.nytimes.com/2017/08/02/us/politics/trump-immigration.html

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing involves risk, including possible loss of principal.

No strategy assures success or protects against loss.

We Are All Connected

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Much has been written about the polarization of American society. While noisy disagreement and entirely human behavior has always been part of our fabric, the whole “us” versus “them” theme seems to be a bigger part of our social discourse. It seeps into our politics and economics too, it seems.

Yet everything is connected. What many miss are the interests we share.

If you hope to be collecting Social Security benefits many years into the future, you might have an interest in making sure that each child today grows up to be a healthy and educated and productive citizen. Why? They will pay more Social Security taxes if they do—and better work towards your financial future. You are connected to the next generation.

Some seem to assume that big companies are always out to get them, and favor any new regulation or restraint that might be proposed to limit their activity. Yet if we needed to fly across the country, would we dare do so in an artisanal airplane, built with locally-sourced materials by a local craft person? You are connected to big companies.

Likewise, the largest oil companies in the world routinely spend more than 96% of their revenues helping people get back and forth to work, powering their homes, and providing materials used in everyday life. If you use gasoline or electricity or plastic, you are connected to them.

“Wall Street”—to some, the only villains in the last financial crisis—presents another example. Communities building schools or sewers, employers building facilities or buying machinery, teachers hoping to retire on their pensions, people saving for retirement or living on their capital in retirement: all these depend on services from the securities industry. We are all connected.

Is this an argument for turning a blind eye to bad behavior or hurtful policies or injustice or anything else that cries out for change? No way. We each should challenge the things that deserve to be challenged, and support the things that deserve to be supported. We won’t all agree on which is which.

But perhaps our differences would more often get us to a better place if we each kept in mind that everything—and everyone—is connected.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.