BPS: Basis Points or units of a percentage point. A quick google search will define it as: A basis point represents the smallest unit of measurement for interest rates and other financial instruments. One basis point is equal to one-hundredth of 1 percent.
The US 10 year bond new yields between 60 and 70 bps…you can lend money to the US Treasury for ten years and get a return of .7%. This low yield has been engineered via complex maneuvering by the Federal Reserve. The Fed works the plumbing and electrical of the globe’s economy – interest rates and the supply of money. The Fed has been busy in the battle to lift the economy against the weight of the pandemic. The strategy is centered around low interest rates and ample supplies of credit throughout the financial system.
As the central bank of the United States, the Federal Reserve system conducts the nation’s monetary policy and seeks to maintain a stable financial system. Three key components of the Federal Reserve System—the Federal Reserve Board of Governors (Board of Governors), the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC)—interact to accomplish these goals.
The Fed has generally been above the fray of politics, although its decisions and world view have massive impacts on growth and economic opportunity. While most of the political fever focus will be on the presidential election and supreme court nomination, a federal reserve appointment has again generated controversy for the current administration.
When Stephen Moore was nominated to the Fed, my Comments from Q2 2019 noted “The fascinating element was in the accounting of all the outlandish commentaries Mr. Moore had delivered over a long media career. In addition to multiple denigrating comments towards women, it was demonstrated that Mr. Moore was exceedingly inconsistent in his public statements. His positions were dictated by the political winds rather than any philosophical or academic consistency.” Market Comment Q2 2019
Moore withdrew from consideration on May 2, 2019 and stated “This is kind of a victory lap for the left because they took me down with a smear campaign”. Not sure who “They” were in Mr. Moore’s case, but he was one of a string of recent appointments that the current administration has put forth that have ended in withdrawal or replacement.
The president is right back at it with the nomination of Judy Shelton to the Federal Reserve. This nomination is under the radar of most and should not be an issue as the Federal Reserve has generally not been subject to fringe ideologues as appointees.
Shelton is known for her past support for the gold standard and for serving as a political loyalist to the president — having worked as an informal adviser to Trump’s 2016 campaign. She appeared to abandon her advocacy for ultra-tight monetary policy when she emerged as a Fed candidate, publicly aligning herself with the president’s calls for lower interest rates.
Judy Shelton Lacks Confirmation Votes for Fed Board, Thune Says
Shelton has gone from fringe advocacy of a Gold Standard to the threshold of the highest financial institution in the world. One would hope that the nomination is withdrawn and a candidate who does not need to turn 180° from goofy past positions could be found. Here’s a wager that better candidates abound. Sadly, current indications are that Shelton will be confirmed.
I have memories from childhood that contain piles of newspapers and business magazines. Growing up I observed my father diligently paging through The Wall Street Journal, Forbes, The Detroit Free Press, and numerous other publications and books. The answers to life were contained in those pages, if I could just put in the time and find the secrets to business and riches.
It turns out that the weight of all the books, periodicals and study creates a block of info that does not readily point to the correct answers. Strategic and tactical success in business and investing can be enhanced, yet there is endless difficulty in separating “The Signal and the Noise” (see Nate Silver’s book).
This challenge grows with each passing day as petabytes of data pour onto the internet. The quicker the access to information becomes, the further we are removed the actual utility of said material. This leads to shortcuts. Most do not have the time or interest for anything but summary.
It is tempting to conclude that the hyper speed of information in 2020 is the root of a new world. I like to consider history that often illustrates the existence of what seems so novel is actually a new version of what has always existed. The velocity and volume of information is perpetually increasing, but it is not necessarily new.
Summary clips and excerpts have always found an audience. In 1922 Dewitt and Lila Wallace began publishing “The Reader’s Digest.” The idea was to clip magazines from the public library, compile into 31 ‘daily articles’ and publish. By the 1940s, the Digest was selling 1 million copies a month and was among the best selling publications in America.
This idea of clips and excerpts of other people’s work would sound familiar to Google, Facebook, Netflix and so many other empires of content that are essentially aggregators of creativity. Without these compilation mechanisms, individuals would be responsible for assembling their own information stream. This “best of” mentality is a key component to the diminishing value of information even as the quantity that is available rises exponentially.
How can we get to the reality of what is happening in real time? Shortcuts can be useful, but as any Miles Davis fan can advise, you must listen to the albums, not “Best Of” or “Greatest Hits” as this will mislead listeners to the true nature of the artist. The alternative to deep reading and compilation is often social media or television. This draws significant audiences into a world of little context, continuity and questionable informational quality.
MILWAUKEE, Sept. 25, 1970—Vice President Agnew described for a Republican audience his political mission for 1970: to arouse Americans to a desire for stronger national self‐discipline and to help elect candidates who oppose “the trend toward permissiveness.”
AGNEW DEPLORES ‘PERMISSIVENESS’
“Discipline is a harsh word. But my friends, there is no greater need in the American body politic today than the need for discipline. Here is what I mean. During the past generation, a philosophy of permissiveness has permeated American life. In our schools, the ability to adjust became more important than the ability to excel. In our courts, the rights of the accused became more important than the rights of the victims. In our legislatures, the temptation to spend exceeded the willingness to tax. In our culture, the need to protect free expression overrode the need to restrain bad taste and outrageous vulgarity. In our society, the need to escape was exalted and the need to cope was demeaned. In our families, the desire to give our young people more pleasant life overcame the responsibility to give them firm guidance. In short, we have gone through a debilitating, enervating age of indulgence.”Mr. Agnew then pondered the results of this age and asked:
Can we say as a result that the upcoming generation is any happier than the previous generation? Is it more productive, more responsible, more capable of human dignity?”
Spiro Agnew is a fascinating character that could have given a very similar speech to an audience in 2020. It is somehow reassuring to study the late sixties and early seventies and see the angst and doubt that existed then. In 1973, Agnew was investigated by the United States Attorney for the District of Maryland on suspicion of criminal conspiracy, bribery, extortion and tax fraud.
After months of maintaining his innocence, Agnew pleaded no contest to a single felony charge of tax evasion and resigned from office October 10, 1973. On October 20, 1973, only ten days after the final resignation and plea bargain of Spiro Agnew, Attorney General Elliot Richardson would resign his own office in protest against Richard Nixon’s attempts to squash his Watergate investigation, kicking off a chaotic chain of events now known as the Saturday Night Massacre.
The political dramas of the past provide perspective on what we are witnessing now. The level of drama and partisan conflict is proving quite tiresome. Those that transgress upon American principles will meet their own consequences and the world will grind on. Underneath it all, innovation and progress will proceed in fits and starts.
The daily drama of DC, social unrest and realization of the racial inequities that challenge the USA seem to be drawing all the oxygen away from what could be deployed to battle COVID, renew infrastructure and distribute the crucial education for the upcoming generation that allows for rising standards of living.
The engine of economic progress is rising productivity. Rising output can only be realized as increases in the inputs to the production process, or to the efficiency with which they are used. With growth in productivity, an economy is able to produce—and consume—increasingly more goods and services for the same amount of work.
It is perplexing to consider that less than a lifetime ago, my youth was impacted by automotive technology that contained leaded fuel. Congress passed the Clean Air Act in 1970, leading to the formation of the EPA, which estimates that between 1927 and 1987, 68 million children were exposed to toxic levels of lead from leaded gasoline alone. The phase-out of lead from gasoline subsequently reduced the number of children with toxic levels of lead in their blood by 2 million individuals a year between 1970 and 1987.
Consideration of air quality will now be bound to the next generation to witness the exponential growth of electric powered vehicles that are likely to have significant impacts on the environment and economic development. Elon Musk and Tesla have emerged as a force to lead the world out of gasoline-based transportation. Future generations will likely look aghast at the reality that autos actually burned petroleum into the atmosphere.
Breathing air filled with lead was not considered a problem for generations of Americans. The innovation that solves these engineering and scientific challenges is as persistent as gravity. While the country was spellbound by the crisis of corruption wrought by Nixon and Agnew, we were also solving the lead in our air. While the country’s focus was on Nixon flashing an ironic V sign as he resigned in disgrace, the innovation of cleaner air was less dramatic, but much more important and impactful.
The election of 2020 is the great challenge for the remainder of the year. There will be many moments and days where it feels that the American System itself is at risk. It is important to look beyond the White House PR and assume that the USA can hold a legitimate presidential election; the USA will do it again in 2020 and get on with 2021. Data seems to show that crucial Electoral College states are leaning for a more conventional approach. There is no point in prediction and investors are best served by staying calm, and rooting for quiet, stable and dignified leadership going forward.
I am not here to take sides but to reason through the philosophy that we need to stay resilient and maintain our investor composure.
The evolution of the global technology infrastructure has been accelerated exponentially by the COVID-19 public health crisis of 2020. The connectivity backbone of internet, cellular and supply chain resilience has allowed for a great portion of the economy to continue to function.
The ghost town of retail, empty restaurants and minimal travel are forcing a shift that is agony for these enterprises and the workers they employ. It is perplexing to understand how the markets have resumed an upward direction in the face of the shutdown sectors of commerce.
In the United States, the supply chain has proved resilient as the early waves of consumer hoarding were met with ample food supply and even sparse availability of premium toilet paper. A pandemic in 2005 or 1995 may have been a much greater threat to food and other critical supplies.
Industries such as engineering and manufacturing have been enabled to adapt pandemic practices by low cost connectivity. Telecommunication costs have undergone a monumental decline over the last 20 years, and we are now beneficiaries of near zero incremental outlays for communication once the cost of a workstation and broadband connection are factored in. The reality of ubiquitous low-cost telecommunications has supported prodigious amounts of economic activity.
These innovations happen slowly. The resulting economic and societal impacts can be immense. The productivity gains are not obvious, and they do not produce headlines. Gradually, economic gains are realized – invention accelerates, lifesaving drugs are invented. Clean energy tech is pushing forward. All manner or good things are occurring beneath the surface noise of society’s daily struggle. Innovation is what drives the bedrock principle of long-term investing. Take a look at the list of the stocks the make of The Dow Jones index:
Walmart Walgreens Boots Alliance McDonald’s Visa Verizon Goldman Sachs American Chevron Johnson & Johnson UnitedHealth Group Microsoft Intel IBM Cisco Procter & Gamble Amgen Merck The Walt Disney Company JPMorgan Chase Apple Honeywell The Home Depot Travelers Companies Boeing 3M Salesforce Coca-Cola Dow Caterpillar NIKE
The amount of impactful innovation that happens per day by these thirty companies is a force for advancement. These developments are hard to perceive incrementally. Society is witness now to the shape-shifting impact of telecom technology on work, supply chain healthcare and beyond. Mother Nature has foisted a pandemic on the globe. Biotech will prevail, and tech of 2020 likely accelerates the learning curve.
This global health crisis has leveled dramatically uneven impacts across the income spectrum. The suffering of uninsured, low income and other vulnerable populations is heartbreaking. While skilled workers log hours of productive work in the virtual realm, front line labor faces exposure to the virus, possible layoffs, and numerous other elements of hardship. The trauma increases as income and education decrease. This is never fair or OK.
There is significant momentum for the political and policy issue of “income inequality” and proposed solutions. Progressive messaging on this has been circulating from the left. There is also a deep connection to social unrest and racial inequities. The challenge for investors orbits around the economic growth and tax policy impact. We might ponder the mechanism for measuring these “inequalities”. It is crucial to evaluate exactly how these income and wealth disparities are being calculated.
Consider the mathematics involved in concluding capitalism is faltering. It seems that these arguments may be leaving out the scalability of wealth in the age of technological revolution. The wealth of Bezos or Zuckerberg may be an anomaly of this tech age.
Society has gotten the “math” wrong over and over. Busing and public housing are just two of many failures of US policy for help to the poor and vulnerable. The narrative from the left that something has gone wrong with Capitalism is a shortcut to a proper assessment of what is hurting the masses. It may well be that the calculations for inequality should exclude outliers. Google, Microsoft and Apple may well be lottery winners and not robber barons.
Tech revolution refines the nature of change itself. While great shifts occur in the character of work, those impacted are generally ill equipped to adapt. Displaced workers during the Industrial Revolution did not see life in the arc of historical change, but rather that a great shift in demand for certain types of skills was underway. It is unlikely that the artisan shoemaker understood that the “revolution” was taking his livelihood.
While the rising cost of traditional university education is debated and cries of “free university” are broadcast, computing skills are the ticket being punched for many. There are indications of great shortages of qualified applicants in a broad spectrum of tech “revolution” occupations, yet the actual economic cost of obtaining these skills is likely less than the traditional four-year degree.
Scalability of technology has created a world that brings previously unimagined windfalls to those who happen to traffic in the right business. Old line tech like IBM, Cisco or ATT are left for dead as the new cloud IPO soars in value and new billionaires are minted. The wealth that is being generated is reaching a level that has little economic justification. These manias are recurring and not necessarily an indication that capitalism is generating economic injustice. The progressive left in the United States will likely overreach in effort to “solve” the wealth distribution dilemma, while we are witness to an era that has more to do with scalability than capitalist theft from the masses.
The reality for investors lies in the relentless nature of injustice and oppression. It is a long-term problem that will hopefully be addressed more effectively in the next political and policy cycle. Ideas of increased taxation to address wealth distribution are generally disturbing to investors and markets. The fear of rising tax rates that drag markets down is unlikely to be realized as there is ample history of great market gains under higher tax rates.
People intuitively theorize that one political party is better than the other for the market, then proceed with intuitive predictions of what may happen. Investors have prospered in both GOP and Dem economies.
Stay strong my people of 2020. Think deeply and vote for what you believe. We can all celebrate as one on the other side of this election. It is even possible that 2021 will be a year with less talk about politics and more evidence of innovation and economic growth.
Please contact Financial Institution Services LLC, if there have been changes in your financial situation or investment objectives, or if you wish to impose any restrictions on the management of your account or modify any existing restrictions.
The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.