2017 was a big year for investors as the S&P has delivered 19.42%. For complete data see https://www.bloomberg.com/news/articles/2017-12-28/asia-stocks-head-for-muted-open-after-record-high-markets-wrap
Less Government, more problems?
Bitcoin is a convergence of technology and libertarian economics that provides a means of exchange disconnected from centralized control and government involvement. Satoshi Nakamoto – a mystery figure – published a white paper in October 2008 with ideas that have resulted in one of the strangest manias in many years.
Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms (not yet to be realized as actual transactions are purported to be slow and limited) and is operated by a decentralized authority, unlike government-issued currencies. Bitcoin is a type of cryptocurrency: Balances are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. Don’t laugh, Randians, spam scammers and all manner of people with money to hide are really serious about this.
These instruments have been mostly relegated to anarchic techies, dark web commerce, money laundering and anti-government zealots until 2017 when the “price” or “value” went parabolic and moved up over 1400%.
Alt-currencies are likely to be revealed as a trap. The notion that governments globally will stand by passively while technological mechanisms allow for tax evasion and unbridled criminal activity is preposterous. As countries see the threat to tax revenue and currency flow, legislative acts are likely that will crimp the “market” for these ideas. Hesitation of buyers could cause a collapse as is typical of buying frenzy events throughout history. “Bubbles always implode; by definition a bubble involves a nonsustainable pattern of price changes or cash flows.” Charles Kindleberger, Manias, Panics and Crashes https://www.amazon.com/Manias-Panics-Crashes-History-Financial/dp/1137525754/ref=sr_1_1?ie=UTF8&qid=1514159965&sr=8-1&keywords=kindleberger+manias+panics+and+crashes
The US dollar has been doubted throughout it’s history. Yet it is resilient and is backed by the full faith and credit of the US treasury – most importantly – the power of taxation. Crypto currencies are simply digital concepts that have attracted an outsized amount of attention and interest. The public mania that has ensued has left many guessing as to where values of numerous cyber currencies can go. Most will likely end up worthless. Avoid, abstain and keep away!
Back in the un-virtual world, 2017 has been a year filled with political drama that is irresistible to newshounds, casual observers and most of everyone else. The format has been driven by regular overnight Presidential Twitter updates, many of which seem designed to provoke and drown out the previous controversies. Extreme views on trade, immigration combined with a cabinet made up of Trump family members and people selected for reasons other than credentials has drawn interest virtually non-stop.
Fascination of the public is being expressed in unusually high voter turnout in special elections. Late night TV, serious periodicals, and cable news have all paid nearly constant attention as President Trump deploys a strategy the seems to crave controversy.
The President’s frame of reference seems to be his background in Television combined with a career in publicity seeking. The influence of Roger Stone, Wilbur Ross and Steve Bannon have drawn a stark philosophy of fringe populism infused with alt-right notions that are far removed from fundamental American principals.
The polling data is unprecedented as it seems that speaking to “The Base” is somehow seen as viable political strategy. The polling numbers and “approval” rating of Trump is plumbing lows never seen in the modern era. Seemingly zero effort has been placed in expanding Trumpism to independent voters. Confrontation may be better suited for brand expansion and commercial real estate negotiation than building a sustainable American political movement. For a great historical perspective on these approval numbers see https://projects.fivethirtyeight.com/trump-approval-ratings/?ex_cid=rrpromo
Data is pointing to an anti-Republican wave for the mid-term elections of 2018. Supporters of the current GOP and president are under a false notion that the razor thin presidential victory was a mandate. More sophisticated conservatives know that The House of Clinton is gone and Obama is no longer there to demonize. Buckle up, as the indications of Virginia, Alabama and polling data may be the canary in the “Bring Back Coalmine”.
As 2017 has drawn to a close, the GOP scrambled to format broad “Tax Reform” with the objective of simplification and rate reductions. What has been passed along partisan lines is unique in modern political history as most major tax revisions seek a level of bipartisanship and caution in ideological tinkering.
This tax cut is being referred to as a “great victory”. The measure is loaded with accounting gimmicks and expirations along with controversial provisions that continue to allow hedge funds and private equity manages to continue paying low taxes using a ridiculous loophole know as carried interest (apparently the hedge fund swamp will be drained at a later date). Rushing legislation that is not negotiated with both parties will be vigorously contested going forward.
The Tax Cuts and Jobs Act of 2017 had no Dem participation, in an eerie similarity to recent partisan governance during the passing of the Patient Protection and Affordable Care Act of 2010 (Obamacare). The results of these one-sided actions often create strong blowback as the political pendulum inevitably swings and the other party regains power. These tax changes are quite likely to run into many amendment actions or even outright undoing just as Obamacare has.
The bill has potential to boost an economy that is already expanding at a robust rate. This is not a bad thing, although over-heating the economy can lead to manic economic behavior which create deeper downturns and recessions. Tax cuts are seen by economists as a tool that can be deployed during recession to bring money to fuel recovery – this fiscal policy tool will be diminished when the next downturn arrives.
Our two-party system is starkly polarized and the actions that we are witnessing buck against the brilliant design of our check and balance system. Republicans and Democrats see the world as two different planets. The traditional conservative GOP is infused with an odd mix of far right and libertarian elements. This GOP led by Trump with his populist ideas and lack of governing experience is a volatile mix.
I refer to the current GOP as a party that soundly does not believe in government. Democrats are a party that sees government as a key player in the socio-economic challenges, often with bloated legislation that leads to flawed outcomes and unintended consequences. The Democrats are currently drifting through the post Obama era with a muddled message. The Dem brand is hard to define although much of the current momentum may come from anti-incumbent sentiment.
Working through recent work by Nassim Taleb, Antifragile: Things That Gain from Disorder, I came across Taleb’s brilliant concept of “Domain Dependence”: “The phenomenon that prompts people to adapt to a different approach or worldview depending on the domain.” GOPers see government as the problem, Dems as the solution. This has been the case for a long time, but the past saw many examples of negotiated solutions between the two extremes.
The stark Domain Dependence of views has torched any sense of collegiality or consensus building. The political battle is continuous without regard to any outcomes other than fund raising, poll numbers and the Un-Holy Grail of winning elections. The wisdom of creating legislation that does not involve both parties is in denial of the sustainability of said acts. When the incumbents are thrown out, which is almost always the case as promises and slogans rarely enact actual reform that satisfies the voter) the partisan laws are attacked and undone. This environment does not create the stability that markets crave.
The ideological mojo of this “great, huge, biggest ever” tax bill is significant. The cap of SALT (state/local) deductions will be an issue that is revisited as it is going to impact the ability of states, cities and municipalities to raise money for police, fire, schools and other critical services. Voters are going to be hyper aware of this cap as it will have a significant impact on their lives. This tax change is a big deal for your town. The ideology behind this is the notion that reducing available funds will force less government and greater efficiency.
Better outcomes should always be the goal. It is not at all clear that reducing government revenue achieves this. We would all love to pay less tax, but the process has two critical elements. Cut the taxes (that is the easy part)…great, but let’s be honest and articulate that there will necessarily be a cut to services, roads, bridges and security. The GOP seems to have gotten past it’s fixation that the USA is a country that is carrying over $20T of debt http://www.usdebtclock.org/. Cutting taxes requires the courage to tell voters that services will be reduced. Instead, we hear nonsense about cuts paying for themselves. There is little proof that this is the case as recently documented by the WSJ https://www.wsj.com/graphics/how-tax-cuts-affect-revenue/
This bill also tinkers with the value of interest deductions for real estate. Seems that the “housing crisis” was not that long ago. It is not clear what the consequences of these changes will be. The conservative notion that the government should not create structural advantages for homeowners, especially so soon after the collapse in values and foreclosure wave that is still recovering is a dangerous move.
The missed opportunity here is that the corporate tax rate could and likely should have been sensibly cut. Once the fetish of broad tax cuts that animate a certain portion of conservatives were added, the lost federal revenue became quite large. This fiscal maneuver, in the midst of the baby boom retirement wave, a federal budget that is being funded with endless short-term budget resolutions and massive current deficits strikes many as reckless.
A large political risk that has hardly been mentioned amidst all the drama on healthcare and taxes is global trade. The USA has drawn great benefit from global trade post WWII. History demonstrates that protectionism and nationalist views are dangerous and lead to conflict.
Open markets create more goods for all…a bigger pie. The challenge and complexity of this issue is immense. Many manufacturing towns, jobs and people’s lives have been turned upside down by global completion and cheap foreign labor. Simplistic slogans like “fair trade” and “re-negotiation” provide no detail or vision for how this incredible challenge shall be addressed.
John French Professor of Economics at Dartmouth College has a new book, “Clashing Over Commerce: A History of U.S. Trade Policy”. He recently wrote an essay that was published by the Wall Street Journal.
From the WSJ: “President Trump has complained about supposedly unfair trade deals with Japan, Mexico and Canada without ever really saying what they have done wrong—aside from the imbalance in our bilateral trade with them. With Canada, the U.S. does indeed have a trade deficit in goods, but it has an even larger trade surplus in services. Is this “very unfair” to Canada? Are we “taking advantage” of our longtime ally? What would Mr. Trump say if Canada said that we are obligated to intervene to reduce our surplus?”
https://www.wsj.com/articles/donald-trumps-trade-war-1513356667
My concern is that these notions of trade are not based on any viable plan or economic theory but rather are spawned from the frustration of seeing people suffer in the face of global competition. It is intuitive that the USA is so dynamic that we could isolate and prosper, but this belief is not supported by history or even seriously debated prior to the recent wave of populism that has engulfed our politics. Here is hoping that cooler heads prevail.
As 2017 finishes out, gratitude for big gains and hope for the future is running high. As I always am here to remind, this is never going to get easy and corrections are coming. There is no anti-sadness medication to take when the markets sell off. I was struck by the passage by Taleb included below. Volatility will build character in us as investors. It is a key part of the process. Prepare to embrace it and reap the rewards of long-term investing.
“Not only are we averse to stressors, and don’t understand them, but we are committing crimes against life, the living, science, and wisdom, for the sake of eliminating volatility and variation. I feel anger and frustration when I think that one in ten Americans beyond the age of high school is on some kind of antidepressant, such as Prozac. Indeed, when you go through mood swings, you now have to justify why you are not on some medication. There may be a few good reasons to be on medication, in severely pathological cases, but my mood, my sadness, my bouts of anxiety, are a second source of intelligence— perhaps even the first source. I get mellow and lose physical energy when it rains, become more meditative, and tend to write more and more slowly then, with the raindrops hitting the window, what Verlaine called autumnal “sobs” (sanglots). Some days I enter poetic melancholic states, what the Portuguese call saudade or the Turks hüzün (from the Arabic word for sadness). Other days I am more aggressive, have more energy— and will write less, walk more, do other things, argue with researchers, answer emails, draw graphs on blackboards. Should I be turned into a vegetable or a happy imbecile? Had Prozac been available last century, Baudelaire’s “spleen,” Edgar Allan Poe’s moods, the poetry of Sylvia Plath, the lamentations of so many other poets, everything with a soul would have been silenced. 3… If large pharmaceutical companies were able to eliminate the seasons, they would probably do so— for a profit, of course. There is another danger: in addition to harming children, we are harming society and our future. Measures that aim at reducing variability and swings in the lives of children are also reducing variability and differences within our said to be Great Culturally Globalized Society.”
Taleb, Nassim Nicholas. Antifragile: Things That Gain from Disorder (Incerto) (p. 61). Random House Publishing Group. Kindle Edition.