Sunday, September 16, 2012

Politics Follows The Market, Not the Other Way Around

This weekend my wife and I drove down to Mount Vernon, the ancestral home of George Washington. For many years Ruth has been a member of “The Life Guard Society.” This is a fund and friend-raising group to support the preservation and enhancement of our first president’s estate and image.  The name Life Guard comes from the group of 150 officers that successfully protected General Washington against personal violence. In other words they were the forerunners of today’s US Secret Service White House force. The purpose of the meeting was to celebrate the acquisition of Washington’s personal copy of a book called the Acts of Congress. This book contains the Constitution, the Bill of Rights and legislation that was passed in the first year of his Presidency. What makes this particular copy extremely illuminating is that it also contains the President’s own notes and concerns. A glance at his brief comments shows he was concerned about presidential powers. His concern was to understand the separate powers of the President, Congress, and the Supreme Court. (He was the only President to appoint all nine of the Justices.) 

After the celebratory dinner there was discussion as to the importance of the written record of both the Declaration of Independence and the Constitution. Thomas Jefferson, one of the principal authors told Washington that there was nothing new in these documents as they expressed ideas that came from the Bible, ancient Greeks, and various philosophers. Once again this view gives me an opportunity to disagree with the third US President. What was new was not the words or thoughts, but that a diverse group of politicians and a few statesmen could and did agree with these principles and literally pledged their lives and assets in support of them.

The enacted political decisions of these 18th  Century men became possible only when they believed that there was support for these ideas and ideals on the part of the people. This is a clear example that politicians and many governments will only move when they deem to have some, if not total support. The old line is that the job of a politician is to find a parade and get in front of it.

What does this history mean for investors in 2012?

I have previously written about being in despair at various learned investment committee meetings with the consensus wanting to hold off making fundamental investment decisions until various elections throughout the world are in the record books. I humbly suggest that is a prescription for not only being late, but also wrong as to the long-term impacts of purely political moves.

Investors need to wake up and look as to what is happening in the real economy and market prices. For example, the US stock market large cap leaders are up mid to high teens on a year-to-date percentage basis. These returns are in many cases twice the too high actuarial rates for many pension plans. If these long-term plans were properly equity oriented and if they went to cash today, which they won’t, they would have met their obligations for two years. Probably much more significantly, this summer’s equity rally reduces the odds in some minds of a fear of a major market decline.

Another sign of the markets moving ahead of the politicians in response to the manipulation by the US Federal Reserve and the ECB, is the significant sale of US dollars not only to buy stocks, but gold and the euro. The latter is a bit breathtaking. Following the very bad practice of US bailouts and corruption of the bankruptcy acts as a vote buying exercise, the ECB will supply enough capital through the purchase of bank bonds to be prepared to restore the major banks’ capital requirements after a soon to be appointed European banking authority eventually forces a substantial write-off of the debts incurred on the periphery.

What is missing in almost all countries that are running deficits is that the politicians provide goods and services because the people won’t. Individuals do not recognize the responsibility for their own deficits. These deficits are not the mismatch of their expenditures versus their incomes. The deficits are much deeper as in healthy lifestyles, competitive useful knowledge, work ethics, and accumulating retirement income for themselves. I am told by those on the left that I am asking too much. I suggest that once again we can learn something from the ancient Greeks. Look at the last Olympics, people all over the world cheered the success of champions and other participants in many competitions even if they had little real understanding of the sport.  Further, in our society someone becomes something of a celebratory for completing a piece of art, musical composition or a book despite what some might say is the poor quality of the work. It is the completion of a recognizable task that is celebrated. What we should celebrate and therefore encourage is striving. When more Americans and Europeans show signs of striving we will begin in a meaningful way to dismantle the deficit producing engines.

How do we develop portfolio decisions?

The first thing to do is to look around you. "The trucks are rolling" was the message I got driving back from Washington on a Sunday. There were many trucks on the Turnpike. Many of them were from logistics companies that have become a critical part of “just in time delivery.”

At last night’s dinner someone in the steamship business noted that business was increasing. A mixed view is the continuing office building and luxury apartment construction one sees driving through Washington. At a recent investment meeting someone noted that people were coming up and offering twice the price for a condo than the owner had paid.

One of the negatives expressed about equities recently is that American businesses are running at very high operating margins in part due to a significant increase in productivity of a smaller labor force. For many companies, global sales growth has been disappointing. If I believe my eyes and what I see out of the logistics sectors of our economy, we are in the early stage of a re-equipment surge. At some point, even to get out today’s volume of goods and services, we will need to replace worn out machines and perhaps people.

One interesting question is how unproductive the heady amount of global Internet and media spending on entertainment is, compared to what has been lackluster spending on the part of business? While I do own a few shares of Apple from a historic accident, I do not consider myself a qualified analyst on the stock. I do not own shares in Microsoft directly, but a number of funds owned by my clients and I hold shares in both Microsoft and Apple. With that as a background, I wonder at what point are we going to see Microsoft’s business clients start to show some of the enthusiasm that has posted orders for Apple's iPhone 5? If that were to happen, the world will become more serious about working on its problems rather than its entertainment.

In the meantime selling US dollars is probably wise.

What do you think? 
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