Finding common ground when politics threaten to tear us asunder

By: Michael C. Eddy, Managing Partner

I’ve never been a fan of reality television programming with the exception of talent contests like The Voice and American Idol. I find The Voice contestants to be remarkably talented, humble, hungry and affable. Same goes for the coaches who have enjoyed careers replete with artistic and commercial successes. I most enjoy the blind rounds and the ensuing banter among the coaches as they lobby for their teams. Watching might be mindless, but it’s definitely entertaining and uplifting. This month I’ve been recording and watching The Voice, while many of you may have been watching the presidential debates-a reality show with all the charm and characteristics of let’s say, The Real Housewives of Orange County. And this might be unfair to the Housewives, because I think they tell the truth.

Under full disclosure, I am not a registered Republican or Democrat. I’m not a fan of big government. I favor private sector solutions. I believe that legislating and policing morality is not a government responsibility. Most importantly, I’m a big fan of the Bill of Rights, particularly the First Amendment. My arguments to support any of these positions could be moderated by those of you who possess political savviness far beyond my own.

Presidential debates, as we know them today, have morphed into arguments based on lies, half-truths, and accusations. When nailed in a lie, the candidates resort to the trick I’ve had to use with my wife- deny, deny and then counter-accuse. In the rare instances a question is answered, you get a stale platitude, like the common response to the final question in the old Miss America contests: “I’m for world peace”. Other than ISIS, who’s not? Perhaps the presidential candidates are just acting as instructed and the American electorate is so dumbed down that they find childish, narcissistic and pathetic campaigning Presidential. I don’t! If forced to entrust either candidate with my health or my money – well I wouldn’t. But I will cast a vote and, like many of you, we won’t be choosing the one we like, but the one we dislike least. I am reminded of Mark Twain’s timely quote: “If voting made any difference, they wouldn’t let us do it.”

I’m not happy being a cynic, but consider the following. According to an August NBC poll, the Democrats anointed a candidate that only 11% of the respondents found honest and trustworthy. The Republicans tried to anoint one of their own and failed. The people’s choice was considered honest and trustworthy by only 16% of the respondents in the same poll. So if honesty and trustworthiness no longer matter, how about the issues?

Interestingly, I believe that most of us are in favor of the following: we want liberty and justice for ALL, protection, property rights, taxation with representation, free trade, legal immigration, the freedoms expressed under the First Amendment, clean climate and good red wine. Our U.S. Declaration of Independence states that we are to enjoy the unalienable rights of life, liberty and the pursuit of happiness. Those not comfortable with this stated proposition might find accord in countries with an opposing proposition. Iran, Syria or Venezuela come to mind.

At my core, however, I believe us Americans all favor the rights stated in the Declaration. We may disagree on the “how”. I have a premise that Americans generally like people and like each other, up until the point we disagree on politics. Disagreements that our career politicians have used to pit us against each other. The acrimony engendered by partisan political posturing has escalated so that “we the people” have grown intolerant of political opinions that are contrary to our own. The Media has built franchises that flourish on our lust for opinions which enforce our own. Divide and conquer!

I write this diatribe because I believe our country is being torn asunder by partisan politics, the big money behind it and the career politicians who prosper on the largess of their constituency. We have a host of social issues upon which we disagree on the solutions. However, I wish we could adapt to disagreeing more agreeably. Every issue deserves consideration, conversation and where possible, solutions attained through cooperative negotiation. My concern is that we can’t provide long-term solutions for social issues without a vibrant and sustainable economy. An economy which provides funding resources without treading on those unalienable rights declared in 1776.

So I am suggesting that the political rhetoric, promises and platform planks offer little address to our lingering national debt issues. How will our $19,000,000,000,000 national IOU be reduced or repaid? The chart below details the rapid growth in national debt over the past 46 years, a period in which both political parties held executive or congressional leadership.

gross-public-debt

“We the people” didn’t create this. The elected elite did, and they cling to the Keynesian notion that we have little to worry about. Really? During the current fiscal year our leaders in Washington will spend $590 Billion more than they will collect through taxes ($1.6 billion per day or $66 million per hour). And yes, the aforementioned debt will grow by that amount. The politicos and their lackeys in the media will run headlines touting another outstanding year of tolerable deficits. The wise will recognize the fib and understand they are referring to the current deficit which is somewhat less than a few years back, but a deficit nonetheless! The uneducated and the misinformed might accept the headlines as encouraging news and reason enough to keep career politicians comfortable in their careers. Please consult the second chart, which illustrates the debt accrued under both presidential parties since 1970. You will notice an unsettling tendency and to the chagrin of some it appears bipartisan. Yes, the two parties can agree on something.

us-debt-ceiling

Some may argue that we can grow our way out of debt. The premise being that tax receipts grow more quickly than spending. The following chart illustrates the growth in federal tax revenues over the past quarter century. Taxes collected by the IRS this year will total about $3.3 trillion dollars, which is almost $1 trillion more than collected ten years ago. You will notice that most of the tax burden has been shouldered by “we the people”. Corporate tax revenues haven’t changed which I find intriguing since corporate profits almost doubled during that period.

federal-revenues

The levelheaded might argue that a combination of higher growth and taxes with a dedicated effort to reduce spending over a lengthy period could reduce and possibly eliminate our debt. Fairly simple! However, suggesting a cut to federal spending equates to political suicide. The levelheaded argument gets little play. Perhaps there are outliers other than fiscal prudence that could eliminate our debt. Destroying the dollar comes to mind and the Federal Reserve’s current strategy might have us on course to do just that. It seems to be working for Japan.

We read all we can on the looming debt issues and the pundits range in view from: “it doesn’t matter” to “it’s all that matters”. At our firm, we happen to be in agreement that our national debt matters, as debt matters in all aspects of our life. We will only be able to “kick the can” down the road for so long. Our political leaders will either have to find the will to make some tough decisions on their own or markets will eventually force their hand. One way or another, change is inevitable.
What does all of this imply about the way we manage investments? Honestly, it’s not all that actionable in the short-term, but it supports our philosophy that we are moving into an environment where active management could prove advantageous over the old “set it and forget it” strategic models. For now we remain cautious in most of our portfolios and will wait patiently for better opportunities to deploy more capital into risk assets.