#politics

By:  Michael Allbee, CFP®, Senior Portfolio Manager

“What we’ve got here is failure to communicate. Some men you just can’t reach.”

– Captain (Strother Martin) from the movie “Cool Hand Luke”

Barron’s recently interviewed hedge fund giant Ray Dalio, who manages Bridgewater Associates, the world’s largest hedge fund with around $150 billion in assets. During the interview, he discussed how social division and polarization could lead to some form of domestic civil war and that we are at a critical juncture.

Is Mr. Dalio out of left field? Could we have a constitutional crisis in 2024 similar to the presidential election of 1876? The election of 1876 and the present day have many similarities, with the relentless anger and even hatred building up in our political system. The history of ancient Greece showed that, in a democracy, emotion dominates reason to a greater extent than in any other political system.¹

Our democracy is fragile and can only survive if most citizens feel the system is fair and legitimate.² “Good words and spirit aren’t enough,” Dalio said. “People will have to agree on both how to grow the pie and how to divide it well. That will require revolutionary change.” I don’t know about “revolutionary change”, but bipartisan government and legislation are absolutely essential for the health of our democracy. With an evenly divided Senate and a near-even split in the House, lawmakers have an unprecedented opportunity to truly come together with a plan to restore truth and respect in governance, putting the nation’s business ahead of partisan loyalties. “History bears the scars of our civil wars”, but history also justifies such moderate hopes.  “I don’t need your civil war”!³

As we enter mid-year elections, there will be lots of headlines but that should not sway you from following the financial plan we created for you. Of course, elections hold great importance in upholding the U.S. tradition of democratic, representative government. However, their impact on market returns has historically proven to be negligible.⁴

How do we counter today’s political climate? We focus on the things that we can control. At least when it comes to investing, we focus on diversification, strive to position portfolios to generate stable returns after inflation and taxes, and disciplined rebalancing in times of market volatility to capitalize opportunistically on dislocations. Even though bonds and other “safe haven” assets (i.e., gold, reserve currencies, some alternatives) don’t provide much income today and may face near-term headwinds with rising interest rates, these assets remain a critical component of a diversified portfolio.

References:

1. Hart, Liddell B.H. Why Don’t We Learn from History? Sophron, 1944.
2. Marks, Howard. The Winds of Change. Oaktree Capital Management, L.P, 2021.
3. Guns N’ Roses. “Civil War”. Use Your Illusion II. Universal Music Group, 1991.
4. Source: Vanguard, based on data from Global Financial Data as of December 31, 2019. Data represents the 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data.

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We are in the middle of election season and emotions are very high. I know many clients are nervous and considering making financial decisions based upon who wins the presidency. This is all too common and the chart below from J.P. Morgan highlights the relationship of consumer confidence and political affiliation.

What is interesting is you can see that consumer confidence is directly influenced by political affiliation. For example, look at Republican confidence being very high until Obama took office in 2009 and it stayed low until Trump took office in 2017. We can see the same but opposite with Democrats where it is highest with Obama in office.

The stock market has continued to climb over the years regardless of what political affiliation is president and there is no reason to expect otherwise. During the election season stay informed, treat everyone with respect, and be aware of your political bias and how it may impact your outlook.

We are here to help and please contact us if you would like to review your long-term goals and how best to navigate market ups and downs during and after the election season.

When is a government fee not really a fee? When it is a tax in disguise! This is exactly what the two government-sponsored mortgage agencies were going to put into effect beginning September 1^st. Freddie Mac and Fannie Mae were going to charge homeowners a ½ of 1% fee to refinance their homes because they want to make up for losses due to foreclosures and non-payments during the COVID-19 pandemic. This so-called fee was not going to be applied to new home financings, but solely to re-financings. This became too controversial for the politicians, especially in an election year, that they have decided to delay the fee until December 1, 2020. How coincidental that the delay in the new tax was postponed until after the election. Welcome to the land of fees and taxes.

We are telling people to re-finance now, if appropriate before your taxes (we mean fees) go up.