Principles and Observations

I’ve just finished reading The Man Who Knew: The Life and Times of Alan Greenspan, by Sebastian Mallaby. It is, without doubt, the most personally and professionally relevant biography I’ve read in many years.

You may remember that Dr. Greenspan was Chairman of the Federal Reserve Board and the Federal Open Market Committee from 1987 until his retirement in 2006 (just short of his 80th birthday). In various capacities, Dr. Greenspan advised every American president from Nixon to George W. Bush, excepting Jimmy Carter. In this book, Mallaby provides both the evidence and the theme for Dr. Greenspan’s reputation. In American industry and in Washington, D.C., he was “the man who knew”.   An obsessive researcher, he always had the facts, and everyone knew it.

If we were in a position to ask, Dr. Greenspan would likely tell us three things that are especially pertinent to this essay. First, no one can reliably predict the future, either of the economy or the stock market. Several Nobel prize winners, and countless PhD’s have blown themselves up trying to prove otherwise. The second thing is that investors and other economic decision makers sometimes behave irrationally. Third: Human nature never changes. Together, these points inform the first principles of our philosophy:

We have to choose to be rational, and at the same time admit that we may not know everything. We can never have enough information to predict with absolute certainty what’s about to happen. But like Dr. Greenspan, we do know from our study of history that well diversified investment portfolios—backstopped with optimism—will stand the test of time:

Patience, Discipline, and Confidence in the Future.

Still, in making an investment plan, the context of your life matters. So, we ask you to help us understand both your current financial situation and your long range goals. In turn, you expect us to provide both investment wisdom and economic perspective. To wit:

The year 2016 began with a decline in the S&P 500 Index of about 11%, bottoming on February 11. The financial media blathered endlessly about that being the worst start to a year since the dawn of time.

Then on June 23, the people of England voted to leave the European Union. Investors—abetted again by financial media—sent stock markets around the world into a spectacular nosedive. That paroxysm lasted for all of a day and half.

In the early morning hours of November 9th, as it became clear that Donald Trump would win the presidential election, the Dow Jones Industrials fell by more than 800 points, only to be reversed when the Sun rose over Wall Street. As I write this on the evening of December 12, 2016, the S&P 500 Index* is at 2256.96. That is 23% above the February 11 low.

The lessons here are: Financial journalism is not your friend, and correlation is not causation.

On February 5, 2016—in the midst of the aforementioned disquiet—we held a little seminar at Baden Square to discuss our outlook for the year. As must always be the case at such events, I told you more than I really knew. I said that the Dow Jones Transportation Average and industrial commodity prices were forecasting a global economic recovery.

As of tonight—and as luck would have it—the Transportation Average is up more than double the S&P 500 Index (year-to-date +24% vs +11%).   Industrial commodities—even coal—are still up across the board. All of which suggests improved manufacturing output and a stronger job market in the coming year.

I’ve also just finished James Rickards’ new book, The Road to Ruin, wherein he predicts financial calamity by 2018. James is very smart, and presumably well-connected in Washington D. C. and on Wall Street. That’s why I read his books. But, he has been predicting a global currency crisis since at least 2010, always pushing out the due date. (The last one was in 1997, so they do happen.)

In this book, as in his previous books, Rickards makes some quite valid economic points. In particular, he criticizes the “equilibrium models” that the Federal Reserve and other central banks use to create their economic forecasts and to formulate monetary policy. Interestingly, Alan Greenspan has always doubted them, too.

James Rickards is probably right about a future economic crisis, though the depth and timing are uncertain. But, both Alan Greenspan and James Rickards affirm that such crises come and go; and economic life continues for those investors who are sufficiently diversified and unleveraged. Indeed, in most so-called ‘crises’ a majority of the population continues with daily life virtually unaware of the changes surrounding them.

Now, don’t take offense—PLEASE:

Donald Trump was not my first choice to be our next President, and I still have some serious reservations, particularly regarding trade policy. But, I am hopeful and optimistic. Only time will tell, of course, but most of the early indications are that we’re likely to experience a better business and tax environment than we’ve known since the Reagan years. As always, though, the best policy for investors will be to focus on great companies, not politicians. Business is the most creative, most adaptable, and most consumer-focused institution ever devised by the mind of man. Politics is—ur, uh—well, you know.

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*The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

 

Ad Astra Per Aspera

Originally published in Flourishing September 2007.

It has been six years since Islamic terrorist hijackers flew two commercial jetliners into the World Trade Center towers in New York City, and another into The Pentagon.  They were thwarted by heroic passengers in their attempt to fly a fourth jetliner into the U.S. Capital Dome.  We must never forget that day.  We must never be deterred in seeking justice, I, for one, will never forgive.  But, that’s not the point of this article.

The day after those inexcusable attacks, I placed an ad in the Winfield Courier urging investors to maintain their poise and to keep faith with the future.  In that ad, I quoted Thomas Paine, the voice of The American Revolution:

These are the times that try men’s souls:  The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of his country; but he that stands it NOW, deserves the love and thanks of man and woman.

Panic is not a strategy, and pig-headed persistence in the face of difficulty is a virtue.

In the intervening six years, our nation has made deliberate, if excruciatingly slow, progress in the effort to defeat Al-Qaeda and related Islamic terror organizations.  In that effort, I am merely a spectator with a powerful vested interest in the outcome.  My real passion, though, and what I am compensated for—by you and people like you—is helping people achieve progressively greater goals over the entire course of their lifetimes.  I am very proud to say that in the aftermath of 9/11, our clients did not shrink from their goals or undermine their own strategic interests.  Like Washington’s army, they continued to march steadfastly in the direction of their dreams.

What has been the reward for their faith in the future?

America’s economy is still the world’s strongest and most resilient.  American markets are still the deepest, best capitalized, and most transparent in the world.  Since September 11, 2001, real (inflation adjusted) Gross Domestic Product (GDP) has risen by more than 16%—$1.65 trillion.  American business has produced twenty-three consecutive quarters of economic growth.  As Larry Kudlow recently pointed out, the U.S. economy has added the equivalent GDP of five Saudi Arabias, eight Irans, thirteen Pakistans, or fifteen Egypts.

Real (inflation-adjusted) annual after-tax income is up more than $2400 per person, the national unemployment rate has fallen from 5.7% to 4.6%, and at last check, continues to fall in thirty-two of the fifty states.  Housing construction—as who could not know—has fallen on hard times, but the median price of an existing home in America is still 45% higher than it was six years ago.

Take note, Osama bin Laden:

By your sponsorship of those evil acts six years ago, you tried to bring the American economy to its knees, and to destroy our way of life.  You failed.

Since 9/11, total after-tax profits in the United States are up 104%.  The Dow Jones Industrial Average is up 39%, the S&P 500 Index is up 33%, and the Nasdaq Composite Index is up 51%.  The Freedom Tower is rising to celebrate the benevolent and resourceful spirit of America.  America:  The land of the free and the home of the brave, and the engine of the Global Capitalist Revolution.  We take pride in knowing that success is the best revenge—you cold, cringing, degenerate bastard!

Have all of our challenges disappeared?

No, of course not!  The war on terror grinds on.  The credit markets are re-pricing risk, correcting a too loose monetary policy by the Federal Reserve.  Oil prices have skyrocketed.  Politicians still do stupid thins and then lie.  It is certain that tomorrow, we will be confronted with new and unexpected challenges.  But, come what may, let us not be summer soldiers in the service of our dreams.  Let us not change who we are in the land of the free and the home of the brave.  We are proud Americans

Ad Astra per Aspera!  mh

Jefferson’s First Principle of Association

Originally Published in Flourishing July/August 2010

“To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.”  

—Thomas Jefferson, letter to Joseph Milligan, April 6, 1816.

Larry Summers served briefly as a Secretary of the Treasury under President Clinton, and later as President of Harvard University, where he got into trouble for inadvertently hinting that boys might have a greater natural aptitude for math and science than girls. He is now a key, behind-the-scenes economic advisor to President Obama, having lost out to Tim Geithner as Obama’s Treasury Secretary.

In a New York Times article, The Return of Larry Summers, published on November 26, 2008, David Leonhardt told his readers about one of Summers’ favorite economic arguments: Require every household in the top 1% of American income earners, who as a group have an average annual income of $1.7 million, to write a check for $800,000. This money could then be pooled and used to mail a $10,000 check to every household in the bottom 80 percent of income distribution, those making less than $120,0001.

Leonhardt’s story may only be symbolic, but it is instructive. I see several problems with Summers’ idea.

First is the fact that the $1.7 million is an average. Many households earning less than $500,000 are also in the top 1%. The threshold income to be in the top 1% was $410,096 in 2007, the latest year for which data is available2. Their tax rate would not be the roughly 47% envisioned by Mr. Summers; it would approach 195%. (It’s an important fact, too, that the makeup of the top 1% is constantly changing, as people with new ideas and special talents migrate from the lowest levels of income distribution to the top.)

Second, I believe that Mr. Summers is advocating government-sponsored armed robbery on a heroic scale. I suspect that many among the top 1% might resist having their earnings from whatever source – intellectual and artistic endeavors, business interests, professional practices, or investment, for example – snatched so imperiously. After all, does Summers’ proposal differ in any basic respect from private citizens taking the matter of income inequality into their own hands? It’s probably true that rich people won’t draw their six-shooters to defend their income from the government, but they might well vote with their feet. Talent and Capital tend to reside where they’re treated best.

Third, it’s widely known that Warren Buffett, the world’s third richest man, is very conservative in his personal spending habits, as was Sam Walton, the founder of Walmart.3 Those two may be exceptions of a sort, but the few hundred mansions, yachts, and airplanes belonging to others among the top 1% pale into insignificance alongside the total consumption of the general population. Moreover, a significant portion of the consumption of the wealthy, who are so often demonized as greedy fat-cats, takes the form of support for universities, hospitals, research facilities, theater and music companies, museums, libraries, and churches; to name just a few of their non-profit pursuits.4

Finally, contrary to the myth of conspicuous consumption, most of the wealth owned by the top 1% is held in the form of business, financial, and industrial assets.5 The wealthy and their productive capital can serve consumers throughout the world by producing a vast array of goods and services, or by financing that production, or by paying the wages, salaries, and benefits of a substantial percentage of America’s workforce. The intended beneficiaries of Summers’ scheme should already enjoy a magnificent range of benefits derived from the savings and investments of all Americans, including the invested wealth of those at the top.

I believe that widespread understanding of this issue is critical for America’s return to lasting prosperity; and that economists like Larry Summers and politicians like Barack Obama simply do not appreciate (or care?) that their redistribution policies may limit the formation of productive capital and the creation of well-paying, private-sector jobs. The history of forced wealth and income redistribution is replete with examples.6

In my opinion, Summers’ favorite economic argument does not really benefit the bottom 80%. Rather, forced redistribution of wealth and income consumes the savings and capital of America’s most productive citizens, or drives it and them offshore. My reading of history indicates that such policies have no lasting beneficiaries, only victims. And, most importantly, I believe Thomas Jefferson observed correctly that the forced redistribution of wealth and income is a first-order violation of human rights. mh

1 http://georgereismansblog.blogspot.com/.

2 http://www.ntu.org/tax-basics/who-pays-income-taxes.html.

3The World’s Billionaires, Forbes Fact and Comment, March 10, 2010. 

All the Money In the World, Peter Bernstein (editor), Knopf, 2007.

4 Caroline Bermudez, “Wealthy Are Making Bigger Gifts to Charitable Causes”, Chronicle of Philanthropy, July 1, 2010. (http://philanthropy.com/article/Wealthy-Are-Making-Bigger/66112/).

5http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

6 The Ascent of Money: A Financial History of the World, Niall Ferguson, Penguin, 2009.

The Last of the Mohicans, Almost

Originally Published in eFlourishing Issue 10, May 30, 2010

There is nothing new under the sun, but the history you don’t know; or in my case, the genealogy.

One of the oldest Indian reservations in North America is reserve land granted to the Schaghticoke Indians (descendants of the Mohicans) in the year 1736 by the General Assembly of the Colony of Connecticut, forty years prior to the formation of the United States. As far as I know, the Schaghticoke do not run a casino. Still, they have my attention.

My great-grandfather, George Washington Harvey (1855 – 1939) was married to Mary Ann Winterbottom (1857- 1897); Mary Ann’s mother was Mary Jane Bearce (1836 – 1901). Her father was James Winterbottom, who was born in England in 1828.

Mary Jane Bearce was the daughter of Sarah Austin (1795 – 1880) and Eli Hervey Bearse (1793 – 1857). Here is the entry point of my interest in the Schaghticoke Indians:

Oliver Canfield* (1729 – 1818), part Schaghticoke himself, had a housekeeper named Sarah Mauwee (1732 – ?), daughter of Joseph Mauwee, a Sachem (chief) of the Schaghticoke Nation. Oliver and Sarah conceived a daughter, who they named Freelove. Yes, that was her real name. Freelove Canfield was born on Long Mountain, Connecticut in 1758. Oliver and his wife, Tabitha Roberts (1732 – 1818), raised Freelove, along with their other three children. Tabitha later moved to Somme, Picardie, France, which is where she died.

On March 27, 1789, Freelove Canfield was married to Josiah Bearse, III* (1755 – 1845). Josiah was also part Schaghticoke. Together, Josiah and Freelove had eleven children. One of those children was Eli Hervey Bearse.

Yes, Eli Hervey Bearse is my great, great, great, great grandfather. Freelove Canfield Bearse is my great, great, great, great, great grandmother. Sarah Mauwee is my… Well, you get the idea.

Now you know what I did this past weekend. Gosh, that was fun – and I’m just getting started. http://www.ancestry.com

*Josiah Bearse, III, and Oliver Canfield both fought in the American Army during the Revolutionary War.