When reviewing the history of man, one can also study the evolution of thought over the recorded centuries. The evolution of societies centered around man’s knowledge… (or rather) perceived knowledge. Likewise, the evolution of banking, investments, warfare and healthcare similarly reveals how and why societies prospered, or went “bust,” depending upon how sound and accurate prevailing thought was.
Prevailing thought, in and of itself, was often wrong, but if the majority of the people were conditioned to believe it, it became policy. Humans have always defaulted to a prevailing thought or belief. This tendency explains why so much wealth was lost during the “Tulip Craze” or the “South Sea Island Bubble.” Writers have dubbed it “the madness of crowds.” This human inclination has also hampered navigation, the expansion of ideas and exchange of knowledge because, after all, wasn’t the earth flat for the longest period of time?
Indeed, humans have conjured up schemes, rationales, and policies that have proven to be pure madness, and millions have lapped up the concoctive brews stirred up by the “mad monks” of a decade or generation. In our own generation, we have seen the rise of Nazi Germany and the Soviet Empire, led by crackpots like Hitler and Stalin. We’ve witnessed Mao’s Cultural Revolution in China, crazed Shintoism in Japan, and now the Mullahs of Iran and the craziness of ISIS. We are still victims of “the madness of crowds.”
From our perch in the investment world we see similar inclinations. Over the last ten years we have witnessed economic madness in the operations of central bankers. Understandably, they have been blinded by the prevailing economic school of thought advocated by John Maynard Keynes. Every business college undergraduate of this generation has labored through the Samuelson textbook for “Econ 100-101” and learned that Keynesianism was gospel. Large government with large borrowings was the only path to prosperity. In our country we have been fed a century of this thought with a few refreshing interludes brought on by the likes of Milton Friedman, John Kennedy and Ronald Reagan.
We have come to believe in Social Security, food stamps, Medicare, Medicaid, farm credit, student loans, Fannie and Freddie, and Obamacare! The belief is so strong that to most, elimination of any of these and other programs must include a replacement. Why? We have also somehow adopted the crazy and unfounded notion that the highest earning taxpayers are not paying their fair share. Even wealth accumulation is now frowned upon…but aren’t we a capitalistic system?
In China, printed money has funded empty cities, the military and high speed rails. What little capitalism and free market initiatives that have been adopted have really helped, but China has recently installed strict capital controls to stem a severe money outflow. This heavy handed approach toward stabilizing the Chinese problem could easily make China a flashpoint for a global credit crisis. So much for free markets.
Japan’s demographics are upside down and after a generation of borrowing, they are on the financial ropes. Japanese leadership must be watched closely.
Europe is dragging Greece, Italian Banks, Portuguese socialism and millions of immigrants around in circles. In France, the socialist high tax leadership will soon be thrown out, while Britain has already bailed out of the Union. Change of some sort is in the air! Like China, Europe is also a possible tinder box.
Argentina has thrown out their latest version of Eva Perón and in Brazil presidents are rightly put in jail when they leave office.
To address this global mess, the Keynesian minded “monks” who run the various central banks around the world find themselves stretched to the limits of their economic learnings. Nevertheless, the world’s debt load of hundreds of trillions must be saved, so they have opted to change the recipe of the brew to include QE 1, 2, 3, negative interest rate policy (NIRP) and capital controls. All, just simple experiments in the Keynesian laboratory, and probable causes of unintended economic problems to come.
Out of nowhere Americans have stopped drinking the monk’s brew. Apparently, after some reflection, they learned that whatever they’ve been drinking has been delivering increasingly harmful hangovers.
Enter the “Donald,” along with a Republican Congress, and Republican Senate. Promises of tax cuts, deregulation, and increased national security fill the air and optimism seeps from every crack in the parched economic pavement. Admittedly, there is some fear that this is just another mad monk, but at least a large part of his message makes timely sense.
We’re not sure about the whiff of protectionism and “cross border adjustments,” but we understand the economic positives that will be dynamically magnified through tax cuts and de-regulation. We also expect the new agenda to confront many obstacles as the many bruised egos that reside in the House and Senate wait to teach Mr. Trump a lesson about political reality. Accordingly, there are apt to be “market ups and downs” on the way to installing a new agenda.
We also harbor doubts about a massive infrastructure bill at this time.
Interestingly, most normal reactive investment decisions may not be the best ones for this changing environment. Many companies and institutions in our society, including large investment institutions, have evolved philosophically and operationally to take advantage of the big government, high tax, Keynesian world that has dominated our country for years. Many of these past performers and winners could be in for a tough time. In order to be advantageous in structuring investments, it will take a new approach to succeed in a Trump economy…at least initially. We think we see the way and are anxious to implement our strategy. There is now a clear chance for success, a better standard of living, higher global growth, and a higher level of achievement for the human race. Let’s hope we don’t “screw this up” in the process of draining the swamp.
We must be very disciplined in the overhaul so as to not leave irreparable damage. We need new economic leadership, embracing a strong belief in free markets as well as the dignity and ingenuity of man. A smart analyst will select investments that can thrive in this coming environment rather than being lead down the familiar analytical path of the last couple of decades.
After all, the world really isn’t flat…and this is quite a story! Wishing you a healthy, happy and prosperous new year.