Transition

“What we witness here today is not a victory of party, but a celebration of freedom.”

John F. Kennedy, Inaugural Address, January 20, 1961

When I was younger I could recite John F. Kennedy’s inaugural address by heart. Like many of my generation, Kennedy’s life and death had a profound impact on my early life. While I no longer believe that Kennedy deserves a place among America’s great Presidents, the soaring rhetoric of his inaugural, penned by Theodore Sorenson, remains among the greatest and most consequential speeches of the mid-20th-century.

I just listened to Trump’s inaugural. What struck me most is how much it departed from the conventions of such speeches, and how uniquely Trump’s distinctive voice and viewpoint came through. As usual, Trump was Trump, for better or worse.

I have been thinking a lot about Obama’s legacy, and trying hard to find reasons to be optimistic about Trump’s rise to power. I’ll share some thoughts about both issues soon. Here’s my immediate reaction to Trump’s speech from the portico of the Capitol:

The phrase “America First” has powerful echoes in our history, and none of them are positive. If Trump used the phrase after consultation with his advisers, he needs different advisers. If he used it despite such consultation, he is willfully ignorant. If he used it in full understanding of its historical importance, we and the world are in big trouble.  I became a Republican, above all else, because the Republican Party under Ronald Reagan had clearly replaced the Democrats of FDR, Truman and Kennedy in recognizing the irreplaceable role of America in the world. Trump’s speech sounds to me like a clear rejection of that legacy.

The unequaled success of the United States is the result of our institutions, our traditions, and our people. The Founding Fathers recognized that no institutional framework could preserve our Republic if the people chose the wrong leaders, or if we abandoned the essential characteristics of our civil society. The Constitution limits the power of the President, but several Presidents have refused to recognize and abide by those limits. If we want better leaders, we need to be better voters. Especially in the primaries.

There is always majesty in the peaceful transfer of power. I will continue to pray for my country, and for our new President to find wisdom and humility in that high office.

End of the Nightmare

“It’s amazing what one honest man can do. One honest man and a cause.”

General Lo Armistead

“I don’t think on that too much anymore. My only cause is victory. This war comes upon us as a nightmare. You pick your nightmare side. Then you put your head down and win.”

General James Longstreet

I’ve had the Longstreet quote above running through my head the last few weeks, unable to recall where I’d heard it. Today I was finally able to retrieve the context from my aging brain. When I located the entire passage from the 1993 movie Gettysburg, I realized the complete exchange was even more pertinent to the entire 2016 election, now coming mercifully to a close.

In the movie, a group of Southern generals are discussing the excellence of Robert E. Lee, while their commander General James Longstreet is reflecting instead on the brutal nightmare the Civil War had become in its third bloody year. The ultimate result of the Civil War was largely decided at Gettysburg, just two hours drive from where I sit in eastern Pennsylvania. In the event that Trump pulls off a surprise upset tonight, Pennsylvania will likely be a key part of his victory.

This entire election cycle has been a nightmare. Asked about their feelings on the final day of the campaign, voters most often identify anger, fear, and depression. Those negative feelings are especially strong among independents, a group with which I find myself identified for the first time. Most Americans have picked one of the two nightmare sides, and are hoping their side wins.

Our national angst at the election contest derives in part from the bitterness and divisiveness of the rhetoric on both sides, but even more from the absolute lack of confidence in the nominees of either party. These are the two most disliked candidates of my lifetime. Despite the apologies of partisans on both sides, I believe that dislike is entirely deserved, again on both sides.

During the Civil War, Americans literally killed each other, in numbers never equaled in any other conflict. Yet the fighting men of both sides were able to recognize the excellence of their opponents, their courage and commitment, despite the fact that they were fighting to the death.

We seem to have lost that ability. The bitterness of this election divides friends, families, communities. How is it possible that our ancestors at Gettysburg could treat each other with respect immediately after slaughtering each other by the tens of thousands, yet our candidates today are unwilling even to shake hands before a debate?

A central reason for the partisan divide is that we have lost the very idea of virtue in public life. This process really began in the 1990s, during the first Clinton Presidency. Conservative William Bennett wrote The Book of Virtues, desiring to instruct children in those qualities of character necessary in a democratic society. Democrat Ben Wattenberg responded with Values Matter Most, a book asserting that such liberal priorities as education or affirmative action should form the core of a more elevated national conversation.

The problem, of course, is that values are something that you are not likely to share with your opponents, especially if values are defined in narrow partisan terms. Virtues, on the other hand, are affirmative qualities of character and soul that you can recognize even across profound partisan, cultural, national or religious divides. At Gettysburg Union General Winfield Hancock, gravely injured, brought water after the battle to his dying Masonic lodge brother, Confederate General Lo Armistead. He loved his friend, even though they fought on opposite sides of the most divisive question in American history, whether men might hold other men as property.

This year, the nominees of both major parties are individuals of poor character. Both have lied about issues of material importance. Both have a history of treating ordinary people with brutal indifference. Both have ignored the law, the rules, and common decency whenever necessary to advance their own interests. Neither candidate possesses any visible humility or ability to admit error.

We once shared the belief that good character was a necessity in any candidate for high office, and we celebrated such character in the lives of great Presidents like Washington, Lincoln, Teddy Roosevelt, and Truman. The choice of these two individuals, Trump and Clinton, to compete for the world’s most important office represents a betrayal, not just of a commitment to character in our leaders, but also of the central values of each party. The Democrats chose someone who has used political influence to accumulate a vast fortune, mostly through relationships with powerful financial interests and authoritarian foreign governments. The Republicans chose a crude man with no understanding of American history, Constitutional principle, or the necessary limits of government power.

Both parties have failed us, in fundamental and obvious ways. Each party’s voters believe that a victory by the other party’s candidate poses a fundamental danger to the health of our democracy.

So my wish is that both parties, regardless of the outcome of today’s contest, will recognize the damage done, in choosing their standard bearers, by abandoning a commitment to basic decency and to the principle that the public interest must take precedence over personal gain . Out nation needs, and our history and principles demand, a better class of candidate next election cycle.

Rolling Bubbles

I just ran across an article on the recent collapse of the “emerging art” scene, which revolves around works by young artists, many still in their 20s. An art dealer bought a work by a hot young artist for $100,000 back in 2014, and is now trying to sell it for $20,000, before it goes to zero. Here’s an excerpt from the article:

This week, estimates for three Smith pieces are as low as $7,000. One, from the series he made by spraying more than 200 canvases with paint from a fire extinguisher, is estimated at $12,000 to $18,000. A bigger spray work sold for $372,120 two years ago.

Who knew that one episode of spraying paint from a fire extinguisher could create art worth more than $74 million at the peak? If the nomination of Donald Trump was not enough proof, this seems like persuasive evidence of the apocalypse to me.

This is also a good reminder to every would-be speculator about the risks of buying any asset simply because it is going up, without regard for its intrinsic economic value. When bubbles burst, they do so without warning, and they can trap even the most sophisticated investors.

We have been defensive in our portfolio commitments for several years now. As a result, we’ve missed some of the apparently easy money, in emerging tech stocks in particular. Right now we’re observing a global tendency for some of the most over-inflated asset markets to head south. This broad decline has already affected some of Silicon Valley’s “unicorns,” the term for non-public companies valued at more than $1 billion, as well as real estate in recently red-hot markets like Vancouver, which was down as much as 17% in a single month.

When considering any investment, the two questions we always ask are:

Does this investment represent an underlying asset or business with real and enduring economic value?

Is the price I’m paying reasonable in relation to that underlying economic value?

If the answer to either question is “no,” our practice is to stay on the sidelines. This causes us to miss out on some apparently easy money, but also helps protect us from permanent and irrecoverable losses.

I’ve been in the investment business since 1978. Time and again, I’ve observed greedy individuals chasing over-priced nonsense, solely based on the fact that it has recently gone up. They always seem to believe there will be some sort of warning before the bottom falls out.

Let’s all consider ourselves warned.

’16 No Trump…Please!

“I tremble for my country when I reflect that God is just.”

Thomas Jefferson                    

“The enemy of my enemy is my friend.”

Sanskrit proverb                    

As a Republican, I weep for my party when I contemplate Donald Trump still leading the field of contenders for my party’s Presidential nomination, based on no qualifications other than a willingness to express crude outrage on a small number of hot-button issues.

Trump is no Republican, and no conservative. He has given mostly to Democrats. A few years ago, he declared himself a liberal, and said he was becoming more liberal over time. He is a past supporter of single payer healthcare, is pro-choice…the list goes on. Bill and Hillary Clinton came to Trump’s most recent wedding. Bill urged him to run for President. Indeed, the idea that Trump is actually a Clinton operative in the Republican camp is entirely plausible.

At last week’s debate, Trump explicitly refused to support the Republican Party’s nominee for President, should it prove to be someone other than himself. This Pat Buchanan-like move would normally be instantly disqualifying for any Republican. After all, this is the party whose nomination process almost always settles on the guy (must it always be a guy?) whose “turn” it is to carry the banner. Thus weak candidates like Bob Dole, John McCain, and Mitt Romney periodically escort the party to defeat for the highest office.

Given his poor qualifications as a Republican, and add in that Trump is unqualified by experience, ability, and temperament to hold the office of President regardless of party, why is he still leading the field among likely Republican voters?

Pretty clearly, the answer is a growing groundswell of rage at the political and media establishment, who regardless of party appear to collude in preventing certain obvious issues from making their way into the public square. For a certain narrow and angry segment of Republican voters, it appears that if Trump is rude to people they dislike (any politician, any media figure including able and dispassionate journalists like Megyn Kelly and Chris Wallace), he must be on their side.

Trump’s sudden prominence echoes a similar personality, regrettably also Republican, who emerged briefly from obscurity more than a half-century ago. From 1950 to 1954, Wisconsin Senator Joseph McCarthy led a crusade against Communists and homosexuals in American government. He started with a speech claiming possession of a list of Communists in the State Department.

McCarthy struck a nerve in an American public fearful the Washington establishment was not taking seriously the threat from communists within the government. The threat from Communism was real, as evidenced by the spying of Alger Hiss and others, but the real threat was in no sense clarified or mitigated by McCarthy’s irresponsible accusations. Indeed, because McCarthy was such a crass and vindictive bully, he left many convinced that anti-Communism was per se an indefensible position. Crafting a rational response to a real issue of public policy was made profoundly more challenging by McCarthy’s tactics. (There was no legitimate issue of public policy behind McCarthy’s persecution of gays. None. The man was just a bully.)

McCarthy was finally undone by his own bluster and lack of evidence. It all came to an end in June of 1954, at the Army-McCarthy hearings, when Army counsel Joseph Welch interrupted the blowhard Senator’s attack on one of Welch’s junior legal colleagues to ask, “Have you no sense of decency, sir, at long last? Have you left no sense of decency?”

The question answered itself. That was the beginning of the end of McCarthy’s reign of terror. He disappeared from the public eye, and drank himself to death within three years.

We know already about Trump’s sense of decency. He has none. How long will it take before he vanishes, and what damage will he do to my party and our country in the meantime?

The Greek Tragedy: Final Act?

As it has been for more than a century, Greece is a financial mess. Last weekend, negotiations broke down between Greek Prime Minister Alex Tsipras and the “troika” of the European Union, European Central Bank, and the International Monetary Fund. (EU, ECB, IMF from this point forward.)  There will be no third bailout for Greece, at least not until the results of Sunday’s Greek referendum are in.

This past Monday, June 29, world stock markets fell sharply. The S&P 500 Stock Index was down 2.1%, erasing all year-to-date gains. This was the biggest decline since April of 2014. On Tuesday evening, Greece officially defaulted on a 1.6 billion Euro loan owed to the IMF.

We have watched the Greek situation carefully for years, and have written about it several times, most recently here. There are two dimensions to this latest chapter in the Greek tragedy.

The first is the human dimension. A Greek exit from the Euro (and probably from the EU as well) is likely to have profound and even catastrophic human costs. The Greek people, most of them hard-working and honest, will suffer greatly. Within a year or two, Greece is likely to be the world’s only formerly developed nation. We may see in Greece a level of poverty, suffering, and social breakdown not seen in Europe in peacetime since the grim decades of the 1920s and 1930s.

The second dimension is financial. How will the Greek drama impact the finances of U.S. investors? This is a very different picture. In the medium term, we expect a “Grexit” from the Eurozone to be a net positive for investors, for several reasons:

  • The risk of a systemic breakdown, like the 2008-2009 financial panic, is low. When the Greek crisis emerged in 2009, European banks had dangerous exposure to Greek loans, and a default could have triggered a collapse of Europe’s financial sector. Those big bank debts have been written down and recycled to European governments. If Greece defaults, it will cost European taxpayers billions, but we see little risk of contagion.
  • Monday’s market action was not unusual. Historically, declines of 2% or more happen several times a year. (Back in 2008-2009, they often happened several times a week.) Here in the later stages of a long, long bull market, periodic downside surprises are inevitable. What has been unusual is the very low volatility of markets since 2013. Expect a bumpier ride, but don’t worry about it.
  • Absent Greece, the investment outlook for Europe looks much more positive. With plenty of bad news already “priced in,” the unanticipated outcome is one where a Greek exit is largely an economic non-event for the rest of Europe. (Remember that Greece’s peak GDP was less than 3% of the Eurozone as a whole.)

Overall, our expectation remains largely unchanged. We expect the departure of Greece from the Eurozone to be an extended, messy process, very much a “Grexident” rather than a clean and surgical separation. But while markets may be volatile, we think any sharp downside break will represent a buying opportunity.

Once in a Century Opportunity

It is nice to know, in a world where social institutions crumble, families fragment and move to the far corners of the earth, and the settled verities are called ever more into question, that we can still rely on certain constants.

Today, we celebrate one of those constants, if only in the United States. And this is truly a case where American exceptionalism cannot be seriously questioned. This is a celebration in which European nations cannot plausibly participate. Only in the United States can this particular event happen.

In case my meaning is unclear, I’m talking about pi. Yes, tonight at we will all have the unique, once-in-a-century opportunity to celebrate one of the Universe’s enduring constants, that irrational quantity without which we cannot even begin to calculate the circumference of a circle or its area — never mind the volume of a cylinder!

piToday is March 14, 2015. Or as we in the United States would notate it, 3-14-15. So at 9:26:53 tonight, we will experience 3.141592653. (Pi actually continues indefinitely. Since I was a teenager, I’ve known it by heart to seven decimal places. This is nothing to brag about. My old friend Clifford can recite it to 50 decimal places, and does so at every opportunity. Which are few and far between.)

The way to celebrate is recognized as being the consumption of pie. Cherry, pumpkin, Boston creme, plain ordinary apple, any will work. My kids are planning to make an Oreo ice cream cookie pie.

It is not entirely clear whether the proper procedure is to pre-cut the pie into slices and serve it out, with each participant attacking their own slice at 53 seconds after 9:26, or whether that is when the unblemished pastry should be put to the knife.

Why can’t Europeans pitch in? Because in the rest of the world, the convention is to abbreviate dates day-month-year. So today is 14-3-15. No kind of mathematical constant to celebrate there. When will Europeans get their pie? Never. There will be no 3rd of the nonexistent fourteenth month this year, or in any other.

Let’s hoist our forks together this evening. This is a chance to unite our families around something we can all believe in, something as American as apple…pi?

Re-boot

Over the next few weeks, I will begin posting again to this blog. I’ve been quiet for two reasons. First, we’ve had lots going on in our business, including an updated edition of one of our two books. Second, and more important, our compliance attorney informed us that we cannot accept comments for this blog or on our other online forums.

Saying I’m unhappy about this is an understatement. While the comments section has never been as active as I might wish, I have found the energetic back-and-forth in the comment threads among the most valuable aspects of writing the blog.

The reason I have to shut down comments is simple. We are concerned about full compliance with regulatory policy. An open discussion carries the possibility that a reader comment might constitute a violation of the SEC’s evolving communications standards.

In simple terms, we need to pre-sanitize the blog to avoid possible trouble with regulators. For those clients who have commented in the past, please know that I value your feedback very much, and I really want to know your thoughts. Please continue to share them with me by email, or just pick up the phone.

More to follow.