No bottom for the Republican Party

The Thinker by Rodin

It looks like I have been giving Republicans too much credit. I assumed there was some core group of Republicans who could agree, “This time Trump has gone too far” and bring him down. Apparently, there is no bottom for the Republican Party.

That’s because I assumed that there were some sane Republicans out there. But it looks like when push comes to shove, sanity takes a back seat to subservience and fealty. Republicans apparently love to take orders. They love authoritarians. I’m guessing it gives them some feeling of comfort that somewhere a Big Daddy is taking care of things. Having decided to get on the Trump train, they can’t seem to find a reason to get off, no matter how surreal and ridiculous it gets.

Signs are pointing to a huge train wreck for Republicans in the 2020 election. Some years back I pointed out that Trump would kill the Republican Party. To severely maim the party, Republicans have to lose both the presidency and the Senate. Barring some massive election fraud, Trump is destined to be defeated in 2020. He’s never polled over 50% and most of the time his approval ratings have been mired in the low 40s or lower. Winning with these sorts of negatives is possible only with massive voter fraud or a third-party candidate that siphons off a lot of Democratic votes. Both the 2000 and the 2016 elections likely would have elected Democratic presidents had it not been for the third-party spoiler effect. It’s not Trump’s base that will win him reelection, but Democratic fragmentation.

Winning the Senate requires flipping three Republican seats, which is a bit of a long shot but not impossible in a wave election. Aside from his base, Trump has managed to piss pretty much everyone off. But even among his base, he is bleeding supporters. White men support him, but according to polling he’s recently lost white women without a college education. Trump is losing farmers from his trade wars, and truckers are seeing major layoffs plus the latest tax law raised their taxes by doing away with a lot of their deductions. Meanwhile, Senate Majority Leader Mitch McConnell is deeply loathed in his home state, with only 33% approval. He can’t even be bothered to pump up a pension fund for coal miners. Yes, in deep red Kentucky, McConnell may lose reelection next year.

Rather than face criticism, Trump does the only thing he knows how to do: reshuffle the deck. This means changing the subject, generally by saying things or posting comments on his Twitter feed that are increasingly outrageous. This is effective but it doesn’t actually fix the issues that got him in trouble in the first place.

Moreover, his pattern never varies. When he decided not to put those 25% tariffs on Chinese goods so people could enjoy nice presents under their Christmas tree mostly made in China, then of course when China added new tariffs on U.S. products as they promised it all went out the window. New tariffs were back on and markets plunged about three percent yesterday. They were doing fine until his announcement.

But just when you thought Trump couldn’t possibly get any wackier, he doubles down on the stupid. Just this week Trump:

  • Said he was the Chosen One, implying he was the King of the Jews
  • Said any Jew voting for Democrats was disloyal and un-American because they should put Israel first … uh, what? And how is putting Israel before the United States showing you are an American patriot? Oh wait, because Trump says so. Gotcha.
  • Ordered U.S. companies to leave China, even though he can’t
  • Decided he could issue an executive order to end birth right citizenship, as if he could unilaterally override the 14th Amendment
  • Blamed the chairman of the Federal Reserve for his economic woes because he wouldn’t cut interest rates fast enough, while apparently absolving himself of the blame of nominating Jerome Powell in the first place
  • Said he wanted to buy Greenland and canceled a summit with Denmark, which manages the island, in a huff because they wouldn’t consider it. Actually, Denmark couldn’t even if it wanted to. Residents of Greenland would have to decide. Oh, and he called their female prime minister “nasty”, his word of choice when acting like the obvious misogynist that he is.

We have a president that is, quite frankly, totally nuts and bonkers. Just one of these by a Democratic candidate like Joe Biden would sink their candidacy. But Republicans so far show nothing but increased fealty to a president who by any objective standard is mentally ill and could not be trusted to even competently manage a child’s savings account.

Moreover, a recession is clearly on the way and every action Trump takes seems to be designed to make it worse. It was tariffs that brought us the Great Depression. Doubling down on tariffs simply increases the odds that a recession will turn into a depression. And if there is a recession, there’s not a single adviser to the president who has either the smarts or the wherewithal to help lead the US out of a recession. The closest we have is Jerome Powell, and only because the Fed is independent of the executive and he can’t be fired. When you surround yourself by incompetent sycophants, well, you get incompetent sycophants. Hell of a way to run a “government” … don’t bother to actually govern!

I was thinking yesterday that the tanking stock market might finally be the straw that broke the Republicans’ back. Moneyed capitalists ultimately hold up Republican power. Yesterday, three percent of their wealth vanished because Trump’s ego was hurt. Likely a lot more of it will vanish soon.

The obvious remedy is the 25th Amendment and twisting Vice President Pence’s arms to get a majority of the cabinet to declare our president is too mentally ill to serve. I’ve been waiting more than two years for this intervention, assuming cooler heads in the Republican Party could prevail. While I still hope for it, increasingly it looks like I misjudged the nerve and sobriety of the Republican leadership. They are wholly captured by their captain, and appear ready to go down with his ship.

Can you profit from a likely coming recession?

The Thinker by Rodin

There are a lot of wags predicting a recession in 2020. There are wonky predictors of recession, like sustained inverted yield curves, which have accurately predicted most recessions in the past. This happens when short-term treasury bonds earn more interest than long-term bonds, which has been the case for a while now. Historically, it’s a great predictor of a recession and gives you about a year of warning.

Much of the world’s investors are already paying for negative yields, basically paying governments to take their money in the form of negative interest bonds. This sounds crazy. They do this as a hedge against currency deflation. During deflation, there is no incentive to spend money because the same dollar will buy more in the future. Fear of deflation often predicts recession too. We saw a little of this in the Great Recession when some money market accounts actually lost money, at least until new rules were created to place the full faith and credit of the U.S. government behind these accounts.

Naturally, Trump is not helping things. By initiating trade wars, principally with China, Mexico and Canada, he is injecting even more uncertainty into the markets, not to mention reducing international trade. Making willy-nilly decisions, like his recent threat to impose new tariffs on Mexico, feeds this pessimistic narrative.

It seems paradoxical that the stock market is rallying. But it’s rallying only because the Federal Reserve is suggesting it will lower interest rates. If it does, it’s only to try on the hopes of stopping a recession from happening, a recession that appears to be likely largely due to Trump’s trade policies. The Fed though doesn’t have a whole lot of flexibility as interest rates were only modestly raised since the last recession, so there’s not much room for them to fall. No wonder that so many investors are scared of the specter of deflation.

It’s been a good stretch of growth – one of the longest ever – ten years pulling out of the Great Recession. Good times never last forever anyhow, but Trump has certainly been pulling the wrong levers. We should be investing in clean technologies because that’s where future growth will come from. We should be improving our infrastructure, which is decaying around us because the economy needs a robust infrastructure to keep humming. We should be promoting higher wages so people have more money to spend, not throwing more money at millionaires and billionaires who can’t spend much of it.

Recession is coming at some point; it’s just a question of when. Most economists think the likelihood of a recession in 2020 is sixty percent. Should you be buckling down for the next recession? Given that personal credit card debt levels are as high as right before the Great Recession, it looks like many of us are not well prepared, a situation made worse by income inequality. Those who could hopefully pared down debt and created an emergency fund. But since 40% of Americans can’t afford an unexpected $400 expense, we can only hope that when the next recession comes it not as severe as the last one. Since many of the factors that got us in trouble last time are back again, largely because Republicans insist on deregulation, that doesn’t seem likely. Most Americans will simply hunker down and pray.

Looking back on my experience from the Great Recession, my takeaway is that it inadvertently made me, if not rich, a lot richer. I was blessed with a steady job that paid well and a 401K I kept contributing toward regularly. I was surprised in 2014 to discover that recovering markets made it not only possible to retire, but to retire comfortably, and I haven’t looked back. Inadvertently, I bought a lot of cheap stocks through my 401K and in just five years this was more than enough time to greatly increase my wealth.

So if you are 10-20 years away from a retirement and in a comfy job that’s unlikely to go away, then perversely you might welcome another recession because you can profit from it the way I did. If you have the nerve (something I don’t have), like a short-seller, you might want to bet against America. By this I mean, count on recession and try to profit from it.

How? If you take the bet that markets are likely at record peaks, then sell. I’m not recommending selling your entire portfolio, but it might make sense to sell a good portion of those stocks, ETFs and mutual funds and park them in U.S. treasuries, which is what a lot of investors are doing. Or you could take them as cash. You can do this with your IRA or 401K without a tax penalty. Then you just have to wait until the inevitable happens. No one can predict how much markets will decline, but if they are down 25% or more, that would be an excellent time to buy some cheap(er) stocks, ETFs and mutual funds. During the Great Recession, there was a huge sale as which discounted Grade A stocks as much as 50% from highs. After all, those who need the money to buy stuff will sell it for any price they can get, which is when bargain hunters like you swoop in. Then, like me, wait for the inevitable appreciation as stocks recover.

Will I take my own advice? Of course not! I’m retired, in my sixties, and although reasonably well off, almost all of our saving are in retirement assets. I could up my percentage of bonds and then later move them back to stocks when the market is at its low. But at my stage of my life, I want to maintain my standard of living, not necessarily gamble on some prospect ten years from now of a much larger net worth which would also be harder to enjoy before I die. Also, I pay a financial adviser to make sure we stay on plan.

But if I were a younger person like I was at the start of the last recession, then I might be taking some joy in the misfortune of others, knowing that when markets recover I would reap substantial rewards.

Betting on failure

The Thinker by Rodin

I regularly look to see what’s trending on my blog. Given the relatively little traffic that it gets discerning trends is kind of hard. My Craigslist posts frequently get hit, which is why I decided to encourage the trend with a monthly review of local Craigslist casual encounter posts. Also, no one else seemed to be doing as a form of entertainment. Over the last few months I’ve watched my Porter Stansberry tag trending upward. This probably means something too.

I wrote just one blog post in 2011 where I mentioned Mr. Stansberry and his dubious “research” firm. I mentioned him mostly in passing. His ads were following me all over the Internet so one day I gave in and spent forty-five minutes or so listening to his pitch. Of course he was trying to sell me something: a pricey subscription to his financial newsletter. He was looking for a certain kind of investor that I’m not, mainly the ultra paranoid “I’m ready for the zombie apocalypse” type.

Four years ago Mr. Stansberry was predicting the imminent collapse of the dollar but really all major currencies. He saw another Great Depression on the horizon and it was coming at us like a freight train. He had a plan to deal with an impending financial apocalypse that would let you survive it and ultimately prosper. When it hit you would presumably be sipping margaritas on your private island in Bermuda while the rest of the world went to hell. It was all pretty vague but his financial forecast was available in small segments via his pricey newsletters. They had to be pricey because not just everyone was good enough to afford his unique insights. Just the chosen, like you.

Four years later there has been no financial apocalypse. The stock market is higher than ever, even though incomes are not. Most of the income continues to go toward the top of the income scale, which explains why incomes still lag, our recovery feels somewhat tentative and why people are getting financially nervous again. China recently devalued its currency to make its products cheaper, basically to hold off a recession. Its stock market has lost roughly a third of its value the last time I looked, and might have lost more if China’s government hadn’t propped it up. Commodity prices are also falling as evidenced by the price of gasoline. Stocks while generally high are a bit off their peaks. So a lot of smart people are reading the financial tealeaves and trying to figure out if stocks are overvalued and whether they should be cashing those investments in for something safer. The bad news is that if you are chasing your financial fears you are probably going to take a financial haircut.

I won’t pretend to be an economist. However, I do feel my advice is at least as good as Porter Stansberry’s and most likely better. After all, I was not fined $1.5 million by a U.S. District court in 2007. Most of the fine was used to refund his investors who were urged to buy stock in a company based on fabricated insider information. Stansberry said it was sure to increase 100 percent. To find out the name of the company, you had to send him $1000. In any event, after the company’s announcement the company’s share prices fell after being artificially bid up by his investors. This led to the demise of his previous firm Pirate Investor and the creation of Stansberry Research and lots of videos hawking his presumably newly improved financial insight.

So even if you are a paranoid investor type, you should not trust Stansberry Research. Moreover, all the gold bullion in the world won’t save you in the event of a total financial collapse. The truth is that while there will certainly be future financial shocks and maybe even major widespread currency collapses, our financial system is too complex to go back to monetary sources based on perceived permanent value, like gold. Instead if there is uncertainty in the market, money will shift toward perceived safer forms of currency.

That’s happening right now with the collapse of the Yuan and slow slide of other currencies like the Euro. The dollar is perceived to be a safer currency, so its value is rising in comparison to most other currencies. This of course makes it harder for the United States to sell products and services priced in dollars. It’s the penalty for having a financial system less screwed up than everyone else’s. This has the ultimate effect of proving that we are all tied together. Investors running toward the dollar reduces economic growth in the United States, which makes it cheaper to buy commodities outside the United States, which hastens their recoveries at the expense of less economic activity in the United States. This cycle repeats endlessly but generally the United States is seen as having the most stable economic system, so generally cash is poured into dollars and U.S. treasury bills when economic uncertainty rises.

So when the value of the dollar rises significantly compared to an aggregate of all other currencies, this can be a warning sign that a financial correction is due. You don’t need Stansberry Research to tell you that. You can simply track currency valuations online and compare it with what happened in previous financial crises. What seems to be happening now is that the market understands that the recovery in the United States is much weaker than investors would like it to be, and that’s likely due to income inequality in the United States. When wage growth hardly moves upward that doesn’t give the majority of consumers a whole lot of money to buy more stuff. It stifles growth because as I pointed out before the top one percent will only choose to buy so much stuff. Hardly any economic growth ever trickles down from the top one percent’s personal spending.

Curiously, the best way to get economic growth on track again would be for voters to vote for a little socialism next year. Changing the rules so more income would go down toward the rest of us instead of the top would put more money in our pockets and start a virtuous cycle. Changing the rules to raise taxes on upper income people would have the same effect, since the government generally spends all it takes in and that feeds economic growth in the United States. Arguably the United States was never better than in the 1950s when top marginal tax rates were about ninety percent. That’s because taxes were put to use providing assets like our interstate highway system. Putting more money into the middle and lower classes gave people the means to spend it to increase their standard of living and keep the economy on a generally good footing. This is why there is more growth under Democratic administrations than Republican administrations.

It remains to be seen if voters will choose optimism or pessimism next year. The financial rumblings happening now and how we choose to react to them will probably influence voters in 2016. A downturn in 2015 would probably ensure a sustained downturn after the next U.S. president is sworn in, since the next president will have an austerity agenda.

None of this matters to Porter Stansberry because the fear of failure is the basis of his business model. It sells more of his pricey newsletters. As for me I will continue to play my financial cards the way I always have: keep a diversified portfolio and move toward more cash and bonds as I age. I’ll never win the game of timing the market, but no one actually does. Instead, investors sell themselves on the delusion that with the right financial guru they can outsmart it. The best thing we can do for our economy is simply talk to our neighbors and friends. We need to convince them to be cautious but rational, and to vote rationally in 2016.

President Obama famously campaigned on hope, which was derided by many Republicans. However, we’ve had seven years of economic growth and falling unemployment. Much of the growth went to investors and not to the rest of us, but it was growth nonetheless. We should hope for continued better times, but hedge our bets by electing politicians who will vote for some pragmatic democratic socialism again.

Paging Bernie Sanders.