Bigger Than You Think

Many of our fellow citizens and this may include yourself, are rubbing their temples to encourage blood flow to minds benumbed by the events of this past Tuesday. Please allow me to share a few thoughts that you may find helpful in establishing your expectations for the financial markets in the weeks and months ahead.

First, please understand that these words are “value-free” in that there is no intent to weight upon the merits of the choice the American people have taken advantage of their democratic rights to exercise.

Not a few of you reading this are both deeply disappointed and concerned about the merits, political and personal, of the next occupant of the oval office. For others, it is a time of having your faith in the American people restored and the anticipation of a time of national renewal.

The intent of these words is less ambitious but hopefully more meaningful for those of you who are now left wondering about the impact of this election upon the economy and financial markets. What follows is written in the spirit of believing that we actually know a great deal more than we might suspect and that it is, therefore, possible to create expectations that will be useful in approaching the topic of investing.

First, some numbers. Seventy-two, thirty-six and thirty-six and eight. It has been seventy-two years since 1944, the election of FDR to his fourth term and the succession to the presidency by Harry Truman one year later. Interestingly, since that time Democrats and Republicans have held the presidency thirty-six years each. The more interesting number I would argue is eight. Eisenhower, Nixon, Bush #1 and Bush #2 were presidencies that represented more slowly moving imitations of Truman, Kennedy, LBJ, Carter, Clinton, and Obama with both Democratic and Republican presidencies leading to a seemingly inexorable migration of the control of the nation’s economic and financial resources towards Washington, DC. Only the eight years of the Reagan presidency represented a real effort to alter the nation’s course but if it was a true revolution it was one that was subsequently lost.

Seeking an approximate parallel to the 2016 election is an exercise in futility because there isn’t one.

Never before, in all of the years since the founding of this country, has a president entered office owing so little to so many. Trump isn’t a creation of the “system” as much as the voter’s rejection of it. Wall Street and large corporation donations were not Trump’s to claim but rather his opponents. For sixty-four of the past seventy-two years the American presidency has been in status quo mode seemingly always traveling in the same direction and only with its rate of speed varying. So…are we reversing course or changing direction?

The answer to that question is not difficult to divine. Trump is not, as some would argue Reagan was, a reactionary seeking to recapture a mythical golden past but rather a radical in the sense of his owing nothing to this nation’s political elites and what many of his voters view as their game of musical chairs.

The president-elect though is perhaps best viewed as a utilitarian. The presidency is an office and there is little doubt that Trump believes himself as the one best suited to occupy it. Interestingly Trump, like Reagan, is more of an actor than a businessman always looking for a larger stage and now occupies the largest stage of all. And so…what now?

Unlike many candidates for this nation’s highest office, it may be wise to assume that Trump actually meant much of what he said while on the campaign trail. Many commentators have suggested that Trump’s politics are the politics of resentment with his attitudes towards immigration and foreign trade being perhaps the best known of his positions but I would suggest that this misses a large part of the bigger picture. Arguments about the causes of the Global Financial Crisis of 2008-2009 and the sources of the subdued rates of economic growth experienced since then are largely irrelevant. What is relevant is the importance of not underestimating Trump’s commitment to aggressively pursue policies that he believes will be contributory towards stimulating economic growth rates as well as removing those policies which he believes inhibit it. And he has a united congress prepared to pass what the new president proposes.

To conclude. The financial markets are essentially amoral inherently believing that whatever contributes towards economic growth is good. Much of what you may care very deeply about and believe makes this a better country is of little to no concern to the S&P or the bond market. Trump believes very deeply in two things at least. Himself and restoring higher economic growth rates to this country. As an investor, I encourage you to believe that at least in terms of the financial markets, as a former president once said in one of his television advertisements, “it’s morning in America.”

Time To Elevate Our Gaze

For the past eight years anyone with a relationship with the economy and the financial markets of the United States, in other words all of us, have felt themselves cast in the role of swimmers striving to increase the distance between the state of their economic lives and the shipwreck of the Global Financial Crisis of 2007-2009 when the global financial system had listed badly, taken on serious amounts of salt water and resembling much too close for comfort a system sinking towards the bottom of the sea. Those born during the market’s lows of March 2009 will be entering second grade this autumn but for many it all feels very much like yesterday.

Time increases the distance but we still cast glances over our temporal shoulders and having been captured by the traumas of the past it becomes our point of reference for how we perceive both present and future. Members of the “chattering classes” shout inflammatory words through megaphones like so many Old Testament prophets forecasting doom to those committing the financial folly of seeking a return much above that of zero. Confusing information for wisdom we go to sleep at night not counting sheep but rather the specter of lower oil prices, deflation, China, zero and negative interest rates, Brexit. We don’t know what any of it means and often it’s our not knowing that acts as fuel that feeds our fears.

Fortunately, every journey through time eventually leads to a future that is distinctly different from that of the years preceding it and so we’re left without the need to wrestle with the probability of the eventuality but only the matter of its timing. No doubt, with our gaze firmly affixed to our rear view mirrors, we’ll miss significant amounts of accumulating evidence of a notable change in the landscape; that it isn’t gravel beneath our tires any longer and those sure don’t look like pine trees.

For those who might begrudge the cheery demeanor of the thoughts which follow the writer will confess to having “cherry picked” the items to substantiate his case for optimism but hopefully the possibility of a notable change in the economic weather for the better might be found by the reader to be an enticing as well as a compelling one. First though the intrusion of some contrary evidence that while much may be getting better all is still not well. US Treasury rates making new lows are mystifying.

And it would be a good thing if the Italian banking system did not so closely resemble a deflating “ciabatta”. Copper. What about it? The most economically sensitive of all metals prices continues to be seemingly content to be merely an observer at the festival of economic good fortune. Still, it is better to be early to a correct conclusion than to be late even when accompanied by substantiating evidence of greater weight.

The stock market stalled out about two years ago and since then investors have been treated like observers of a dance; two steps to the left, two to the right but somehow while always moving nothing much ever changing. Economic growth had slowed. The forces of economic recovery that began in 2009 clearly had abated. Corporate earnings growth diminished and then disappeared. At least in this instance the market has made a lot of sense though precious few dollars. But then, earlier this year, things began to change, most notably the prices of those things whose existence in this world substantially precedes that of bipeds like us seeking to create wealth without the unfortunate necessity of actually having to expend physical effort in the obtaining of it. Metals, coal, natural gas, oil, gold and silver. Stuff being sold on television by performers lacking meaningful work since the twentieth century.

Numbers in the teens and twenties began to pop up on spreadsheets denoting returns for A MONTH.

The tone of the economic news began to change. With greater frequency some of the data was coming in revealing an economy displaying the rosy complexion of increasingly robust good health. April’s increase in personal consumption expenditures, excluding a month in 2009 supported by the “cash for clunkers” program, was the strongest in any month since 2005. In June the twelve month average of housing starts reached the highest level since 2008. On June 28th the 1st quarter GDP number was revised upwards from 0.5 to 1.1%. Also in June the Chicago PMI (Purchasing Managers Index) reached a six month rate of increase that had been exceeded only eight other times in the past fifty years and seven of those times were when the economy WAS COMING OUT OF RECESSION. On July 1st claims for unemployment compensation came in below 300,000 for the sixty-ninth consecutive month, the longest stretch in more than forty years. On July 6th the ISM (Institute of Supply Management) NonManufacturing Index rose to its highest level since February 2008. On July 8th a broadly based unemployment number including discouraged workers and part timers seeking full time employment dropped to its lowest level since April 2008. Finally, the ISM Purchasing Managers Index for Manufacturing came in with a figure that may be forecasting an acceleration of Real (inflation adjusted) GDP growth to 3.2% which, if realized, would represent the highest rate of economic growth post 20082009.

So there it is. It’s still early days but quite possibly the financial markets and the economic data are offering us the answer to the “when” question posed earlier. NOW.


Mark H. Tekamp


Like a patron of the local pub no doubt financial markets would have much preferred to pass around the hat to come up with the money to buy another round but wiser heads have prevailed and someone has called a cab (or is it Uber) to bring a situation that has already lasted much too long to its inevitable end.

Capitalism hasn’t enjoyed a particularly good decade reputationally but it has resulted in a historically unprecedented level of global wealth and if you are an average citizen on planet Earth the odds are significant that you’ve never had it so good. Thus it is passingly ironic that a system that ultimately depends upon the liberty of those who operate within it should be critical of a people who have arguably done more than any other to create an environment conducive to the exercise human freedom to have voted in pursuit of it. While in the short term, perhaps a week or so, the markets are possibly going to assume the worst they will, as markets always do, come to celebrate what they will come to view as a provider of solutions to long standing economic problems.

Pursuing brevity while also attempting to shed light on a widely misunderstood issue can be challenging but here we go. The Economic Union (EU) has always been like the suitor asking for the first date while slipping a wedding ring into their side pocket. Always asking for little it has ended up with quite a lot but unfortunately without the permission of those whom it seeks to govern. While possessing an elected parliament the EU is essentially a bureaucratic state but unlike our own nation unconstrained by an electorate possessing the right to vote upon the rules which it is required to live under. Interestingly the EU was relatively popular in the United Kingdom (England, Wales, Scotland and Northern Island. Britain is incorrect as it excludes Northern Ireland which also voted) enjoying “only” a four point popularity deficit (44/48). In France it’s 38/61 and even in Germany, arguably the greatest beneficiary of its membership in the EU, it’s only 50/48.

The European Union has 28 members and in terms of its global economic footprint it does matter and actually a great deal with an economy of $18.4 trillion versus the US’s $17.4 trillion (2014 #’s). 19 of the 28 countries share the Euro as their currency with 6 of the other 9 committed to its future adoption and with the UK, Sweden and Denmark having been the permanent holdouts. In Europe as a whole only Norway, Switzerland, Iceland and Russia along with various remnant states of the former Yugoslovia precede the UK as non-members of the EU.

An uncomfortable fact underlying the birth of the Euro on January 1, 1999 is that those countries who have been permitted to vote upon its adoption, Denmark, Sweden and the United Kingdom, have chosen to reject it resulting in the rather undemocratic phenomenon of the only countries actually using the Euro exactly mirroring the same universe of countries whose citizens have not been permitted to vote on whether to adopt it with its accompanying dubious privilege of surrendering the use of their own domestic currencies.
It is the Euro which has done more than anything else to give the EU a major “hair cut” to its popularity.
Those countries adopting the Euro found their economies locked into a monetary relationship with a variety of countries with economies possessing very different characteristics from their own and.
without the ability to address those imbalances through adjustments in the relative values of their respective currencies. Germany was able to surrender its D Mark at terms very favorable to its ability to price its exports at relatively low prices. For Spain with its Pesetas, Italy with its Lira and many other countries the terms would result in their being sentenced to years of economic purgatory. As Europe’s largest economy much of Germany’s growth resulted from very large foreign trade surpluses. The problem for much of the rest of the Eurozone was that Germany’s surpluses were required to be their deficits. To sustain the growth rate of their economies they were required to take on increasing amounts of debt until at the time of the Global Financial crisis of 2008-2009 they hit the outer bound of their debt limits and the credit markets were closed to them resulting in a deep economic recession and very high levels of unemployment.

The criticism of Greece and other predominantly southern European countries has been often couched in moral terms; thrifty Germans and spend thrift Italians, Greeks, Spaniards etc. when in reality it is nothing of the sort. Germany cannot necessarily be blamed for pursuing its own national economic interests but the bill has been paid more often than not by the other members of the Eurozone. It is the pursuit of its interests without a willingness to assume an appropriate share of its responsibilities that has led Germany and other surplus countries to be primarily responsible for the extraordinarily dysfunctional system that the Eurozone has become.

By voting to leave the Eurozone the UK has turned on the lights at the end of a very bad movie while reminding other countries that democracy and freedom must be the principals upon which any political system that hopes to endure must be based. The UK will be better off on the outside than in. Its tradition and its destiny of being an economy based upon freedom with its facing the Atlantic Ocean and open to the world will lead in the not too far distant future the 48% of its citizens who voted to remain thanking the 52% who voted to leave. The EU will shrink further and become both more democratic and prosperous. The world will be a better and more prosperous place and this shall be an outcome which the financial markets will celebrate.


Mark H. Tekamp