Outside the Box

Four More Years

John Mauldin

November 9, 2012

There have been many competing analyses of the results of the election last Tuesday. I am still trying to absorb the longer-term implications. One of the more thought-provoking pieces I read was from my friends at GaveKal. Four of their writers give us their initial thoughts, and not surprisingly (for them!) they don’t agree. But the piece does give us a broader take on the ramifications. And I love the first line in the lead paragraph (different dreams, indeed):

The American electorate may share the same national bed, but they have vastly different dreams. In this report, our take on the election’s significance is similarly bifurcated. Anatole see it as a cathartic political cleansing allowing for a deal on the fiscal cliff, but Charles as a disaster. Arthur asks whether the Republican Party can win nationally without reconciling itself to America’s changed demographics and the realities of the new knowledge-intense economy. Will Denyer contends that an Obama win is probably bad for the dollar and gold – but he doubts that would have been different with Romney.

I write this afternoon from Buenos Aires, in between media interviews, having done my last speech. Soon, I’ll head to the airport and back to Dallas. Randomly, Grant Williams, who writes Things That Make You Go Hmmm, and his partner Stephen Diggle of Vulpes Management (based in Singapore) will be in Dallas tomorrow night, so I get to connect up. They are at the end of their own three-week road trip, and it will be good to compare notes.

I will be writing about my impressions of Argentina this week, as well as adding a few other observations. While I’m ready to be home for a few days, it has been a most interesting trip. It has made me think a lot about how to deal with governmental chaos, and perhaps more positively than you might imagine. I am now more Muddle Through than ever.

I encourage you to sign up for the free internet “summit” I’m organizing, along with my friends at Real Clear Politics. It’s called “The Post-Election Economy: A Clear-Eyed Analysis of the Risks and Opportunities for Investors.” I’ll be sharing the stage with Mohamed El-Erian, Barry Ritholtz, Richard Yamarone, Gary Schilling, Barry Habib, and James Bianco; and Lauren Lyster of RT America will be moderating. And as a very special part of the event, I will be doing a session with the chiefs of staff for both Senator Harry Reid (current Majority Leader) and Senator Rob Portman (one of the true GOP experts on the budget), discussing together the problems we face as a country.

This event will be a no-holds-barred discussion on where we can expect the economy and investment markets to go, post-election. And most importantly, you'll learn how the unfolding events will impact you and your money.

This 90-minute online video event is completely free to attend.  You'll be able to watch directly from your home or office computer.  All you have to do to register is visit http://www.PostElectionEconomy.com/?ppref=MEC011TF1112A

Cafayate was far more restful and restorative than I thought it would be. It is muy tranquilo and remarkably beautiful. The town has real character and energy to it, especially in the night life and restaurants ringing the square.  The resort of La Estancia de Cafayate is world-class, by even the most discriminating tastes. I can see why so many people are buying property and building vacation homes or moving there as their primary residence. I can guarantee you that I will be trying to figure out how to get back there and stay longer next time.

Spending time with my partners in Mauldin Economics (David Galland and Olivier Garret) while we were there has me energized and excited about all the new things in our (your and my) journey together. Talking with Doug Casey and Terry Coxon and a host of their libertarian friends, thinking and debating about the implications of the elections, has gotten me excited and drifting off down all sorts of intellectual paths. And I did get to read some very stimulating books, which I will write about later.

Right now it’s time for some hard questions from Argentinean TV. The demonstration last night was rather large, and the frustration I felt from all those asking questions is still palpable. I guess 30% inflation can do that to you. Still, they seem to cope, and the restaurants were full late at night. The demonstration did not even start till nine. Quite peaceful, if noisy, with a million people banging away on their pots & pans; and families brought out their children to enjoy the chaos. Rather a surreal moment for your analyst. But a lot to think about.

Your trying to see a bigger big picture analyst,

John Mauldin, Editor
Outside the Box

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Four More Years

GaveKal

The American electorate may share the same national bed, but they have vastly different dreams. Our take on the election’s significance is similarly bifurcated—a cathartic political cleansing allowing for a deal on the fiscal cliff (Anatole) to disaster (Charles). Arthur asks whether the Republican Party can win nationally without reconciling itself to America’s changed demographics and the realities of the new knowledge-intense economy. Will contends…

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Benjamin.Chiarelli@gmail.com

Nov. 13, 2012, 8:23 a.m.

Mr. Little - you seem to only tell a piece of the story (as usual with people that have a clear bias).  I personally do not care for either side but will give my two cents on your commentary.
“The party nominated a businessman who was very skilled at decreasing labor costs with massive leverage to increase short term profits.”
- Isnt removing waste from the system a good thing?  As Thomas Sowell explains so eloquently in his book Basic Economics the world has a fixed amount of assets.  In order to use those assets most effectively you must optimize productivity.  Companies like Bain do that – if they do not create value and make the assets better off then they would have no business and would not exist.  If your premise were true who would buy these assets from companies like Bain if they just stripped them for profits and ran?  Are there some cases where private equity firms fail to make companies better off?  Sure.  Are there instances where companies not run by private equity firms also fail?  Sure.  Did our government “invest” over 90bn in green energy companies that failed?  Yes.
Moral of the story here is that when you put capital at risk on an asset you must improve that asset for its go-forward value – no one is buying something for the results it produced in the past.  The issue at hand is who should be putting capital at risk – me and you as we see fit or some bureaucrat on our behalf?  I know what I would choose but it appears many in this country have a different view.
“It also nominated a businessman who has a long history of shipping jobs to China and in fact had a massive factory closing on Nov. 5, the day before the election.”
Is there something wrong with this?  Sure it may hurt your ego and make a great campaign slogan for those that fundamentally do not understand the importance of the global economic system in asset allocation – but fundamentally don’t you want every dollar you spend to get you the most goods in return?  That is the reason products are manufactured elsewhere in many cases.  Our laws and regulations on this point are outdated.  Labor laws, unions, etc. were needed in the early days of the industrial revolution.  Now, in the age where we the consumer are given news in a matter of minutes, a company that takes advantage of people or has poor working conditions would be run out of business by the media and the population.  Simple changes have made a difference on this point.  Right to work states like Tennessee are seeing massive inflows of manufacturing jobs in spite of our heavy regulation and minimum wage requirements.  Why?  Because there is still an argument to be made for quality and that good old fashion made in the USA stamp on a product.  If we got out of the way and let the markets work we would see an even bigger resurgence of domestic manufacturing.  This point is critical.  The US has turned into
It also nominated a businessman who ranked 47th out of 50 states as governor of Massachusetts.
This point is disingenuous.  Again great for political theatre but not really a relevant metric.  When your state already has unemployment below 5% where do you go from there on the “job creation” front?  He actually did lower the unemployment rate further (as much as any politician actually affects that)
Given that he lost Massachusetts by 20 percentage points in the general election, it seems clear that his political and governing talents are not up to par with his ability to use negotiating leverage and compound interest with cold, hard, effectiveness.
Again another disingenuous point.  His political life in Massachusetts was ended due to governing to the center right on social issues.  Massachusetts is a far left state and this just will not fly.  It really had very little to do with his economic policies which are what we are discussing in this forum.  When quoting a stat like 47th in the country you must also add the context.  If unemployment in Mass were 14% when he took office this point would be relevant – given the law of small numbers (in this case a small number of people unemployed) it would have been nearly impossible for Mass to be at the top of the charts in job creation – especially in such a short amount of time.
“It is a mistake to assume that entrepreneurship and libertarian values are connected.  There are a lot of people who are not entrepreneurs who wish they were entrepreneurs and hold libertarian values, but there are also a lot of people who value entrepreneurship who are quite progressive.  I haven’t seen a study of actual entrepreneurs and what they believe in, but people with high education levels are very consistently more progressive, whereas people who have a lot of money because of real estate, plumbing, construction, etc. tend to be more conservative. “
Again I think you miss the point.  I think you are both wrong and I would not make a broad-based statement as to political beliefs based on an entrepreneurial spirit.  Political beliefs are often formed based on experiences and personal relationships / the views of those people.  Being a libertarian myself my views were formed from my parents – my grandfather came to this country with literally nothing – his family lived off the land in Italy and he brought them here for a better life.  Working three jobs, forcing his eldest son to work in the factories at 15, all to save money to send my father to college.  My father worked his entire life to send me to college and now our family as a whole (extended an all) have succeeded through hard work.  My family was poor and did not need a hand out.  My family was not educated but worked hard to support the ones they love.  Every situation is different and I understand that but I would argue that most libertarian views start with a story like mine.  We did build it, we did earn it and we don’t want to give our rewards of this hard work to a government that is incompetent on most things and plans to redistribute my hard work (the spoils of) to others.  I give more away to charity in 6 months than our Vice President does every year.  That is how I help my neighbor – I don’t need someone to tell me how.
“Also, places like silicon valley are massive endorsements for a combined socialist/capitalist hybrid model in which government does what private industry is not properly motivated to.  You saw a massive technical talent pool build up around the colleges of the state and the economy built itself around that talent pool.  The socialist side also favors that competition that capitalists claim to like so much, as NSF grants are highly sought after and encourage research that is too far out in most cases for private investment.”
This is a function of environment.  When you live in a state that believes in, as you call them, “socialist” policies you run into a group mentality.  If this were actually true then I ask you the following:
- Why do many silicon valley companies move to places like Texas?
- If this model works why is the state of California, despite being one of the largest economies in the world, have one of the worst fiscal problems in our country?
The issue is that most people with “socialist” views have good intentions – the question then becomes is the best way to help people through the bureaucracy of government or through the good of man?  If you say government then you, like those who promote the government having a hand, have less faith in the “greatness of the American people” than your political ads lead on.
“Romney promised to give 5 trillion dollars in tax cuts in the ten year budget and he promised to do it in a way that would not negatively impact any interest groups or hurt the budget.”
Yet another disingenuous point.  I am glad you watched the debates and read the talking points from the side which clearly educates your bias.  What will the tax increases on the “rich” accomplish?  Even if you taxed them at 100% it would be a drop in the bucket when compared to government spending.  The real “tax increase” is the inflation that will inevitably hit ALL of us and be most impactful to those that are poor and in the middle class.  This inflation will be caused from borrowing and printing – on that point we can all agree.  So if taxing the rich will not provide enough revenue to make a dent – what do we do?  There are three choices – increase revenue or decrease spending or both.  Much like the plan in the 80s Romney believed that we need REAL economic growth to solve the debt problem.  I think those that can do basic algebra would agree.  You cannot cut defense (or any major job creating spending) until you get the economy growing again.  Cuts need to come after growth is achieved and there are places for displaced government workers and contractors to go.  You can however cut the wasteful spending in Washington.  Bridge to nowhere.  Studies on why pigs smell.  “Investments” in green energy – I know this one may be controversial but until we get back on track don’t you think we should let the private market place work on this until the technology is truly viable???
“If you compare Rhetoric to Reality, then the choice was actually between one party that wanted to increase government while reducing taxes on the wealthy and one party that wanted to increase government moderately while increasing taxes on the wealthy.  To see this, look at a bit of history:
Results? 
Public spending: https://bit.ly/LJlVnA
National debt increase: http://bit.ly/SBHeZK”
Can you please share those results excluding the costs of wars?  If you do I think you come to a much different conclusion.  Agreeing or disagreeing with the wars is another story.  Also – the links you provided did not include the public spending and national debt increases of the current administration – please provide the updated “facts” there as well.
“Oh, and by the way?  Obamacare actually cut Medicare costs by 700 Billion.  You can tell I am telling the truth because Mitt Romney ran attack ads against Obama for cutting Medicare by 700 Billion.”
I would be embarrassed of this point if I were you.  Where did that $700mm go?  To pay down debt?  Not at all – it was taken from one program and put into another.  To call this a “cut” is actually a lie – it is robbing one program to pay for another – an accounting trick – the same type of trick that was used by our government that resulted in social security being in the position it is.
“Some of that went into expanded coverage, and the number of term health rip-offs being sold (“We’ll cover you until you get sick.  Good luck if you get cancer 10 days before your policy ends.  We hope you find a very fast doctor…”) is going down, so despite costs going down, overall premiums have gone up.  But that’s a good thing because it means more people are finally going to be covered decently, and more importantly it is a one-time thing, Paul Ryan’s scary chart to the contrary.”
Oh the scare tactics.  Couldn’t have comments with this type of bias without them.  There will always be cases of people that are not getting the best care possible.  This is not a question of whether or not that is “fair”.  This is a question of whether or not it is your responsibility to pay for those people.  Ultimately in either system you do.  Your private insurance premiums are higher because those companies cover high risk patients – we in a sense subsidize those policies.  Now if the government gets involved we will lower those costs right?  Quite the opposite.  In countries like Norway do you know what a Big Mac costs?  Last time I was there – 4 years ago – the Big Mac meal was $16 and trust me its not because they are making it out of Kobe Beef.  In order to drive down the cost of providing socialized medicine the governments have started taxing things like smoking, drinking, fast food, etc. very heavily.  This has two great results for the powers that be.  They get more revenue (assuming people still buy the products) and they deter people from doing things that may be unhealthy and cost them money in the future.  I ask you this – does the government have the right to tell you that you cannot have a Big Mac?  Does your neighbor have the right to tell you that you cannot enjoy a beer on your front porch after a long day at work? 
The fundamental problem is that people now think that healthcare is a right.  If you believe that then you probably think government having a hand in it is a good thing (even though ultimately it will make care more expensive and at lower quality – I am in the healthcare profession so I understand the ramifications).  Find for me where our constitution says that healthcare is a right?  Find for me where it says the government can use their unlimited power of taxation to take from all to provide healthcare to a few.
Conclusion:
Our country became the greatest power on earth and the light on the hill because of the power of the individual.  Since our beginning we provided an environment where, if you work hard, you can achieve greatness.  In risking all that you have to succeed you may come up short – that is the essence of risk and reward.  If you have no risk – no downside – if you will be bailed out like our banks and car companies – why would you not risk it all?  If you are surviving on money and resources that are not yours what incentive do you have to allocate these things in the most efficient way possible?
Since the beginning of time these different philosophies have been tried.  One has succeeded.  My question is – if we really want to learn from history – democrat, republican, libertarian or independent – why don’t we look at how we got here.  It was not because of the government – it was in spite of it.  This country needs to get back to its roots – on the fiscal front, on the regulatory front, and most importantly on the moral front.
In a world of limited resources prices, with all of their flaws, best define the allocation of these resources.  When the government interferes with these prices in any way this leads to a suboptimal allocation of those resources.  This ALWAYS leads to the world as a whole having less wealth and therefore being worse off as a people.  Until you come to that realization, no matter your motive, you are really arguing for people to be worse off.

pcelrod@att.net

Nov. 12, 2012, 6:50 a.m.

Unfortunately, my thoughts align more with Charles. Obama’s interests are not, in my opinion, aligned well with a prosperous free market political system. I weep for my children and grandchildren.

tom.duffy@verani.com

Nov. 11, 2012, 6:37 p.m.

In our state of NH, we are discovering election fraud.  Seems that organized groups of FIRST TIME VOTERS showed up and voted.

I suggest that the Secretaries of Stae do not certify results until this NEW VOTER domile is proven.

There are ample web references to this effort, especially near college towns. ANYONE who has obtained a fake photo idea ( $40 around here) would share my concern.

Ad to this dead peole, moved people….I ask: why is there not a national standard for Voting ID if the election is ultimately chosen by Electoral College?

If 4 states control; the electoral vote…..this is not a real challenge…assuming someone can provide proper ID’s for college students - who can sell their blood to blood banks-  why is this perceived as impossible, given small margins?  Florida was VERY CLOSE.
good thing those retirees who voted werent dead…...?

Kelly Jones

Nov. 11, 2012, 8:40 a.m.

Ditto - I agree there’s some better analysis in the comments section than the essay.  The essay includes segments by a Libertarian (a member of the small, but well-heeled “free market and individual rights will solve it all” cult based on that complete fantasy) and a powerfully right leaning writer who titles his section on the election “A Dangerous World Begins”, and describes Obama as a left-leaning president, which is a complete joke to anyone who has even a couple of solid progressive strands in their complex belief structure. 

It’s a new world, boys, time to move on from the same old divisions and talking points.  We can drop kick Libertarianism out of the political scene as a dominant force, aside from providing a very useful foil and frame of reference in the on-going dialogue and quite valuable caution on the over-reach of government.  I love to turn on the House hearings with Bernanke just to root for Ron Paul as he slowly roasts Ben on the BarBQue spit.  But there will never be a national Libertarian administration unless it’s put in office by force or fraud and backed by military rule.  Do you seriously think people are really foolish enough to believe, after 2008, that what we need is less regulation and to do away with social safety nets?  You’re living in delusion.

There won’t be a truly leftist or even powerfully socialist government in the US either - at least for a very long time.  We can’t afford it, for one thing, even with Ben printing full tilt.  Unfortunately, the US missed the boat when it came to creating an actually intelligent social welfare system with a lower cost, government supported universal healthcare like every other sane developed country in the world, or a low-energy per capita, widespread, highly efficient public transportation system like Europe.  Now we have a gerry-rigged dog’s breakfast health care with minimal cost control, thanks to Libertarians, the GOP, and their well-heeled funders acting like a 5 year old putting hands over ears, closing eyes and yelling “socialism, socialism, death panels, death panels”, when presented the fact that the US is #1 in cost/person globally and 37th in delivering outcomes.  For their part, the healthinsurer/carer owned Democrats quietly drowned single-payer in the bathtub before the 2009 debate began and didn’t stand up for a watered-down public option supported by the majority of citizens.  Obama wouldn’t even speak-up for that flimsy thing when the time came - jumpin’ Joe Lieberman said he never got the call. 

So, don’t tell me Obama’s a leftist.  He bowed down to the monied-power of the healthcare industry just like he bowed down to the monied-power of Wall Street and couldn’t even get his well-corrupted Treasury secretary to nationalize Citi and put it out of its misery after he gave him a direct order to draw up the plans.  He left all the Wall Street execs in place even though regulators repeatedly replaced or brought CEO’s up on charges in the early nineties S&L debacle.  Obama left Dick Fuld of Lehman, who had the biggest fraudulent liar loan warranteed but guaranteed-to-fail securitization operation in the world - a much bigger criminal than Bernie Madoff ever was - staggering around free with his mansion and his millions trying to figure out what relevance an unprosecuted but discredited crook has in a world that largely knows what he did but refused to put him in jail.  Crony capitalism remains quite vibrant and alive in the USA, and the public doesn’t like it.

Yes, the US is on an unsustainable financial path, and it has to set priorities and make some decisions.  No, US finances can’t be made to work by taxing the wealthy - not even close.  But it’s part of the mix, and as Bill Krystal said in the news today, it won’t kill the country if we raise taxes on millionaires.  The country might be a lot better for it - even for the millionaires, shocking as that may seem.  I may have missed it, but I haven’t heard John Mauldin, whose interesting posts I often like, ever express concern about the huge and growing wealth gap in the US or mention the fact that studies show that countries with less of a gap, more evenly distributed income and wealth, are actually much happier - even the rich are happier because they’re part of a thriving rather than divided society.  By refusing to have a sane discussion on healthcare, climate change, wealth distribution, the budget and a hundred issues, the quality of life of everyone is degraded. 

Like all my more conservative friends, I hope politicians don’t use this election as an excuse to >not< deal with real math and real issues, and just add taxes but not deal with deeper restructuring toward a sustainable plan.  But there are going to be differences of priorities and values in trying to resolve the issues.  For example, Romney’s plan to kill healthcare and kick 2 trillion more into defense was lunacy of the first order, as far as I’m concerned.  In that respect, I’m glad the election might have provided a slight nudge in the right value direction.  It turns out that at least trying to keep entitlement promises as best we can is a bit more important than keeping so many zeros on millionaires monthly bank balance statements, even if the GOP wants to squash the non-partisan study that says those extra zeros to “job creators” don’t actually create jobs.  The highly touted, loudly shouted brand of GOP unreality took a blow, and for that we should all be glad.  Now, we just can’t afford to enter into a corporate Dem tax and spend version of unreality.

Steven Russ

Nov. 11, 2012, 5:22 a.m.

Better analysis on the Comments section than the essay.

Richard Abell

Nov. 10, 2012, 9:43 a.m.

Will there be four more years before a fiscal crisis destroys the US economy?

Bush and his Republican congress were undoubtedly big spenders.  They ran up large deficits.  However Obama has put Bush’s spending to shame with his Democrat congress and in the last couple of years with a GOP controlled House of Representatives.

We have a situation in this country where a small percentage of the population pays for almost all the cost of the government due to a progressive Federal Income Tax Structure.  President Obama wants to further this bias. Those people that don’t pay tax but receive benefits paid for by the tax payers will always vote to maintain this situation.

Continuing along this path will lead to the fiscal ruin of the USA.  Along the way inflation (the worst and most insidious tax) is exacerbated by the Fed’s ongoing Quantitative Easing and will erode everyone’s purchasing power.

The only real solution to the massive debt is to have tax income to the Federal Government exceed expenditures. A Fair Tax and a balanced budget, anyone?

As long as taxes exceed spending (even by just a little bit) then the government and the country can operate indefinitely.  Each year the deficit would be gradually reduced and sometime in the future the debt would be eliminated.  This requires tax reform and reduced spending.  This will work as long as interest rates remain low until the debt is reduced substantially.  But the debt is now so large that if interest rates were to return to historic norms of 5% or 6% the interest expense would be so large that it would be game over.


The people in Congress are incapable of enacting either of the two steps required to save our economy.


Taxes will certainly increase and spending will continue to exceed receipts until the whole house of cards collapses.

This really could happen sooner rather than later.
       

tony bennett

Nov. 10, 2012, 5:58 a.m.

We are a divided country. Mitt Romney carried about 1/2 the vote. (13 million voter chose not to get involved). The main stream media back Obama, allowing his actions not to be scrutinized. When we became an entitlement nation, political dynamics changed and the republican party has not kept with this change. Time will tell whether both parties will compromise or send us over the “cliff”. My personnel view is they push us over the cliff because each side has there own mandate from those who voted for them.

terence moore

Nov. 10, 2012, 4:57 a.m.

Missing the forest for the trees here.  Obama added 15,000,000 to the welfare rolls, and more millions to the disability rolls, while removing any work requirements.  That is your answer to his achieving 51% of the vote, so no need to pontificate on reasons.  As predicted by Ayn Rand in Atlas Shrugged in 1957, the marxists/progressives have effectively taken over the country.  Barack Hussein certainly got the vast majority of the votes of those wanting freebies, and that situation will only worsen.  He now will certainly get to nominate leftist, perhaps marxist, judges for the Supreme Court over the next 4 years, and we can all kiss liberty goodbye.  The trial bar does not address this issue, as they are bought and paid for by the Demoncrats, who allow them unbridled access to the courts and they respond with many millions in donations to Demoncrats. Like children offered ice cream by a class candidate, they voted for the ice cream without any thought as to where the money to pay for it would come from.  Don’t know whether Ayn Rand is crying or laughing at folly that is the American electorate. 

ROBERT PETERS

Nov. 10, 2012, 4:34 a.m.

There are many election effects discussed, but, again, the efforts that will be needed to deflect climate change seem to be lost.  We can not ignore Greenland losing its entire ice sheet for the first time in history and the “opening of a northwest passage” because of Arctic ice melt, worsening storms, drought, water shortages etc. etc.  Dramatic changes are taking place in Europe and elsewhere in terms of the types of energy systems being put into place and soon this election and the oncoming effects of “climate change” will necessitate considerable investment in ways to minimize and cope with these changes to all of our lives.

Roy Sjoberg

Nov. 10, 2012, 2:08 a.m.

Ladies and gentlemen, it’s about the ‘ground game’! Republicans can not ‘dirty’ themselves by polling the electorate and getting out the vote. Politics is about blocking and tackling and not all the visions and asperasions. The border States had Republican governors and Romney should have held their feet to the fire and had them deliver their State - after all they had won it for their jobs and therefore, the alledged organizations. That’s why we lose the urban areas, the Democrats get out the vote. Volunteer for the party of your choice!

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