“Don’t’ look for the truth when politicians brag, look for it when they gaff”
-Me
Lot’s going on the markets recently, much of it taking some of the overbought technical’s to more desirable levels. However, with so much going on in the world of politics it’s important to remember that there are two ways to fall behind a strategy, one is to play politics with our portfolios and the other is to ignore the pitfalls of judgmental bias and other distractions that motivate so many investors. I don’t ignore either, but work to avoid both, and here are some examples.
Domestic Politics
There’s a very curious narrative surrounding the current administrations plans to spend money towards infrastructure. Curious, because the intent is to raise taxes to pay for the plan. But is it a plan or is it an investment? And if it’s an investment, which in my opinion it is, then why not wait for the companies that will implement the massive infrastructure needs start building the strongest balance sheets in decades, and then pay it back at the new higher (28%) corporate tax rate. The question to this observation might be where the money is to make such an investment coming from. Well, if one wishes to buy Apple (AAPL) they have two options, buy it with discretionary cash, or buy it on margin. Discretionary cash, as far as the government is concerned, would need a budget surplus, which it hasn’t had in 20 years. But margin is snap, to affect a loan the government need only issue Treasuries to cover the cost. There’s no doubt that I’m pointing to an option that will increase an already overladen deficit, but when an investment pays off and the taxes raised go into reducing the deficit, remember the banks and TARP, infrastructure can be a program that takes care of itself. There is also much being spoken about the increase in the Capital Gains Tax rate. First, capital gains are taxed on profit and that should not be too much of a surprise. But the level of increase is such that the market narrative suggests the super wealthy who make up the bulk of the stock market, which I don’t entirely accept, will be an incentive to sell. This narrative brings me to an observation that has followed me as long as I’ve managed clients and their expectations, namely the more money a client has the less concerned they are with growth in favor of capital preservation. The less they have, I’ve generally observed the opposite. So, the likelihood, in my opinion, will be money moving into fixed income for preservation and dividend stocks for a level of growth that meets expectations. Problems solved; the markets can still go up.
Global Politics
There are clear changes happening in the European Community that are the result of the rising number of vaccinations and the recounting diplomacy with America. Rules pertaining to opening up are beginning to appear similar to those in America, and the broad array of capital market are showing some welcome investment. However, whether it’s climate change or growing instances of geopolitical aggression, the relationship is an important one as China becomes more of an adversary, using the rhetoric of the west to counter criticism. But the one criticism that doesn’t get enough attention is the concern in the global markets of the potential of an unprovoked attack on Taiwan. There are obvious concerns when a country decides another country is theirs to own, but Taiwan is not only a leader in the production of Semiconductors, but also Metals, Aircraft, Medical Instruments, and the list goes on, it’s a very vibrant economy that has also handled the pandemic better than most. And, true to their stripe, the narratives in this country are exploiting the fears of such an event as reason for the nervousness in the markets for the last few weeks. As mentioned in previous commentaries, I never know the reason for the probable outcome of an overbought market to occur, but I also don’t want to either oversimplify or ignore the potential of events that can have economic consequences. For now, the Chinese and Western economies are complementing each other and it’s up to the less optimistic diplomatic relations to find middle ground. And in the meantime, investments are focused on reopening, and the opportunities in Industrial, Healthcare and Consumer activity that are still driving growth every day. And when the markets are ready to pay attention, they can respond favorably.
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