Month: January 2017

The Presidential Baton

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January 29, 2017

Welcome to the new site, Innocent Investor.  You can easily reach this blog by entering innocentinvestor.com into your browser. Loyal readers can resubscribe by clicking the RSS Feed button at the bottom of this blog.  For a few weeks, I will post up a short entry at LucreTalk.blogspot.com in order to activate existing RSS feed subscriptions.

I think readers will love the presentation of both text and graphics in this WordPress format. I plan to integrate comment balloons so that a reader who is unfamiliar with a term like “GDP” can hover over the word and a quick explanation of the term will appear.

On the menu at the top of each page is an item labeled “Tools.” That page is under construction but will include many of the resources I have mentioned over the course of the past eight years.

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The Presidential Baton

After the Trump inauguration, President Obama and his family boarded a helicopter bound for Andrews Air Force Base. The headline U-3 unemployment rate was less than 5%, half the level when he had taken office eight years earlier. In that time, the SP500 stock index had almost tripled. Consumer Confidence has risen from 61 in January 2009 to almost 100 as he left. GDP has been growing for 30 quarters.

Good job, Mr. Obama. Thanks for your leadership during a very bad economic crisis, and have a good life. Wouldn’t it be nice? History is a messy business. Presidents endure a lot of stress, their families make major compromises and yet half of us focus on their faults.

Let’s revisit another President who took office during very bad economic times, Ronald Reagan. When he assumed the leadership role, we were on the tail end of a recession, and still deep in an energy crisis. Interest rates and inflation were more than 10%, small business loans were about 20%, and the unemployment rate was 7.5%.

Reagan made the difficult decision to let Fed Reserve chief Paul Volker take some monetary measures to bring down interest rates, knowing that those actions would probably send the economy back into recession.  Unemployment rose 3% to 10.8%, GDP fell 2-1/2% and stayed negative for four quarters.  Inflation came down from 10% to less than 5% in that year long recession, providing an environment for businesses to grow and consumers to borrow.  Real GDP started growing at rates greater than 5%, and in 1984, Reagan was re-elected by a landslide over Walter Mondale.

A historic tax reform bill capped Reagan’s second term in office.  Like health care, tax reform is notoriously difficult because there are so many powerful interests involved. Although the Soviet Union did not officially collapse until 1991, the democratization process began in 1987 and conservatives have built a narrative that credits Reagan for the collapse. Like the executive of any large corporation, a President takes the credit and the blame.

A President’s administration rarely escapes scandal, and Reagan’s second term was so riddled with scandal that his own Vice-President, H.W. Bush, had to distance himself from Reagan’s policies in Bush’s 1988 Presidential bid. Iran-Contra and the S&L crisis were the most conspicuous of the scandals, but the Keating 5, and the HUD and EPA Grant Rigging to influence elections indicated an administration with lax ethics.

Let’s turn back to the first few months in former President Obama’s first term.  Almost daily came the announcement of another major American company near bankruptcy. In February 2009, a few weeks after Obama’s inauguration, the credit rating firm Moody’s estimated that 15 large companies were close to bankruptcy in the coming year.

The list included Rite-Aid drugstores with 100,000 employees, Chrysler with 55,000 workers, Blockbuster with 60,000 employees, and Six Flags Amusement Parks with 30,000 workers. One of the companies, Trump Resorts with 9500 workers, went into bankruptcy within a month of Obama’s inauguration.

During Obama’s first two years he was able to get some fiscal stimulus enacted and, like Reagan, took on a historic task – health care reform. The tax bill of 1986 was passed by voice vote (Govtrack) so we don’t know the vote by party.  However, the Democrats held the house at that time so nothing could be done without bipartisan bargaining. On the other hand, the health care reform was passed without a single Republican vote. A hostile voter reaction to Obamacare swept the Republicans into control of the House in 2010. The Republican House stymied attempts at further stimulus or much of any fiscal policy to alleviate the economic suffering.

The policy burden of economic recovery rested on the shoulders of the Federal Reserve, who were forced to be extremely accommodative to avoid another recession. Throughout this long and slow recovery, the Fed’s monetary tools have been stretched thin to the point of ineffectiveness.  For several years, they have wanted to raise interest rates to a more normal range of at least 2%. This past year, Chair Janet Yellen felt confident enough to bump up rates by a mere 1/4% in December.  This left the key interest rate in a range of just .5% – .75%.

With one party government Donald Trump has promised to get a languidly growing economy into high gear. GDP growth in the 4th quarter slowed to 1.9%, bringing annual growth in 2016 to a disapointing 1.6%. The post-WW2 growth rate is more than 1% higher.

The bond market is estimating that the Fed will raise interest rates three more times this year. This attempt to normalize interest rates may frustrate the Trump administration, since rising interest rates tend to curb economic growth.  President Trump will likely voice his antagonism but Chair Janet Yellen has pledged to serve out her full term, which expires in February 2018.

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Best President for Stock Market

So you were having a friendly conversation with a co-worker about Obama’s legacy and you mentioned that Obama had been the best President ever for the stock market. The conversation turned not so friendly and the issue was left unresolved because neither of you could find the information at the time. Well, here’s the chart

returnsbypres

Coolidge, the President that many of us forgot in history class, ranks top with annual gains of 25%.

The chart ranks the Presidents by Total Return during their term(s) in office.  Because term lengths vary, a truer rank is by annualized return (many times the rankings are the same). Coolidge tops the list in both categories. #2 is Clinton, #3 Obama, #4 Reagan. The worst on the list were #19 Hoover, and #18 G. W. Bush.

Inauguration 2017

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January 22, 2017

Mr. Trump’s inauguration marks the first time in almost a hundred years that a business person assumes the highest political position in the country.  His cabinet choices share that same characteristic. There will be an inevitable clash of cultures.  Many civil servants are lifers, drawn to the generous benefits of government service, and the stability of employment.  Some may be drawn to the work because it gives them a sense of self-worth.

Many have little experience in private industry and distrust the motives of business owners.  Former President Obama was one of these.  An inspirational figure to some, his antipathy to business interests of all sizes antagonized political foes who challenged him for most of his two terms.

Mr. Trump has a similar weakness – his antipathy to and unfamiliarity with the insular culture of civil servants who work in a massive bureaucracy characterized by a thicket of rules and a lack of transparency.

Work in the private sector is characterized by competition, a striving for efficiency, the changing winds of people’s preferences, and the quality of the services and products we provide.  Employment in the public sector requires patience with burdensome procedure, a tolerance of a heirarchy of both the competent and the undeserving, and a willingness to work in a system that relies less on merit and more on seniority.

What will happen when these two diametrically opposed cultures mix?  Stay tuned.

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Obamacare Kaput?

Since FDR began the custom, Presidents have signed executive orders on their first day in office to signify that they are on the job for that portion of the American electorate that put them in office.  One of the highlights of Mr. Trump’s campaign was the repeal of Obamacare.  Shortly after his inauguration President Trump signed an order stating his intention to repeal the ACA.  The order freezes any further promulgation of rules and regulations pertaining to the act.   I thought it would be appropriate to republish a blog I wrote in April 2011, a year before the Supreme Court ruled that most of the ACA was constitutional.  Like Social Security, ACA premiums and penalties were a tax.

The problems of providing health care and the insuring of that care have not gone away: rising costs, more sophisticated and expensive therapies, more demand for care from an aging population.  The problem is a knotty one:  how to distribute health care costs.  We all benefit from the availability of medical resources, yet these resources are very expensive.  The 24 hour care and equipment that stays idle in an urban hospital must be paid for with funds from other parts of the health care system.

It might surprise readers that more than 50% of the $3.5 trillion in Federal outlays is for Social Security benefits ($930B), Medicare ($600B) and Medicaid and Community health programs ($500B).  Eighty years ago, FDR initiated a new role for the Federal Government: an economic support system. To do that, FDR had to threaten and cajole a Supreme Court reluctant to stretch the meanings of several clauses in the Constitution.

Even FDR would be appalled to learn that the Federal Government has become an insurance company whose chief function is the collection of insurance premiums through taxes in order to pay insurance claims in the form of Social Security, Medicare and Medicaid Benefits.

Readers who would like to read more on a pie chart breakdown of government spending can visit the Kaiser Family Foundation’s fact sheet. Dollar amounts are from the latest White House budget.

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MM Bash

I’m about to bash criticize some of the reporting in mainstream media (MM) publications, whose budgets rely on viewership.  When that audience was more predictable, flagship publications like the NY Times, Washington Post and Wall St. Journal could wait to verify facts before running a story.  In the current 24 hours news cycle and the rush to print, fact checking sometimes comes after the story is published online – if at all.

MM channels rested on their decades old reputations for thorough journalism and were willing to cut off at the knees any reporter compromising that reputation.  More than a decade ago, Dan Rather lost his anchor job with CBS for running with a story about George Bush that had not been properly vetted. News (fact-checked) and opinion (not checked) were clearly defined when they were in separate sections of the newspaper. In this new age when most information is delivered digitally, we are quoting blogs or other opinions that are not fact checked as reputable news sources without verifying the information.

A lie travels around the world by the time the truth gets its boots on. Something like  that.  In today’s lightning fast world of information flow, an apocalyptic news item that can move markets can be tweeted, webbed, facebooked, and retweeted.  “China fires on U.S. destroyer in South China sea!”  “N. Korean missle hits Alaska!” Sell, sell, sell, buy, buy, buy signals can flash instantly to world markets.

Later, it’s no, China didn’t fire on a U.S. destroyer.  China said it would fire if fired on by a U.S. vessel in the S. China Sea.  No, the North Koreans didn’t actually fire a missle.  Instead they said that they had a missle that could fire a nuclear payload on Alaska.  They’ve been saying that for several years.  Most defense analysts remain skeptical.  Oops, nevermind stock and bond markets.

We can not prevent this, nor can we hide our savings under a mattress.  We can prepare by making sure that we have some emergency funds in place.  Most financial advisors recommend six months replacement income.  Only after those funds are in place should we consider that boat we want on Craigslist or the down payment on that house we want to flip.  Don’t just plan to have a plan.  Have a plan.

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Household Net Worth Ratio

The zero interest rates for the past eight years are not natural and have created distortions in business and residential investment as well as stock market valuations. Let’s look at the residential side of the picture.  Below is a sixty year chart of the percentage of household net worth to disposable income.

The majority of the net worth of households is in their home.  The value of stocks and bonds comes second.  One or both of the two factors in that ratio is mispriced.  Perhaps disposable income has not grown to match the growth in asset valuations.  When reality doesn’t match predictions for a time, assets reprice.

What affects the pricing of these assets? The stock market rises on the prospect of sales and profit growth.   Salaries and wages rise as businesses compete for workers in a faster growing marketplace.  Disposable income rises.  Home prices rise on the prospect that more workers can afford to buy a home.

Now, what happens when disposable incomes, the divisor or bottom number in this ratio, don’t rise as much as predicted?  Yep, the ratio goes up, just as it did in 1999-2000 and 2006-2008, the peaks in the graph.

Ten Year Review

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January 15, 2016

10 Year Review

Before I begin a performance review, I’ll refer to an article  on the errors of comparing our real world portfolio returns to the optimized returns of a benchmark index.  An index stays fully invested, has no trading costs, taxes or fees.  An index has survivor bias; companies that go out of business or don’t meet the capitalization benchmark of the index are effortlessly replaced, so there is no risk.  Share buybacks benefit an index but not our portfolio.

The article contains some prudent and realistic recommendations: the importance of preserving our savings, a balance of risk and return that will meet our goals, AND our time frame.  As we review the performance of the following portfolio allocations, keep those caveats in mind.  If a model portfolio earned 8% per year, use that as a rough guideline only.

A 60/40 stock/bond portfolio returned an annual 6.3% over the past ten years with a maximum drawdown (MDD) of 30%.
A  50/50 mix returned 6% with an MDD of 25%.
A 40/60 mix returned 5.75% with a MDD of 20%.

A difference of 10% in allocation equalled a .3% in annual return, and a 5% change in MDD.  Let’s put that .3% difference in dollars and cents.  Over a ten year period, a $100,000 portfolio earning .3% extra return per year equalled about $43 extra per month, or about $1.40 per day.  Why is this important?  For whatever reason, some people worry more than others and may be willing to accept a lower return in order to sleep better at night.

Not all ten year periods will have the same response to various allocations.  The majority of ten year periods will include a recession, but this past ten years included the Great Recession. Let’s look at the historical effect of portfolio allocation during the past ten years.  In the chart below you can see the annual returns of various balanced allocation mixes shown in the left column.  At the end of 2009, the 10 year results show the results of two downturns: the 2001 – 2003 swoon and the 2007 – 2009 crash.

Note that the more aggressive 60/40 allocation has a lower return than the cautious 40/60 allocation during the years 2009-2011.  As we move forward in time, the effects of the 2001-2003 swoon diminish and, starting in 2012, the more aggressive allocation earns a better return.

Not shown in the chart are the results of a 100% allocation to stocks during the ten year period 2000-2009, the first column in the chart above.  A 40/60 allocation had a return of 3.8%.  A 100% allocation to large cap stocks had a LOSS OF 1% per year.

During the 10 year period 2007-2016, a 100% allocation to stocks returned 6.8% annually, a 1/2% higher return than the 60/40 mix, but the drawdown was 51%, far more than the 30% drawdown of the 60/40 portfolio.

High Winds or Hurricane?

A person who spends twenty years in retirement can count on at least two market downturns during that time.  Here’s how MDD, or drawdown, can affect a person’s portfolio.  I’ll present a more extreme example to illustrate the point.  Imagine an 80 year old retiree with a portfolio devoted 100% to stocks.  For several years, she had been withdrawing $40,000 from a portfolio that had a balance of $600,000 in the fall of 2007.  Projecting that her portfolio could earn a reasonable return of at least 7% per year, or $42,000, the balance looked secure.

But by March 2009, a period of only 18 months, the high winds had turned to a hurricane.  Her portfolio, her shelter in the storm, had lost 50% of its value, an MDD or drawdown of approximately $300,000.  During those 18 months, she had also withdrawn $60,000 for living expenses, leaving her with a balance of about $240,000 in the spring of 2009, the low point of the stock market.

Only 18 months earlier she had projected that she could maintain a minimum portfolio balance of $600,000. She had gnawed her nails raw as the market lost 20% by the summer of 2008, then sank in September when Lehman Bros. went bankrupt, then continued to lose value during the winter of 2008-09.  When would it end?

In March 2009, she had only 6 years of income left before her savings were gone.  Unable to stand the loss of any more value, she sold her stocks for $240,000 – at exactly the wrong time, as it turned out.  Her $240,000 earned little in a money market, forcing her to: 1) cut back the amount of money she withdrew from her portfolio to about $24,000 per year, and 2) hope she died before she ran out of money.

Of course, most advisors would NOT recommend that an 80 year old devote 100% of their savings to stocks.  BUT, some retirees might – and have – adopted a risky strategy to “whip” a portfolio to get more income or capital appreciation the way a jockey might do with a tired horse.  On the other hand, some 80 year olds with a very low tolerance for any kind of risk might have all of their savings in cash and CDs, a 0/100 allocation.

Now let’s imagine that our retiree had a cautious 40/60 balanced mix.  She would have had a drawdown of 20%, or $120,000, during the Great Recession.  After withdrawals for living expenses, she still had a balance of about $420,000 in March 2009. At a conservative estimate of a 5.5% annual return, she could have prudently drawn down her portfolio $25,000 – $30,000 for a year and waited. This is important for seniors: an allocation that allows some temporary flexibility in the withdrawal amount from a portfolio.

By the end of 2009, her portfolio had gained about 24%.  After living expenses of about $22,000 taken from the portfolio during the last 9 months of 2009, she had a balance of more than $500,000.  Her balanced allocation allowed her to wait longer for the market to recover.

In 2010, she could once again take her $40,000 living expense withdrawal and still have a $530,000 portfolio balance by the end of that year.  She has weathered the worst of the storm. At the end of 2016, she continued to take out $40,000 (adjusted upward for inflation) and still has a portfolio balance of $486,000.

Finally, her 40/60 allocation mix kept to a rule I have mentioned from time to time: the five year rule. If she wanted to take approximately $40,000 from the portfolio each year, she should have a minimum of 5 years, or $200,000 in bonds and cash – the “60” in the 40/60 allocation mix.  In the fall of 2007, she had $360,000 (60% of $600,000) in less erratic value investments.  This rule helped her withstand the storm winds of the Great Recession.

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Seniors at Risk

Although the number of loans to those 65+ are less than 7% of the total of student loans, a shocking 40% of these loans are in default.  Most of these loans were cosigned by seniors for their children or grandchildren. The law allows the Federal Government to garnish or lien Social Security and other federal payments to cure the loan defaults.  Readers with a WSJ subscription can read the article here or Google the topic.

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Hot Housing Markets

In a recent analysis, western cities rule Zillow’s top 10 housing markets for valuation increases.

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Take this job and shove it!

The latest JOLTS report from the Labor Dept. shows the highest quits rate in private industry since the housing boom in 2006. Employees confident of finding another job are more willing to voluntarily leave their job, and have driven the rate up to 2.4% from a low of 1.4% in the 2nd half of 2009.

Statista compiles data from around the world, including this revealing tidbit: 26% of jobs in the U.S. are unfilled after 60 days, the highest percentage in the developed world. Germany ranks 2nd at 20%, and our neighbor to the north, Canada, comes in at nearly 19%.

What lies behind this data is a mismatch.  Employers may be requiring skills that job applicants don’t have.  Job applicants may want more money or other benefits than employers are willing to pay.

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Obamacare Repeal

The Committe for a Responsible Federal Budget (CRFB) – yep, it’s a mouthful – has projected costs to repeal Obamacare in whole and in part.  Using both conventional, or static, budget scoring and dynamic scoring (google it if you’re interested), they guesstimate a 10 year cost of $150 to $350 billion for full repeal of the ACA.

Repeal of ACA’s insurance coverage would actually save a lot of money, more than $1.5 trillion. The net effect is a cost, not a savings, because of the $2 trillion in tax revenue on higher incomes that is built into the ACA law.

CRFB analysts have put a lot of work into these projections, including a breakdown of repealing just parts of Obamacare or delaying repeal of certain ACA provisions.  Since the Republican Congress is likely to keep some provisions, readers who are interested might want to come back to this link in the coming weeks as the discussion of this issue unfolds.

Sales Tax Collections

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January 8, 2017

The New Year begins, the 9th year of this blog that began during the financial crisis.  For two decades I had studied financial markets but the financial crisis surprised most people.  This was my attempt to organize and share my thoughts.

Sales Tax Collections

Let’s look at a data point that has been a consistent indicator of economic health – sales tax collections. This is not survey data or economic estimates but actual tax collections based on consumer purchases. For the first 3 quarters of 2016, sales tax collections are up 1.6% above the same period in 2015. (Census Bureau)    As we will see, this tepid growth rate does not compare well with the historical data of the past 25 years.  Below is a quarterly graph of sales tax collected in the 50 states.

As we can see in the graph above, the 2nd quarter (orange bar) is the highest each year, and is a good indicator of consumer activity and confidence. Since population growth is about 1%, the annual growth of sales tax collected should be above that mark to be effectively positive.

In the graph below, we can see negligible or negative growth in 2001, 2008 and 2016. In 2001 and 2008, we were already in recession, although it took the recession marking committee at the NBER almost a year to declare the beginning of those recessions.  By selecting the 2nd quarter growth rate in the historical data, we can more easily see the weakness at the start of an economic downturn.

In retrospect, 25 years of data is rather sparse.  We can only hope that this year’s lack of sales tax growth may turn out to be a warning sign only, a fluke.  Third quarter tax collections were effectively positive, but only 2% growth, and that annual growth has consistently declined in the past three years in a pattern exactly like the weakening of 2006 – 2008.

Of particular note in the graph above is the steep 10% drop in sales tax collections in the second quarter of 2009. Fom a vantage point eight years in the future, we may have forgotten the degree of fear during the winter of 2008-2009.  The American people were holding onto their money.  State budgets were crippled by the lack of sales tax collections, an important and ongoing source of revenue for state and local governments.

See end for a side note.

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Population Growth

Business Insider published a chart of 2015-2016 population data from the Census Bureau.  We can see a clear shift from the northern states to the mountain and southern states.  Retiring boomers, who want to maximize their fixed incomes, will shift from states with high state income and property taxes like New Jersey and New York, and move to states with lower taxes.

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Tax Reform

In a few weeks Republicans will control the legislative machinery, and have promised  tax reform that, after thirty years, is overdue.  One of the proposals on the bargaining table is the end of the home interest deduction, which prompted this blog post at Slate.  The author contends that the elimination of this deduction will hurt middle class homeowners, who will see the value of their homes decline by 7%.

I’ll add in some contextual data from the IRS.  In 2011, 22% of the 145 million (M) returns claimed mortgage interest totalling $321 billion. ( IRS tax stats Table 3) People making a middle class income of less than $100K claimed half of that interest – 14% of all returns.  The average interest deduction for these middle class households was $8100.

Two million returns with incomes of $500K and above claimed $46B in mortgage interest, about 15% of the total interest claimed.  For these high earners, the average deduction was $20,000.

The tax reform of 1986 eliminated the interest deduction on credit cards and cars, but lawmakers could not go the final distance and squelch the home mortgage interest deduction.  At the time, auto dealerships complained that, without the interest deduction on new car loans, their business would suffer.  Tax subsidies affect both consumers and the businesses who are indirect recipients of the subsidy. Should 78% of taxpayers subsidize the housing costs for 22% of taxpayers?   Certainly, the 22% appreciate the subsidy! The real estate industry continues to resist any tax changes that might have a negative impact on their business.  Each industry deserves a subsidy of some kind because that industry is important to the overall economy – or so the argument goes.

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The End of Capitalism – Almost

Let’s get in the wayback machine and dial in 1997.  The dot-com boom is not yet a bubble but is growing.  Cell phones are growing in acceptance but the majority of people do not have one.  A one year CD is paying more than 5%.  The unemployment rate is about the same level as today (2016).  What is very different between then and now is the number of publicly traded companies.  In 1997, there were over 9000 listed companies.  Today, there are about 6000 companies.  The 2002 Sarbanes-Oxley (SB) law has such stringent and plentiful financial reporting regulations that many companies decide not to go public, or to sell themselves to a larger company that already has the internal infrastructure in place to comply with SB regulations.  Both parties want to repeal or amend the law but cannot agree on the details.  Readers can click for more info.

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Next week I will compare the 10 year performance and risks of various portfolios.  There are some surprises there.

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Side note on Sales Tax.  The Federal Reserve charts retail sales but these are based on data samples and will not be as accurate as the actual tax collected.  When retail sales are adjusted for inflation, the year over year growth can give a number of false positives.  In the graph below, I have marked up periods that went negative without the economy going into recession.  I think that the actual tax collected may be a much more accurate predictor of economic weakness.

Post-Election Bounce

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January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.

Homeownership

The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)

Earnings

Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.