Long-time readers of this column know I have entrusted an ever-growing portion of my retirement account to Chris Brown’s small Aristides Fund, because he’s smarter than I am (which is annoying) and far more disciplined when it comes to investing (which is why it’s the portion of my retirement account that’s been ever-growing).
I thought you might find his February 4 letter, in which he’s become increasingly cautious about the market, interesting. Between longs and shorts, he is now only 23% long.
I feel oddly disconnected with the general confidence reflected in the broad market these days. . . .
When the fire alarm goes off in your office building, what do you do? Most people tend to look at the other people around them, to see what they are doing. If everyone else just goes back to work, it is likely you will also just go back to work. If people start to leave, you will probably leave. It’s like in college where if a couple of folks stand outside of a closed classroom door, the other folks who come behind them will assume it is locked, and wait for someone to unlock it. I’m the odd bird who can’t resist just trying to twist the knob anyway, even if I am the 14th person to arrive.
It’s no secret that I’m not a fan of President Donald Trump. Because he is the President of the United States I want him to succeed, from a policy perspective. I’d actually be very happy to see him reelected in 2020 if it was because of successful policy and not because we were engaged in a major war or because people come to be brainwashed by a propaganda campaign. I am trying my best not to let my personal opinion of the President influence my view of the U.S. macroeconomy, but it is hard. . . .
Since Trump’s election, other than one brief trade on election night, we hadn’t really tilted our total net exposure one way or the other because of him. But it seems like it might be time for that to change, and on Thursday, we tweaked our net exposure down from 26% to 23%, via a short in the Russell 2000 Index ETF.
In the first two weeks of the Trump presidency, instead of getting the best parts of Trump, and the best parts of Bannon, and the best parts of the Republican leadership, instead of there being some sort of thoughtfulness and synergy, where meaningful conversation cancels out most of the bad ideas or the rash moves, and sensible policy prevails, what has actually emerged has been nearly the opposite.
Take Steve Bannon, the President’s chief adviser, for example. Bannon believes that the force for good in the world is an enlightened form of capitalism tightly combined with Judeo-Christian beliefs. This good is under assault from state-sponsored “crony” capitalism, from a kind of libertarian capitalism (a Marxist caricature of capitalism, in which people are treated as commodities), from atheists, secularists, from elites and globalists, and most notably, from the new Caliphate, which we are we are in the early phases of a global war with. Islam, in Bannon’s public comments, is not ever similarly placed as Judaism and Christianity as a major world monotheistic religion, but is only discussed as an ideology, for example “the ideology of expansionist Islam.”
Now, let’s compare Steve Bannon’s stated belief system with the things Republicans did in the last week: ban travelers and U.S. permanent residents from seven predominantly Muslim nations (Bannon approves), eliminate the fiduciary rule for financial advisors (crony capitalism), allow coal companies to dump pollution in streams (crony capitalism), allow oil and natural gas companies to make undisclosed payments to foreign governments (crony capitalism), make it easier for mentally ill people to buy guns (libertarian capitalism). Literally, only the worst, most objectionable parts of Steve Bannon’s agenda are actually getting done.
I am somewhat at a loss as to how Americans are currently demonstrably more afraid of terror attacks than they are of gun violence (this has been shown in reputable polling), in spite of gun violence being greater than 50-fold more of an actual threat. I am also at a loss as to how American fear crime from immigrants, who have been shown to commit less crime than non-immigrants. And I am likewise at a loss that people are scared of men and women who literally risked their lives to translate for and to help our soldiers in Iraq, so scared that they don’t want to let them into our country, even after two years of vetting. It doesn’t make rational sense. But it does make sense in the realm of confirmation bias, if one is constantly exposed to anecdote upon anecdote that paints a picture, an untrue picture, that we live each day under an existential threat of radical Islamic terror, and that we “don’t know anything” about these people who want to come live here. The administration is constantly fomenting this fear, both with ridiculousness such as Kellyanne Conway’s “Bowling Green massacre,” and with choices about what facts they do and not consider worthy of attention. For example, Trump quickly and repeatedly condemned the “radical Islamic terrorist” who threatened the Louvre with a machete, while saying nothing about the slaughter of six Muslims by a Christian white extremist in Quebec this week. Trump’s recent immigration order even included a provision to publish a weekly comprehensive list of crimes committed by non-citizens.
These actions, aside leading us towards an unwinnable perpetual war against 1.6 billion people, strike at the very heart of the American economy. The number one correlate of long-term economic growth is educational attainment. In the United States, we have experienced unprecedented prosperity in spite of a fairly middling K-12 educational system, because we have the best university system in the world, attract many of the world’s top students to our colleges and universities, and keep many of those graduates employed here, in many job-creating enterprises. We also have immigrant-visa programs that attract high- skilled labor from other countries, helping to power our most successful businesses, and in turn creating more jobs. Sergei Brin, Andy Grove, Jerry Yang, Elon Musk, Do Won Chang, Vinod Dham, and other immigrants have created tens of millions of American jobs.
The number of students, professors, physicians, and engineers affected by the recent ban of travelers from seven predominantly Muslim countries is relatively small, but it speaks to a growing sense that immigrants of all stripes, or at least non-white/non-Judeo-Christian immigrants are less welcome here. It has been reported that certain agency heads advised President Trump against including green card holders (U.S. permanent residents) in the recent ban, but Steve Bannon prevailed over their objections. This is the same Bannon who believes there are too many Asian and South Asian executives in Silicon Valley, and the same Bannon that, when Trump expressed in a radio interview that we should try to keep the best and brightest students from around the world as citizens after they have studied here, did not agree. The result of Trump’s presidency thus far is that the rest of the world is starting to view us as unwelcoming.
My father-in-law, a typical Right-leaning, family values, middle-class Hindu engineer, in Hyderabad, India, doesn’t usually talk politics when he calls his daughter, but this week he couldn’t resist commenting on the “crazy” stuff Trump was doing and hoping that Americans speak out against it. This cannot be good for foreign student enrollment in U.S. universities.
We don’t know what the Federal budget is going to look like yet, but there are strong rumors that the President’s advisers are using a blueprint from the Heritage Foundation which would largely gut non-defense spending by nearly 40% in several large categories. If that happens, it’s highly likely that there will be large cuts to the funding of scientific grants which now sustain America’s global lead in basic science research.
If, as has been rumored, visa programs change such that Apple, Google, Facebook, Microsoft, First Solar, and other advanced technology companies will no longer be able to hire sufficient talent in the United States, these companies will be forced to hire incrementally more staff in other locations, or to outsource work to companies outside of our borders.
Direct investment in U.S. has benefited tremendously from the fact that we have such strong institutions, world-leading intellectual capital, and a reasonable and welcoming immigration policy. Capital goes where it is treated best. Tax rates are certainly a huge part of that equation as well, but it’s important to remember that effective U.S. corporate income taxes are already in-line with other large developed nations around the world. There’s only so much room to lower them, and lowering them in a revenue neutral fashion (while closing loopholes) is only a very small net positive catalyst for the economy. Most people are only going to want to put their capital here if they feel welcome here.
So, long story short, I’m quite wary of the political influence on the U.S. economy right now, and stock market prices (and recent asset flows) suggest there is a pretty good amount of optimism already baked into valuations. We are likely to proceed with caution “until our country’s representatives can figure out what the hell is going on,” to quote our President. Kidding, but not kidding. I am not sold on a bearish view; anything as complicated as running the country is a learning process, and hopefully our strong institutions, including the judiciary and business leaders, can help the President put things on a more constructive path going forward. Narcissistic Personality Disorder, though, is a really big challenge for a guy who has to look out for 319 million people who are not himself.
Also, you should probably know that we spend almost all of our time working on bottoms up, one company at a time, investment ideas, not top down macroeconomic thinking, especially now, when it is earnings season. But, this letter was more fun to write than one that describes the selection process behind a bunch of new small positions. I hope it was more fun to read.
Thank you, as always, for your partnership. Have a kind February.
Christopher M. Brown
I’d also like to put in a word for red cabbage. It’s been a while since I offered a Cooking Like A Guy™ recipe, so here it is. Buy a head of red cabbage. It’s cheap. And heavy! But you’re a guy! Just carrying it home along with the beer will work biceps. Now put it in the refrigerator. It will stay good for weeks. Now, when you’re hungry, just peel off a leaf and eat it. Kinda crunchy. Or use those leaves instead of bread — if you’re on some kind of low-carb cave man diet — to make sandwiches. (That’s right: with the chicken salad wrapped in a cabbage leaf.) I’m not a fan of red meat, as you know — bad for the planet, bad for your arteries, no fun for the cows — but I’m a fan of red cabbage.
Oh! And don’t forget to call your Valentine.
Quote of the Day
The only thing I like about rich people is their money.~Nancy Astor
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