Altus Insight: April, 2017

The Altus Insight

Market news, commentary and relevant topics for today’s alternative asset investor

Date: April 30, 2017
FR: Forrest Jinks
RE: Hard Goodbye

This past month, Altus Equity lost two members of the extended Altus family when our investment partners and friends Mark and Brenda Richard’s plane crashed in the Sierras. This tragedy was a reminder that with the harried nature of our professional lives, we sometimes forget the true treasure we have built here at Altus Equity. Yes, we need investment dollars to be a successful business, but our real and lasting wealth is the relationships we have created with our stakeholders, and this is something we could never put a price on.
We didn’t get to know Brenda as well as we did Mark, but through our interactions with Mark everyone in the company grew to love the man. I certainly considered him a friend. While losing them both is heartbreaking, they wisely took measures to ensure that those left behind could carry on without them, and not just financially, but they taught the importance of love, responsibility, and nurturing strong relationships. It has been a rough few weeks for our office as we process the event, and I can only imagine how much more difficult it is for their four daughters. Our thoughts and prayers truly go out to everyone who had the good fortune to know Mark and Brenda.
I am so grateful that I had the opportunity to know Mark and Brenda, and I am thankful for the many great relationships that I’ve been fortunate enough to build over our years in business.  Please know that I appreciate each and every one of you.

Before jumping into the main body of this month’s article I want to comment briefly on the reactions to the one page tax plan overview that the Administration released this past week.

  1. Just as with the House tax plan released a few weeks ago, there were immediate complaints that the tax breaks favored the wealthy (I think the commenters probably meant high-income earners, but they may not know the difference). Ten percent of US taxpayers pay 90% of the country’s income taxes. So far as I can tell, it would be impossible to introduce economic growth-inducing tax cuts without high-income earners having a disproportionate absolute benefit. It is simply math.
  2. A lot of people are pretty worked up about the idea to reduce corporate taxes to 15%. The top statutory corporate income tax rate is 35%, the third highest in the world and only lower than Chad and UAE. Despite this statutorily high rate, corporate income taxes comprised only 11% of all federal tax receipts in 2016, $444B in absolute dollars. If we assume all corporations pay the highest 35% tax rate (they don’t), the 15% corporate tax rate proposal would reduce corporate tax collection by $250B. There is no question that is a lot of money, but that is less than half of the budget deficit in 2016 and less than half of defense spending. The logic driving those most upset by this proposal does not take into account that corporate tax receipts won’t drop the full 20% of corporate taxable income.  This perspective also doesn’t consider that it will cause an increase in other taxes, through increased dividends, payroll taxes, etc..
  3. The stock market rallied after the Administration released its one page overview. This latest rally is on top of stock market growth equivalent to three times the value of the best-case benefit of tax “reform” as President Trump presented in the run-up to the election. In fact, the stock market increased more in the first 100 days of the Trump presidency than any presidency in history. Either people are investing in euphoria (a pretty dangerous place to be) or they are investing because they think other people are investing in euphoria, and that they can get out in time if the market reverses course. Time will tell.
  4. Historically when the federal government has lowered taxes, it has led to increased growth rates and when it has increased taxes, it has led to lower growth rates. However, never before in US history have we had such elevated levels of governmental indebtedness. Study after study have shown that once a country passes a certain point of indebtedness (somewhere around 100% of GDP, depending on the study) economic growth becomes constrained. The current administration is hoping to spur growth through a combination of tax cuts and spending. We have already seen that spending and accommodative monetary policy haven’t worked. All we are is deeper in debt. As much as I hate taxes, I am far more concerned with short term “solutions” for structural fiscal issues. In the parlance of our industry, painting over dry rot doesn’t take care of the dry rot, it just hides it for a little while until the structure itself becomes compromised and the cost to remedy has vastly increased.
  5. The above bullets are not arguments in favor of, or in opposition to, decreasing corporate taxes. They are not arguments as to whether or not there should be tax cuts or tax restructuring. They aren’t really even an argument as to what should be happening to stock prices. They are simply pointing out that as investors, and as voters, we need to understand information in the appropriate context. Nearly anything taken out of context can create hysteria, but the only association investors should have with hysteria is investing when there’s blood in the streets (as Warren Buffet would say).

As a follow-up to last month’s article, this month’s topic is going to touch on one of the untouchables, Politics. Politics and religion are considered the two untouchables of conversation within our society. (In the south, SEC football may approach the same level.) The reason for the taboo is most of us are more close-minded about our politics and religion than anything else in our lives. As a result, we fall into a habit of selective perception, quickly accepting and assimilating information that supports our existing beliefs while quickly discounting information that threatens our assumptions.

Other than Dr. Spock, all of us are guilty of this bias, though to vastly differing levels. For many people their religious beliefs may cause an increase in investment inclination in or away from certain things/companies/strategies, but our political beliefs have a much deeper impact on our investing. For one, political beliefs may result in similar investment discernment as associated with religious beliefs as per the above, but probably on/in different investments. From my thinking this seems to be healthy, as it is a conscious decision to do, or not to do, something based on our beliefs of the way we think things should be. Our political beliefs become dangerous when our selective perception influences our thinking beyond beliefs about the way things should be in the future, and into altering our cognition of the way things currently are.

As is often said, hope is not a strategy, and without acceptance of what currently is, or what is imminent, or really even what is possible, we can wind up in a position that can cause financial harm. Our psychologies will recover from the pain of having our paradigms destroyed, usually quickly and with many justifications, but our portfolios are tied to the real world.

While correlation between our political views and that of our parents has been shown to be much lower than previously thought, other stimuli (like opinions of our friends, preaching or teachers, etc.) have been shown to have a greater impact, with some recent studies even saying our political leanings are tied to our brain composition. Whatever the source of our original political viewpoints, once ingrained our political leanings are hard to shake, even in situations where there is a clear disconnect between our belief and the vote we are casting. The fact that so many Republicans voted for Trump despite actions and platform so contrary to many Republican’s core beliefs, illustrates our likelihood to vote with the party we have historically associated. (Perhaps the most amazing outcome of the 2016 election may not be just that Donald Trump was elected president, but that so many non-Republicans bucked party lines, and their own historical political associations to vote for him.)

These tendencies may be magnified by our current two-party system since options outside of the main parties are considered fringe, and can be lonely places to be. However, there is considerable evidence that the platforms of each of the main parties is/has changed. Do we, in following our selective perception bias, adjust our beliefs to remain in harmony with the new party platforms? Do we become disengaged? Or do we change to the other major party, which we have been conditioned to think of as evil (which may be the most difficult of all outcomes)?

Political parties in the US don’t represent what they used to, or even what many US citizens think they still do. Ongoing arguments/fights between those entrenched within each party are the result of decades of habits, and old habits die hard. However, as people are able to step back from the emotional ties to their political associations, and as younger voters/politicians develop that have different emotional associations, this will start to change. Slowly over the past several years, and certainly going forward, the true political divisions are going to not be along the historical political party lines. I believe they will instead be focused around globalism versus populism, and among the various classes and societal groups (this part isn’t new, as we’ve seen with such issues as abortion and the death penalty).

While I had no understanding of the implications at the time, I wrote an Altus Insight almost eight years ago, pointing out how similar George W. Bush and Barack Obama were in their positions across a myriad of issues. While there were obviously differences, the similarities were more comprehensive than those differences. I can already hear strong Republicans saying that Bush wasn’t a true conservative. Maybe, maybe not. But more likely, the definitions of liberal and conservative have changed. Below are two lists describing candidates from each of the parties. View this list through the lens of the 1984 or 1992 election and then choose which candidate was more likely to be associated with which party for that election, at least according to the “common knowledge” of the time period:

 

Candidate #1                                                      Candidate #2

Nation building                                                   Isolationist

Free Trade                                                        Restricted Trade

Globalist                                                           Candidate of Change

Big Business Support                                        Massive Deficit Spending

Support of Wall Street                                        Working class support

Support of big banks                                          Candidate of revolution

Candidate of the rich                                          Controversy about morals

Status Quo candidate

Interventionalist

I think most people, in reading through those lists with the time frame above in mind, would quickly point out Candidate #1 as the Republican candidate and Candidate #2 as the Democratic candidate. In this most recent election those characteristics were primarily reversed, though obviously with many shades of grey. For instance, Hillary Clinton’s economic plans also included large amounts of deficit spending, but nothing to the extent that Trump has proposed. Another example is Clinton’s (and the Democratic Party as a whole) support of increasing trade pacts and easing trade restrictions, a stance historically associated with the Republican Party. Meanwhile, Trump gained the support of a large swath of unions, historically a Democrat stronghold.

The lesson here is probably similar to the lesson last month - self-awareness is a key to making good decisions, certainly in investing and probably in life. It is easy to look at Europe and develop opinions, but still stay somewhat neutral to the outcome. It is much more difficult to do so when considering events more close to home. Self-preservation, usually manifest as preservation of our preferred status quo, not just physically but emotionally and psychologically, is a powerful influence in our lives. And while this isn’t necessarily a bad thing, it can be a dangerous force if not paired with the self-awareness to know we are acting on it.

Happy Investing.

Forrest Jinks