Money & Politics: Will You Vote This November?

Posted by   admin on    October 9, 2010

Money & Politics: Will You Vote This November? 

In the next couple of weeks, registered voters in the U.S. will get another chance to influence our nations direction. I may be biased by short-term thinking, however, never before can I remember passions being so strong and ideologies so divided.

I'm opting to believe that the depth of the recent economic downturn stirred these fires. During much of 2008, the downward spiral of the U.S economy had everyones attention and most were fearful about the future - we were fearful about our financial well-being. In the run up to the November 2008 elections, Democratic candidates were more articulate in describing their plans for leading the nation back to prosperity. The result of those elections allowed the Democrats to achieve unchecked power and a significant shift towards increased social programs, regulations and spending. Now, there is much debate about the need to raise tax rates on a portion of the population - the wealthy - to maintain the cost of new and existing governmental programs.

The offshoot of these wide differences in ideologies and of the one-sided representation in government has manifested a passionate political Tea Party movement:

From Wikipedia - The Tea Party movement is a populist political movement in the United States that emerged in 2009 through a series of locally and nationally-coordinated protests. The protests were partially in response to several Federal laws: the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and a series of health care reform billsThe name "Tea Party" is a reference to the Boston Tea Party, a resistance movement throughout British America against the Tea Act, which had been passed by the British Parliament in 1773. Colonists objected to the Tea Act for a variety of reasons, especially because they believed that it violated their right to be taxed only by their own elected representatives. Tea Party protests have invoked themes, images, and slogans similar to those used during the pre-revolutionary period in American historyThe movement's primary concerns include, but are not limited to, cutting back the size of government, lowering taxes, reducing wasteful spending, reducing the national debt and federal budget deficit, and adhering to the United States Constitution, among other issues.

In the discussion that follows, I'll not try to sway your political ideology - even though my occupation pushes me towards moderately conservative beliefs. Instead, I'll seek to provide some thought provoking commentary to help you sift through the political rhetoric as we quickly approach this Falls elections. And, by all means, this is one election season that you'll want to get out and vote!

The Battle of Political Ideologies

The following excerpts were adapted from the publication article "Political Parties in the United States by John F. Bibby as reflected on America.gov:

When America's founders wrote the U.S. Constitution in 1787, they did not envision political parties playing a role in the government. Rather, they expected constitutional provisions such as separation of powers, checks and balances, federalism and indirect election of the president by an electoral college would deter the formation of parties.

Despite these provisions, the United States in 1800 became the first nation to develop political parties organized on a national level and to transfer executive power from one party to another via an election. By the 1830's, political parties were an established part of the U.S. political environment.

Today, the Republican and Democratic parties are the two main political parties in the United States. Most elected officials serving as president, congressional representative, state governor or state legislator are members of one of these parties. The Republicans and Democrats have dominated American politics since the 1860's, and every president since 1852 has been either a Republican or Democrat.

Compared to political parties in other democratic nations, political parties in the United States tend to have relatively low internal unity and lack strict adherence to an ideology or set of policy goals. Generally, Republicans have tended to support limiting federal powers and protecting the authority of state and local governments, to take a conservative approach to taxation and spending, and to oppose government interference with free enterprise. In contrast, Democrats have tended to take a more expansive view of the powers of the federal government, to support raising and spending money to address social ills on a national basis, and to favor federal regulation as a tool to improve business practices. But these are broad generalizations: In U.S. politics, conservative Democrats and moderate or even liberal Republicans are not unusual.

The major focus for both political parties is winning elections and controlling the personnel of government 

U.S. presidents cannot assume that their party's members in Congress will be loyal supporters of presidential programs, nor can party leaders in Congress expect all members of their party to vote along party lines....

For many of my gentle readers, the general differences in political ideologies of Democrats and Republicans are well known. However, this just sets the stage for a couple of comments.

Long, long ago, when I was just beginning my financial career, a financial services CEO shared with me his thoughts about the rivalries that were common within his firm. He contended that the heads of the marketing department and the accounting department were always at odds with each other - both forever challenging each others worth to the company. Rather than tire of the rivalry, he viewed this dynamic as a healthy one.

When asked who influenced his thinking most, his retort was the I listen to them both. He went on to explain that if left to their own devices, the marketing people would spend the company's money faster than they could generate it and bankrupt the business; if the accounting people were given too much power, they would likely be so overzealous about cost cutting that they put the company through a slow liquidation. He contended that a balance between the two was necessary to promote the business toward healthy and sustainable growth.

Now, by this little story, I am not implying that all marketing people are Democrats or that all accounting people are Republicans. However, I am suggesting that bad things can happen when one political party is allowed to shape public policy without a healthy balance of both ideologies.

From the 2008 elections, we found ourselves with a liberal Democrat as President and liberal majorities in both the House and Senate. This has lead to rapid public policy changes that have broadly expanded social program spending and has been unfriendly towards business. This has provoked a number of concerned citizens, likely ones who feel ideologically alienated, to become part of or support the current Tea Party movement.

Public Vs. Private (Governmental Vs. Business) Sector Differences

While differences in espoused ideology can lead one to believe that voting for a Republican candidate will help to create a more fiscally conservative government, it is often more helpful to consider the bigger picture. Voting Republican, doesn't guarantee that you will be voting for someone who is a fiscal conservative.

For example, President George W. Bush started his presidency by pushing for one of the largest tax cuts in U.S. history. Then, his priorities were greatly altered by the terrorist attacks of September 11, 2001. Thereafter, government spending and regulations significantly expanded with a primary focus on national security. Yet, September 11th offers little explanation why he is also attributed with expanding Medicare entitlements.

This is not meant to be critical of President Bush as the events of September 11th were quite emotional for the nation. However, afterwards, spending policies went out of control and became uncoordinated with the tax cuts passed.

When Republicans act like fiscal conservatives, they have won, again and again. And, when they have spent with reckless abandon, they have lost -- again and again.

Let me propose that it may be inappropriate to think of the words fiscal conservative as holding the same meaning for all people; or that all powers rest with our elected President. The concepts of finance and decision-making have different connotations attached for those in the public sector (like government) versus those in the private (business) sector.

In the private sector, a company is considered fiscally conservative when it simply pursues a single priority of maximizing profits. However, in the public sector, fiscally conservative can have multiple meanings:

  • It can mean seeking to accomplish more than what was intended with the money allocated to a specific goal(s); or,
  • It can mean reducing wasteful spending while continuing to spend the entire appropriated budget towards the policy goal(s); or,
  • It can mean the act of advocating against deficit spending, to name a few.

In the public sector, fiscally conservative does not necessarily mean reducing the federal budget, curtailing various spending programs, reducing the rate of national borrowing, paying off the national debt or reducing the cost of administering regulations. If you seek a more conservative government, sift through your favored candidates rhetoric closely.

Next, understanding how decisions are made and implemented at the Federal level should alert you to why the upcoming Fall elections are very important.

Unlike, in the private sector, where decision-making authority is commonly very centralized with the company's president, President Obamas authority is limited by the U.S. Constitution. Written in 1787, The Constitution was crafted as the main law in the United States and each subsequent law passed here must agree with it. The Constitution explains how our Government is to be run and sets forth the responsibilities of three branches:

  • The Legislative branch is charged with making laws. This branch is made up of 100 Senators (two from each State) and 435 House Representatives (whose numbers are determined for each State by its population). Together, these groups are referred to as the Congress.
  • The Executive branch is charged with administering and enforcing the laws. This is where President Obama, his Secretaries, Advisors and the people who support them fit in.
  • And, the Judicial branch is charged with interpreting and applying the laws. This branch includes the Supreme Court and nine Justices who interpret laws according to The Constitution.

So, the significance of this Falls elections is that we are getting the opportunity to vote for those people who make the laws. This is not to say that President Obama is powerless. His office holds great respect and he is our nations #1 lobbyist. He lobbies Congress to tell them what he wants and lobbies our nations citizens to influence how Congress acts.

This leads me to discuss an interesting conversation I had with a Washington lobbyist that I met at a business roundtable hosted by GE Capital last month. When asked about his thoughts on how Washington might be impacted if Conservatives gained a majority in the House of Representatives, he made some interesting comments:

He didn't expect Obama to follow the path taken by Clinton. Clinton modestly opposed Congress and moved more towards the center on issues. The lobbyist expressed that as President Obama has remained so strong to his convictions, he would more likely be very vocal against a Congress that sought to block his agendas and would blame them for any failures. His response suggested that the best conservatives could hope for is grid-lock.

For investors and business owners, gridlock might not look so bad.

ELFs Outlook and September Performance

The month of September saw markets rise strongly off of August lows  seemingly all encouraged by the expectations of another round of quantitative easing (the code name for printing money) by the Federal Reserve Bank. FRB officials have expressed intentions to deter deflationary forces through additional easing - they want to create some inflation. Over the past month there was little encouragement in reported economic indicators that remain mixed. Apparently QE2 is floating all boats despite weak to mixed fundamentals in the economy. I don't know about you, but I'm already seeing higher prices at the gas pump and in the supermarkets and don't understand how invoking artificial inflationary forces is going to help households already struggling with high unemployment. PIMCO's co-CEO, Mohamed El-Erian characterizes QE2 as an interesting experiment by the Fed.

While the markets are signaling pleasure with the possibility of QE2, it seems a risky proposition to me. As many economists believe that increasing the money supply should lead to GDP growth, I think artificially stimulating inflation could also serve to slow the velocity with which money changes hands. So, the result could back-fire. In the economic equation M (money supply) x V (the velocity with which money changes hands) = GDP. If V slows faster than M grows, then GDP will decrease and that spells recession.

We took the opportunity to slowly sell into this rally and raise cash levels above 50% in our portfolios. This will have us under-perform against the averages to the upside, but also buffer against any reversal in this QE2 exuberant sentiment. If the QE2 story creates real momentum in the economy, well happily take on more exposure.

Our portfolio clients ended the month of September up 5.16%. Here are some comparative numbers for you to review:

ELF-strategy-chart-sep10.gif

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ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.

The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.

ELFs' performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELF's ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.

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