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Gridlock or Governance



November 24, 2010 – Comments (0) | RELATED TICKERS: C , EXAS , GMO

A week after the third consecutive monumental Congressional elections in which seat turnover was extremely high, what do we take away?  Conservatives would claim that the United States has taken a decided turn to the right and that liberalism in America is dead.  I find these conclusions hard to believe.

Let's look at a little history in figuring out what happened and what it will lead to.  In 2006 and 2008, the Republicans lost dozens of seats in Congress, after holding Congress for 12 years from 1994 to 2006, leading to the unusual condition in 2009 that the Democrats had a lock on Congressional politics with a 60% super majority, something that rarely happens.  Did that spell doom for the Republican Party?  Hardly.  In the wake of large losses in 2006 and 2008, the Republicans won more seats in one election last week than in recent memory (maybe ever, I didn't check).  

So, in the past four years we have seen both parties severely repudiated.  That does not bode well for either party's extreme edges.  It may however bode well for American politics and America in general.  It seems logical to me that mainstream Republicans- yes, there are some around despite the Tea Party- realize that the working middle of the country holds the hammer in elections and has wielded it with regularity lately by whacking both parties.  It would be foolish to assume that the moderate, "let me work, leave me alone and protect me," middle of the country wants another severe swing in government policy.  The recent elections have had more to do with frustration with politicians and the economy in general than any shift away from centrist viewpoints among the majority of Americans.


Split Government is Good

In 1994, the Republicans took Congress while Democrat Bill Clinton was President. What followed was an impressive economic run.  In October we explored that the 1990s boom was largely demographically driven, but we can recognize that Government did not screw things up catering to either extreme, at least through 1999. 

Will we see such an impressive economic run now that we have split government again?  Probably not.  The demographics just do not support a large economic resurgence in the short run.  However, what we should see are policies that build for the future of America while not further depressing short term standard of living.  

I say, that we should see such policies.  There is a possibility that I am wrong and that reasonable heads do not prevail in formulating government policy.  There is a possibility that demagogues like Mitch McConnell and Jim Demint, and inexperienced economically challenged Tea Partiers hijack government and either pass no legislation at all or pass bad legislation.  It would not be surprising if that happened, but I would be surprised if self preservation does not kick in on Capital Hill and centrist compromises are not reached.

Let's suppose I am correct and government works efficiently, what would we likely see:

A realization that in the short run, monetary and fiscal stimulus is necessary to prevent a decline in middle America's standard of living.  The American balance sheet is in far better shape than it gets credit for by those who use fear to gain power.  Austerity for ideological reasons could very well cause the type of social unrest in America we are seeing in Europe.  We must remember that the nation does not run like a household.  It runs like a large business that presumably has a very long life span.  Prudent borrowing against that long life of earning is essential to smoothing out rough patches.

That in the intermediate term, government spending must moderate and that in the long run government spending must approximately balance.

That the money government spends ought to go to productive ends, such as rebuilding infrastructure, education and research & development support.

That a domestic energy policy overhaul is vital to the long term health of the nation.  Such a policy needs to be supportive of natural gas, nuclear power and solar power as the energy sources of choice for the rest of the century.

That there is an admission that the health care reform is good for most Americans and small business in particular, and that outright repealing it would be a mistake, although tweaking it is necessary. Cuts in redundant, outdated and unneeded military spending actually get made.  I do not think that many people realize that half of the military spending on the planet is by the United States.  We really could do with a few percentage points less and be just as safe.

States continue to get adequate Federal aid, but on the condition that states balance their budgets over the next decade or so.

Government does not shut down cutting off essential services that millions rely on.

There is more of course, but those are the basics off of the top of my head that we need to see in order to be lined up for exiting what I have called a demographic depression.  I hate to sound so dire, but if the government misfires yet again, as it did in the early 2000s by deregulating too much and recently by not focusing on the economy, a real crisis will unfold, a crisis far greater than having a little too much intermediate term debt.


As I discuss with regularity, most risky investments should be avoided.  Only knowing what you are invested in seems to be a prudent approach.  This is why I use few mutual funds, and the ones I do use are not what most financial people use.  We are more concentrated, ala Warren Buffet, than most investors.  We take less risk than most investors.  When we do take risk, we look for returns that beat the market by a lot.  We have done pretty well by not following the crowd.  I will be adding a page in the next few weeks that discusses our bifurcated investment strategy which we have been discussing in our annual investor meetings.


Given the tone of this letter it might be hard to believe that I think that America is the greatest nation on earth.  While we have enormous challenges ahead, we also have massive gifts.  In the past century the United States has been the greatest force of good in the world.  We have helped liberate entire nations.  We have helped people around the globe improve their standard of living.  We have been able to do it despite occasional mistakes and miscalculations because we are brave, free and hard working.  So, this Thanksgiving, I plan to spend some time with family and friends enjoying the fruits of our labor and resting because I know that there is more to be done.

Your "loving the world even though it's tough" advisor.


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