Now What?
David R. Kotok
April 29, 2013

 

 

Last week, the public was enraged by the needless disruption in air traffic. People created websites, made calls and sent email to Congress and the White House, and launched an attack on Democrats and Republicans alike. In one week, the wrath of the American citizenry created a necessary and successful change in policy. It demonstrated that angry American voters can coalesce around an issue when their anger reaches the boiling point and they set aside partisan politics. They said to their elected representatives, “You, Senator and Congressman [not "Democrat" or "Republican"] are responsible for poor governance.”

It took a week of pain. It cost the US economy billions of dollars. It cost operating businesses time and money and discouraged them from investing and hiring – and this particular disruption only lasted a week. Now, imagine the ongoing effects of sequestration on the rest of the federal government.

Keeping in mind the Federal Aviation Administration (FAA) experience, let’s speculate a little about other potential trouble going forward – particularly the sort of trouble that could be made worse by the federal government’s failure to allow departments to prioritize, as we saw last week.

Will the next crisis take the form of a public-health disaster? Are we going to see a lack of sufficient preparation in case H7N9 bird flu mutates and emerges as a pandemic?

We have a rapidly mutating and very troubling flu virus spreading in the world. There are over 100 confirmed human cases. One out of every five cases has resulted in death, and almost all other reported cases have been hospitalized, with most remaining seriously ill. Only a handful have walked out of the hospital fully cured. Are we now missing information about this risk because of sequestration?

Or will the next crisis happen due to inadequate care for the poor and elderly? Will it instead result from inadequate flood control on our rivers or perhaps from cutbacks to the National Oceanic and Atmospheric Association’s (NOAA) national weather forecasting services? Will the next big failure occur because the Food and Drug Administration (FDA) can no longer adequately oversee the safety of our food, or will it be a deadly disaster that could have been prevented had there not been a falloff in bridge and rail-safety inspections?

Or is there another major issue that will emerge, take center stage, and then trigger rage once more because we citizens will not be content with the quality of our governance? If so, then we will again light up the White House switchboard; email Senators and Congressman, call them on the phone, and send them telegrams; and launch another round of hot-issue websites.

In place of “Don’t Ground America,” the website might be “Don’t Sicken America” or “Don’t Starve America” or “Protect America” or “Make America Safe and Secure Against Terrorist Attacks” – or something else.

From where we sit, a milestone has been reached in the US: citizen anger rose to the point of reaction. Americans are very slow to anger. We tolerate awful governance in Washington. We go on about our business and act as though we cannot do anything about the problem. Over half of us give up and don’t vote. But once angered, the citizens of the US have the capacity to take their country back. And we did it last week.

Now we have to do it again, or we’ll soon lapse back to divisive partisan politics, finger pointing by Democrats at Republicans and by Republicans at Democrats, finger pointing by the White House at the Congress and by Congress at the White House. America, if the finger pointing continues, I hope we will inflict more wrath on our Senators and Congressmen, both Democrats and Republicans – the men and women who we elected to represent us in Washington.

Meanwhile, markets are facing a slowdown in 2Q2013. Worldwide, statistics are trending in favor of a slowdown. Incomes are rising, but very slowly. The corporate-profit share is very wide, but it may have peaked. The labor-income share, on the other hand, is very low, and it may be bottoming. Each shock delivered by Washington sets back the process of recovery, whittles the growth rate and jobs, and extends the period in which interest rates will remain near zero according to the central banks of the developed world.

This trend is bullish for stocks and other asset classes. Low interest rates, very low growth, and no inflation pressure create rising prices for assets of all types.

In the longer run, this is a terribly unhealthy circumstance, and our longer-term outlook deteriorates progressively as our Washington politicians continue their disjointed puppets’ dance.

From a strategic point of view, we remain fully invested. We are back and fully invested in the US stock market and have been participating in the rally. There was a temporary respite during which we raised some cash that has now been redeployed.

On the bond side, we expect interest rates to remain low for an extended period. We are gradually transitioning accounts in preparation for rising interest rates, although we do not expect to see them this year and perhaps not for another 2-4 years. The timing of the interest-rate shift makes future strategic moves is impossible to determine. We continue to gradually phase in hedged accounts in order to protect against long-term interest-rate risk.

We watch and worry about Washington. And we worry about our country.

~~~

David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Now What?”

  1. jwhjkh says:

    Voters were so upset with the FAA that it took Congress less than a week to adjust the FAA budget. What will Congress do when voters see their health insurance premiums increase significantly due to Obamacare?

    • Joe Friday says:

      What will Congress do when voters see their health insurance premiums increase significantly due to Obamacare?

      You mean when Corporate America increases premiums to rip off the American people, and then falsely blames it on Obamacare.

  2. YouthInAsia says:

    “Now, imagine the ongoing effects of sequestration on the rest of the federal government.”

    I work for a DoD branch. To spend money that has already been allocated and received for a project intended to SAVE the taxpayer money if I want something as simple as a $19 component I have to:
    1) generate a Mission Critical justification (5 minutes)
    2) Get a Logistiacian to travel across base (10 minutes)
    3) Get a signature from a GS-15 branch head (1 minute)
    4) Travel back to his desk and make the order (10 minutes)

    We all bill the taxpayer at ~120/hr for our fully loaded cost.
    We’ve just spent $52 of the taxpayers dollars to authorize the purchase of a $19 component.

    Now, our Logi isn’t a moron and he typically tries to gather up a handful of these things to be signed at once…but there are certainly days where it’s just a single signature needed.

    This is because of sequester.

    • ilsm says:

      DOD is essentially welfare.

      Pentagon’s sequestration priorities: cancel air shows, cut current operations, eliminate training for repeating Vietnam, wars that won’t happen.

      Undiminished by sequestration DOD will throw away trillionson poorly engineered weapons acquisitions whose operating, training and sustainment will be “unaffordable” when the economy no needs stimulation.

      The result of no one doing anything about 20 years of GAO reports identifying high risk of fraud in DOD acquisitions.

    • AnnaLee says:

      Thank you for that summary, which, I might add, is really understating the massive creation of unscheduled waste.

    • socaljoe says:

      Looks like we have two choices:

      1. End the sequester so these guys can install a telegraph and send morse code instead of running all over the place at $120/hr.

      2. Sequester the entire branch out of existence.

  3. MidlifeNocrisis says:

    “What will Congress do when voters see their health insurance premiums increase significantly due to Obamacare?”

    Have you got any facts or references to go with that statement?

  4. WhipTail says:

    jwhjkh, What did the American people do when healthcare premiums went up astronomically without Obamacare? It looks like the answer is elected Obama and a Congress that passed his most of his Republican inspired healthcare plan. I’d say we Americans are going to give it a chance to work, and it may be modified but it isn’t going to be repealed. A look at the history of the growth of the “welfare state” will give you your answer.

  5. Lyle says:

    Why it happend so fast. it directly affected the members of congress. Except for those from states near DC, members of congress have to fly to and from DC every week to meet with those they represent, as well as see their families. So the slowdowns directly affect them, and so action happened. It was not so much the public outcry as it was this that got fast action.

    • krice2001 says:

      Yes, and the fact that it affected BIG BUSINESS – The people that fund campaigns. I’m not so sure John Q. Public or even a large group of John Q. Publics have that much of an impact.

  6. RW says:

    The sequester was rotten game-of-chicken policy, a FAIL from the get-go, and should have been repealed in its entirety when it became obvious even a tactic as revanchist and stupid as across the board sequestration was not going to force compromise so my reaction to the FAA ‘exception’ was similar to Theda Skocpol’s (note to Josh Marshall)

    I teach an undergraduate seminar about Inequality and American Democracy and we go over all the new research …showing definitively, statistically that government responds to the preferences of the privileged and pretty much ignores everyone else, including the middle-income citizenry as well as the poor. I know all this abstractly, but this particular Senate vote makes it concrete in a hit-you-in-the-gut way.

    The citizenry “rising up in anger” over flight delays would have been a lot more impressive if said citizenry had been equally ticked off about children removed from food support programs and loss of aid to families of soldiers killed in Afghanistan. Fah!

  7. ComradeAnon says:

    This was a “Citizenry” based revolt just like the Teabaggers were. Meaning it wasn’t. For God’s sake. How stupid does one have to be to see that this was nothing more than Congress making things easier for themselves. What a Dolt.

  8. 873450 says:

    “In one week, the wrath of the American citizenry created a necessary and successful change in policy. It demonstrated that angry American voters can coalesce around an issue when their anger reaches the boiling point and they set aside partisan politics. They said to their elected representatives, “You, Senator and Congressman [not "Democrat" or "Republican"] are responsible for poor governance.”

    In light of Congress comfortably ignoring 90% of the electorate last week when it killed firearm legislation expanding gun purchaser background checks, it’s ridiculous to conclude exempting air traffic controllers from sequester cuts is a congressional response to to angry American voters.

    The FAA “fix” was about money = speech (Citizens United). Suggesting otherwise is nonsense.

    Result? Air traffic controller furloughs get shifted to airport infrastructure workers.

  9. ilsm says:

    YouthInAsia is telling a typical tale about the “quietly infamous” DoD contracting scam for “buying” clerical, administrative, tecnhical and operating/support services.

    These service contracts are filled with waste, the government ordering inflated man years of labor categories which do low level work not justified by the “service output”.

    Worse they are managed as “level of effort”, the deliveries are activity reports such as “YouthInAsia delivered 20 such in the month”, and no one asks if the $120 per hour charged is worth the taxpayers’ scarce dough.

    YouthInAsia likely bills $120/hour to wash windows.

    In 2010 DoD spent nearly $400B on contracts about half for services managed like YouthInAsia describes.

    Here is what GAO said in Apr 2012.

    http://www.gao.gov/assets/590/589951.pdf

  10. park city skier says:

    Capitulation is next at some point. The market believes the central bankers are omnipotent. It’s like people are running into a burning apartment building to collect the money under the mattresses, they continue to keep going up to higher floors to collect money believing no harm will come to them that the omnipotent powers (central banks) will protect them. The higher they go the greater the risk is that the floor will collapse and they will get severely burned. In Oct 2007 the market topped in Dec 2007 the great recession happen, let’s see how different it will be this time.

  11. YouthInAsia says:

    “YouthInAsia likely bills $120/hour to wash windows.”

    I’m an engineer (STAND BACK!!!) working to fix the multi million dollar messes created by one of the countries major prime aircraft vendors (messes, btw, that the prime was more than happy to fix themselves at $200/hr estimating double the number of hours we are doing the work in). Other guys in my organization have basically upended their lives for going on 6 months now with many of them living out of hotels for long stretches to help pull in the massive schedule delays on a $100 million contract to another large prime.

    Defense spending is a tough game. The Government could certainly refuse to fund any development efforts and wait for contractors to fully mature their weapons own their own dimes so the operation and maintenance costs are known but we then run the risk of being behind other countries that spend the money to fund these efforts.

    I figure on a blog like this the government spending money on new technology that keeps people employed would be greatly encouraged.