Who Will Repair What Is Broken?

By Michael Starr Hopkins

I am a Democrat, but I have always felt that strong opposition parties were good for the country. For this, I have sometimes been harshly criticized by other Democrats. Such criticism could be confusing. Aren’t Americans supposed to promote bipartisanship? Indeed, when I first came of age politically, I fundamentally disagreed with Republican leaders like former Gov. Chris Christie and former Rep. Paul Ryan on policy, but I respected them as public servants. I believed that they were the type of leaders who would turn the GOP in particular away from nativism and lead Republicans into some semblance of 21st century politics.

I was wrong. Instead, the GOP has done the opposite. Republicans have taken partisanship to a level that would make Newt Gingrich blush. They have embarrassed themselves, and they have embarrassed me for even suggesting that they could provide a better path forward — and for what, some tax cuts and conservative judges? As angry as I am at Donald Trump for his lack of decency and empathy, I am equally as disappointed in the Republicans who aided his rise to power.

Still, while most Democrats would understandably prefer an America free from the Republican Party, I somehow find myself hoping for the rebirth of a more tolerant and inclusive conservative party that can help to one day restore America’s faith in government.

Repairing what is broken is a task too heavy for one party to bear, and an obligation too onerous for any single group. Rebuilding our institutions and strengthening the bond between people of differing viewpoints requires a commitment from each and every one of us. It requires honest brokers, willing to find common ground and ignore the naysayers whose sole goal is to be the loudest in the room. It requires a confidence of purpose that cannot waver in the midst of an election season that could signal the end of one’s political career. Most importantly though, repairing our broken country requires Republicans in particular to stand up and take their party back from those who are attempting to bastardize their message

Succumbing to the worst tendencies of one’s party isn’t new or unprecedented; we’ve been here before. Moral crises have repeatedly tested the will of our great nation. This country has battled through the dark days of slavery, segregation, McCarthyism and Watergate, and still we stand. Not because of magic pixie dust but thanks to brave patriots, willing to take unpopular yet principled stands because our social contract demands it.

And America has always managed to find its way back from the brink because of our ability to come together, in search of a shared purpose, when we as a country need it the most. We are edging toward a brink now, not of violence necessarily but certainly of near-intractable partisanship. Just look at the differing ways the impeachment inquiry is being covered. I may be foolish, but I still believe in our shared purpose. I still believe that, in spite of those who have turned their back on our motto, e pluribus unum, principled conservatives will find their way back home.

So who will stand up now and help take the Republican Party in a new direction? Election season cannot go into perpetuity, at some point we must govern. Someone must lead.

I am not naive, nor do I believe that the majority of our political leaders have the intelligence or moral compass to act with the courage of Abraham Lincoln. Expecting an overnight solution to a longterm problem is a recipe for failure. And I realize that the same people who mocked me for believing that Republicans and Democrats could work together before, will likely mock me once again for believing that all hope is not lost.

I realize that the same people who mocked me for believing that Republicans and Democrats could work together before, will likely mock me once again for believing that all hope is not lost.

But what other choice do we have? Our democracy requires compromise and courage to meet the challenges that we face. We cannot afford to continue down the broken roads that have led us to gridlock. We need each other.

Like it or not, Democrats need a strong Republican Party to act a a counterweight in our deliberative process. The Framers fully intended for progress to be incremental, not overnight or all at once. A democracy absent diversity is not a democracy. This symbiotic relationship may not be pretty and certainly may not always be successful, but it is necessary to the framework that makes us a shining star on a hill.

I have often been called too optimistic and criticized for my faith in my fellow American. Yet I wear those labels with pride, because at the end of the day we have to believe. We have to believe that we are part of something worth fighting for and saving.

Most importantly though, we have to believe in the goodness of each other and our ability to correct course even when it seems impossible. That has been our saving grace throughout history, our ability to turn this social experiment around and live up to our motto “out of many, one.”

Donald Trump’s Campaign Is Becoming an Exercise in Public Insanity

If it doesn’t work out in his favor, someone is always conspiring against him.

image.png

If the economy goes south, as a lot of people are warning us it will, then it’s comforting to know that the president* already is only a baby step away from blaming the Gnomes Of Zurich. From The New York Times:

He has insisted that his own handpicked Federal Reserve chair, Jerome H. Powell, is intentionally acting against him. He has said other countries, including allies, are working to hurt American economic interests. And he has accused the news media of trying to create a recession. “The Fake News Media is doing everything they can to crash the economy because they think that will be bad for me and my re-election,” Mr. Trump tweeted last week. “The problem they have is that the economy is way too strong and we will soon be winning big on Trade, and everyone knows that, including China!”
Mr. Trump has repeated the claims in private discussions with aides and allies, insisting that his critics are trying to take away what he sees as his calling card for re-election. Mr. Trump has been agitated in discussions of the economy, and by the news media’s reporting of warnings of a possible recession. He has said forces that do not want him to win have been overstating the damage his trade war has caused, according to people who have spoken with him. And several aides agree with him that the news media is overplaying the economic fears, adding to his feeling of being justified, people close to the president said.

Oh, lovely.

Weaponized paranoia always has been at the heart of El Caudillo del Mar-a-Lago’s political identity. In the tangles of his mind, he is always standing strong and alone against a vast array of enemies, including the minions of The Deep State and certain Guatemalan toddlers. If he feels like his presidency* is in serious peril, he’s liable to go off the deep end. He’s already setting up the members of the cult to refuse to accept the result of any election he doesn’t win. (He’s recently gone off again about those busloads of Massachusetts voters who drove to New Hampshire to deprive him of his win there in 2016. Neglecting the fact that IF all these people were bussed in to vote- they voted IN a Republican Governor) If a recession hits, he’s already blamed his own Fed chair and the evil media. Who would be left?

The president’s broadsides follow a long pattern of conspiratorial thinking. He has claimed, without evidence, that undocumented immigrants cast millions of ballots, costing him the popular vote in the 2016 election. During the campaign, he predicted that the system might prove to be “rigged” if he did not win. He conjured up a “deep state” conspiracy within the government to thwart his election and, more recently, his agenda. And he has said reporters are trying to harm him with pictures of empty seats at his rallies.

Unless somebody finds the strawberries soon, this campaign is going to be an exercise in public insanity.

It May Be Time To Sell Your Stock

From Jim Collins at  FORBES

The yield curve has inverted and you should sell your stocks.  That is a simple, declarative statement, and yet one that I have not read anywhere this morning.  Having awakened to the news that the yield on the 2-year U.S. Treasury note had risen above that on the 10-year U.S. Treasury note, I have enjoyed this morning’s sell-off in the equity markets.  I founded a new asset management firm, Excelsior Capital Partners, a month ago to initiate short positions on stocks, and so far the timing has worked out well.

There seems to be a basic misunderstanding of the meaning of the inverted yield curve and its meaning for equity markets.  I am making a few bucks on this confusion, to be sure, but I would rather see an educated investing public. Some of the articles I have read this morning in the financial media are wildly misleading.  So here are a few answers to basic questions:

What is an inverted yield curve?  The yield spread is a simple calculation that involves subtracting short-term interest rates from long-term interest rates.  The yield curve is a plot of interest rates for government bonds of all maturities in a given country. Bond yields represent, in percentage terms, the price investors are willing to pay for those securities.  When demand for bond purchases rises, prices rise, and thus yields (interest rates) fall. When long-term bond yields are lower than short-term yields, the spread is negative and the yield curve is inverted.

Money has a time value.  A dollar today should always be worth more than a dollar tomorrow.  I think most investors grab that basic fact.  There’s a second derivative there, however.  At most times in economic history, a dollar two days from now has been worth more than tomorrow’s dollar, which is worth more than today’s dollar.  Similarly, a dollar a year from now is worth more than that two-day dollar and the dollar five years from now is worth more than the dollar one year from now, and on and on and on.  If I am lending you a dollar for five years not five days, I want an extra incentive to do that. Five years gives you much more time to default on that loan, plus—in a concept known as duration among bond investors—there is a much larger chance that the interest a lender will earn over a longer time period can be rendered less valuable by inflation, always the biggest factor impacting bond pricing.

The rate of inflation in the U.S. probably won’t change much in three months.  In ten years, though, it could show a marked difference.  The Federal Reserve and other central banks have consistently referred to the fear of deflationary pressures as the biggest worry facing financial markets.  This morning’s bond markets are telling you that inflation is going to be much much lower in 2029 than it is in 2019.

That is the key meaning of an inverted yield curve.  Inflation expectations for future periods are lower and that can only mean a slowing, and perhaps contracting, global economy.  Stocks are valued based on growth, and the colossi that are Amazon, Facebook, Netflix, etc. have all been built on rapid rates of growth in revenues and earnings.  If the bond market is telling us the global economy is slowing, the stock market should price in lower rates of growth for individual stocks.  That is why shares of those tech titans—and the vast majority of stocks around the globe–are falling sharply today.

Isn’t lower inflation a good thing?  If it costs me less to buy things outright and lower interest rates also result in lower costs to finance purchases made over time (house, car, etc.) how is that a bad thing?  Simply put, it’s not a bad thing for consumers. At the same time it is a horrible, terrible, awful thing for financial institutions such as banks. If it costs a bank more to finance the money underlying a loan than the interest that bank can earn on the loan, the bank would take a loss on that loan.  Obviously bankers are not stupid, and loan growth can be expected to decline when short-term funding costs are higher than long-term loan prices.

The global economy in 2019 is based on access to credit, and it has been for the past 50 years.  This is what we should have learned from 2008. Jamie Dimon’s balance sheet at JPMorgan is much more important than the one based on your household’s financial situation.  I am sorry if that offends you from a political standpoint, but please do not misunderstand. There have been zero real changes in policy or statute since 2008 that would change that.  If credit conditions dry up, we could just easily see a meltdown in 2019 as we did in 2008-2009. These are basic facts, not conspiracy theories or political slogans.

For the past 10 years, naysayers have been calling for another global financial crisis and yet my stock portfolio has gone up, up, up…what is different now?  The biggest development in the world economy over the past decade has been the astounding growth of the financial system in China.  China’s economy, which was barely dented by the financial crisis that ravaged Western economies in 2008-2009, is now, ten years later, just as dependent on credit as that of the U.S. and in fact more so, by certain measures.  The Chinese only really embraced state-sponsored capitalism in the early 1990s and it took them 20 years to embrace the concept of leverage. But, man, have they done it in a big way.

In December 2008 the total assets of the Chinese financial system were $9.1 trillion.  That compared to $12.2 trillion in U.S. financial system assets. As of June 30, 2018, the latest data available, Chinese financial system assets totaled $39.0 trillion dwarfing the U.S.’ total of $17.5 trillion.  So, the Chinese financial system has more than quadrupled in the past decade. Does that worry you? It should.

That’s why pictures of protestors occupying the airport in Hong Kong are so scary.  That’s why the Chinese government’s decision to let the yuan/dollar exchange rate rise above 7:1 (making Chinese financial assets worth less in dollar terms) is so scary.  That’s why President Trump’s trade tweets can and will move the markets significantly—in either direction. Anything that makes Chinese companies less likely to repay their loans is a decided negative for global bond markets.  Each of those three factors certainly qualifies.

That’s also why the yield curve in the U.S. has inverted.  Any measure of U.S. current economic activity or financial system liquidity looks fine or even better than fine.  But the bond market looks like the world is in the middle of a global catastrophe. Why? Because global markets are interlinked.

You can’t just sit in Peoria, Illinois and say the fact that Danish banks like Jyske are now offering negative rates on 30-year mortgages doesn’t affect you.  It does. Some financial institution you use will have exposure to European bonds and when those bonds mature refunding them at negative rates is going to lead to losses.  You can’t just sit in Rexmont, Pennsylvania and say that the fact that assets in China’s financial system now represent more than half of the world’s GDP doesn’t concern you. If you have a 401k, it damn well should.

So, wake up, smell the coffee and lessen your holdings of equities.  The bond market and its inverted yield curve are telling you that economic growth is slowing—or perhaps even contracting.  The valuation of stocks, above all else, depends on estimates for rates of earnings growth. Anyone who is telling you “don’t panic” or “you can’t time the market” is a complete buffoon and should be ignored.  That includes many of the talking heads on CNBC, by the way.

Selling stocks into an economic downturn isn’t panic, it is just smart investing.  Practice it.

 

UC San Diego history prof’s book on fall of Rome’s democracy draws parallels to today

UC San Diego history prof’s book on fall of Rome’s democracy draws parallels to today

The parallels are striking: Rising income inequality. Partisan gridlock. The erosion of political norms and the loss of faith in public institutions. Angry populist uprisings.

Is America going the way of Rome?

“Mortal Republic,” by UC San Diego history professor Edward Watts, raises the question. The book has been garnering national media attention — The New Yorker, Smithsonian, Time, Vox, the New York Times — since its release in November.

“The lesson we can take away from the Roman example is that a republic doesn’t last unless you protect it,” Watts said in an interview. “It can and will die unless you ensure that it lives and thrives.”

Rome’s representative democracy lasted almost 500 years, still among the longest in history, and its checks and balances and other consensus-building elements were used by America’s founders as they drafted their own system of government.

But what the Romans put in place slowly crumbled and led to an autocrat taking power, and the early Americans understood that, too. The United States would be a republic, Benjamin Franklin once said, “if we can keep it.”

Watts, 43, has been teaching Roman history for about 20 years and he’s noticed a shift in his students’ interests away from the later empire to what its republic might teach us about the challenges facing democracies in the United States and elsewhere.

He found himself increasingly having similar conversations with family and friends. And he began thinking about the structural similarities between the Roman government when it started coming under strain and some of the things happening today.

So he wrote this book, his fifth.

The main purpose was to help readers “better appreciate the serious problems that result both from politicians who breach a republic’s political norms and from citizens who choose not to punish them for doing so,” he writes.

Watts cites complacency as a key danger.

“You take for granted the fact that you are going to live in a free society and you take for granted the fact that the republic that’s been there for hundreds of years is going to remain there for hundreds more,” he said.

“What that does is give you the false sense of assurance that you can take steps and make decisions that have short-term benefits for you as a politician or as a voter, but have long-term consequences that are quite negative for the system.”

Asking questions

Watts grew up in New Jersey and got his Ph.D in history at Yale. He taught for 10 years at Indiana University in Bloomington before coming in 2012 to UC San Diego, where he specializes in Roman and Byzantine history.

“I got interested in history because as a high school student I was first exposed to Roman culture and Roman history and really was shocked by how much we could learn from a society that is so distant from us,” he said.

That got him asking questions, trying to bridge the present and the past, and he found the process both challenging and rewarding.

“Mortal Republic” shows how Rome’s elected leaders who initially believed in national service and personal honor moved away from collaboration, compromise and consensus as the population expanded.

Wealth became concentrated in a small number of families who figured out how to manipulate an increasingly sophisticated economy, and they used their money to influence the political process. The fortunes of the middle class stagnated.

Attempts to address income inequality and ease public resentment moved slowly. Rome’s army was privatized, which eventually caused soldiers to put the interests of plundering commanders (and their own desires to share in the loot) ahead of their country.

Over the course of a century, starting in about 130 B.C., outbreaks of economic populism grew increasingly violent. Government rules were broken, traditions ignored, the notion of a common good trampled. Immigrants were disparaged. Politicians used their own militias to intimidate opponents, and when that didn’t work they sometimes turned to assassinations.

Eventually came civil war, and the republic was done. Romans traded liberty for the stability promised by the autocracy of Augustus.

“Above all else, the Roman republic teaches the citizens of its modern descendants the incredible dangers that come along with condoning political obstruction and courting political violence,” Watts writes. “Roman history could not more clearly show that, when citizens look away as their leaders engage in these corrosive behaviors, their republic is in mortal danger.”

Because of when his book came out, some online-forum commentators have dismissed it as a thinly veiled jab at President Trump, whose two years in the White House have been marked by a steady upending of the status quo.

Watts was writing the book during the 2016 campaign, so Trump was certainly on his mind. But he said the president wasn’t the main target.

Political, not partisan

Like most college historians, Watts is cautious about going too far in comparing and contrasting what happened 2,000 years ago to what’s going on today.

“You can’t take a political figure like Trump or Pelosi or whoever and say there’s a Roman example and this is how we understand this person,” he said.

Instead he hopes readers will see that his book “gives us a set of tools to think about the American republic as something that has particular qualities, and it allows us to imagine courses of action that allow us to advocate for the system,” he said. “So in that sense, I think the book is both highly political and not partisan. I hope that it gives us a way to speak for the larger concern about our political system.”

His own view is that “we are in a dangerous political process right now. I think that we’re in the middle of something, the end of the beginning maybe.”

But he also thinks “we have time to right the ship” if Americans can “again embrace what makes our republic work, and defend it.”

That means being willing to support a politician’s policies while also objecting to his or her methods, Watts said. It means refusing to allow governance be a zero-sum game where one side wins and the other side loses.

“I think that’s one of the profound departures we have in the United States from what a republic is supposed to do,” Watts said. “In a functional republic, you don’t have politicians playing exclusively to their base and disregarding everybody else.”

He’s been heartened by the responses to the book from critics and other readers who think it “offers a way we can think positively about steps we can take to maybe correct the trajectory of our political life.”

Will we take them?

“I won’t say that I can guarantee that will happen,” he said. “But I think there is a path forward that has a positive outcome. The challenge we have is to understand what that path is, and decide if that’s what we as a society want.”