Why Children Are Afraid of Donald Trump

After the election, newspapers and news services were filled with stories about children crying and suffering anxiety and distress over the election of Donald Trump as President.  Many adults may have thought this to be an over-reaction.  But we're talking about our youngest citizens, who have the sometimes disarming and sometimes disquieting tendency to speak the truth without the convenient filters adults use to soften the harshness of reality.  Why would kids harbor such fear?  There's a simple reason.

The generation that's now in primary schools is approximately half minority.  By 2020, children under 18 will be majority minority.  https://www.census.gov/newsroom/press-releases/2015/cb15-tps16.html When Trump blew a fuse over a racial category, a religion, or an ethnic group, the blast hit perhaps up to half these kids in a very personal way.  And when Trump delved into misogynistic ranting about women, a partially different half of this generation was directly impacted.  They've been raised to believe that girls and women are worthy, and deserving of dignity and respect.  The specter of a boorish pig in the White House flies in the face of everything that today's parents and schools try to teach.   And remember also that large numbers of white children believe in diversity and respectfulness for all.  They're more colorblind than the Boomer Generation.  Many of their good friends aren't white, and they cherish and value their friends.

So, it would seem that Donald Trump, with his hateful cacophony, has likely frightened and offended over half of today's children one way or another.  As they grow older, these childhood fears may well morph into anger and a desire for change.  By the 2040s, America as a whole will be majority minority.  Today belongs to the Republican Party.  But its victory may have sown the seeds for its demise.

Winners and Losers in the 2016 Election

This was one wacky election, and there are some unusual winners and losers.
 
Winners.  Among the least obvious, but most important winners are liberal Democrats.  The middle-of-the-road, milk-the-liberals-for-votes-and-then-abandon-them strategy of Bill and Hillary Clinton is definitively dead, with a stake driven through its heart.  Bernie Sanders is a major victor from yesterday's election, as he now has a chance, along with Elizabeth Warren, to reshape the Democratic Party.  The Clintons' decades old strategy of cozying up to Wall Street and other obscenely rich donors while talking but not walking like progressives blinded them to the prairie fire boiling up from people who work hard but for not a lot of money.  Sanders and Warren, who may be the most influential Senators today, won't make that mistake.  They will reach out and try to help the people who are driving politics today.  Politics is ultimately about the flow of crowds, and you can't capture the energy of insurgents by condemning them as deplorable. 

Another major winner is the FBI.  Had Hillary Clinton been elected, the specter of possibly wholesale "personnel changes," shall we say, might have hung over the FBI, crippling its ability to function in numerous crucially important arenas.  Donald Trump and whoever he appoints as Attorney General would be wise to leave the FBI unconstrained to conduct business regular way, with no hint of a political agenda.  Everyone benefits when law enforcement is evenhanded. 

And, of course, another winner is that . . . what's his name?  Oh, yes, Trump.  That Trump fellow will find out that running for President is a whole lot easier than being President.  It's one thing to make speeches.  It's another altogether to make things happen.  Even though the Republicans control both the House and the Senate, that doesn't mean Trump will have a successful Presidency.  Barack Obama had the advantage of a Democratically-controlled Congress at the beginning of his first term, and his approval ratings have fallen dramatically since then.  Donald Trump will have to find a way to work with all kinds of people, and lashing out at them isn't likely to be productive.

Losers.  One of the biggest losers is the Establishment.  Both the Democratic and Republican establishments got their heads handed to them yesterday.  An outside observer can readily tell that it's time for change.  But people holding power rarely give it up without a struggle.  George Washington set a noble example when he refused to run for a third term as President and returned to Mount Vernon.  Try to find someone as noble as that in today's political establishment and you'll have more luck seeking the Seven Cities of Cibola.  Things are likely to get ugly as both parties struggle to change. 

Big Money Donors got hammered in this election.  They bet on Hillary Clinton and a platoon of mainstream Republican primary candidates, and wound up only with much smaller bank accounts.  It turns out that, in democratic politics, money isn't everything.

The Democratic Message was lost.  In fact, perhaps the most important reason Hillary Clinton lost was she had no message.  All she seemingly did was attack Trump and proclaim, ad nauseum, that she wasn't Trump.  Trump had a message, a message of hope for working people who usually have only stagnation and despair.  This was not a message that Clinton or the elitist mainstream press clearly discerned.  But Trump got through loud and clear to his supporters.  Nothing drives voters as much as hope.  Trump instilled hope in his constituents.  Clinton didn't seem to have hardly anything positive to say about the future, and her potential constituents lacked the most powerful motivation in politics to vote.

Of course, there is Hillary Clinton.  Bill and Hillary's time in politics is over.  One wonders if they know it and will be able to step aside graciously.  The successful resurrection of the Democratic Party depends on the establishment of new leadership.  But the tremendous cash flow the Clintons have enjoyed since Bill left the White House appears closely linked to their power in the Democratic Party.  If they give up the power, the cash is likely to flow to the new power players.  Since Bill and Hillary have an obvious love of money, the struggle to rebuild the Democratic Party could be grisly. The Clintons, now more than ever, need to think about their legacy.  They already have more than enough money to live in luxury for the rest of their lives.  But, given their baggage that was recounted ad infinitum during the campaign, their legacy needs a lot of work.  Graciousness would be a very valuable first step.
 

Happy Halloween, America

This may be the scariest Halloween ever.  Two ghouls are in the lead for the Presidency.  They claim to be people, but that seems to be just a masquerade.  Even in their guises as humans, they are horrifying.  Parents could use their names to scare children to eat their vegetables and do their homework.  But then the children would have nightmares.  The parents already do.

The financial markets are being inflated by the Federal Reserve into a monstrous bubble, a bloated spectral presence that could bring back the demons and vampires of the 2008 financial crisis.  Pension plans, annuities and long term care insurance are being scared to death by ultra-low interest rates.  Anyone hoping to retire is hanging garlic over their front doors.

Overseas, demons, banshees and poltergeists bedevil us.  The Middle East is a seething mass of murderous conflict, seemingly a nightmare from which we can't wake up.  North of the Middle East, a fiendish demon toils at midnight, boiling eye of newt, toe of frog, wool of bat, and tongue of dog into a toxic mix that he flings in all directions while chanting diabolically in a language not heard since ancient times.  In North Korea, a beast with curved horns labors with a crooked smile revealing jagged teeth to find ways to deliver inferno thousands of miles.

Our industrialized economy spews noxious fumes that heat the Earth hotter and hotter.  Everything we ingest--food, water, and air--causes cancer or heart disease.  Even sweetness itself, in the form of sugar and other natural sweeteners, silently stalks our health. 

Alfred Hitchcock never made a movie so scary.  The real world would scare the bejesus out of Vincent Price.  If Stephen King needs inspiration, he can simply pick up a newspaper.  The truth is we have Halloween year round.  The only thing that happens on October 31 is people wear costumes.  The rest of the time, we can only try to stay safe, if that's possible.  Happy Halloween, America.

The Nobel Committee Got it Right

Awarding the Nobel Prize for Literature to Bob Dylan was exactly the right thing to do.  He's a great singer-songwriter, whose songs touched millions and influenced generations of musicians and composers.  He richly deserved the prize.  Equally important, the Nobel Committee recognized that literature isn't just a dry, narrowly defined collection of dusty texts appreciated only by tweedy, dust-covered obscurants.  It's an organic, dynamic concept that evolves and grows over time.  Stories are told in many ways and today's troubadours are among the modern world's best story tellers.  There's a lot of literature to be found in smoke-filled bars smelling of stale beer and cut rate whiskey, a lot of story telling set to the simple chord progressions of the blues and rock and roll.  The Nobel Committee could have a great time selecting future prize winners from the vast literature of popular music, rocking out instead of plowing through another snoozer of a book.

Who might be eligible for the Prize in today's new, expanded literature?  There are plenty of potential nominees.  How about:

Bill Haley and His Comets.  Rock Around the Clock was the song that start the rock and roll revolution.

B.B. King.  The King of the Blues brought the blues out of the honky tonks into the larger world.  Sweet Sixteen is one of his finest ballads.

The Rolling Stones.  Among the greatest of the rock and roll literati, the Stones give us so many choices.  Honky Tonk Women is a gem.

Mountain.  The Nobel Committee sometimes looks at works of the less well-known.  One of the hardest rocking bands of the 60's and 70's was Mountain, four guys who created a bigger sound than ten other guys could and inspired generations of hard rockers to follow.  Their best song is Mississippi Queen.

Would the Fed Please Shut Up?

At the beginning of 2016, the Federal Reserve Board anticipated four quarterly interest rate hikes for the year.  Three quarters of the way through the year, the Fed hasn't lift rates even once.  And it's far from certain it will in December.

Why such a divergence between expectations and reality?  In a nutshell, because economists can't predict the future.  Essentially all leading and well-regarded economists get it wrong when they try to predict future economic growth.  Since the Fed is an economist-driven agency, it devotes a lot of time and energy to being wrong.  And it has been wrong early and often this year.  It's probably wrong in suggesting a significant likelihood of a December increase.  The truth is it has no way (i.e., zero percent probability) of knowing whether or not it will raise rates in December.  Its capacity for error has been copiously demonstrated and its "guidance" is worth less than a palm reader's prognostications.

Who benefits from the Fed's "guidance"?  Not investors, who only profit if they disbelieve what the Fed says.  Not consumers, whose bank accounts and certificates of deposit, money market accounts, bond holdings, pensions, and long term care insurance policies are being devastated by the perpetuation of Lilliputian interest earnings.  Those who would prepare for the future with life insurance and annuities face ever-escalating costs.  Comfortable retirement is increasingly available only for those who have both very high incomes and a ferocious propensity to save.  Everyone else will become a burden on public retirement financing.  Anyone who thinks the government will be balancing the budget by cutting the cost of Social Security and Medicare is chilling on angel dust.  Tax increases and more deficit spending will be necessary--full stop, end of discussion.  The bulk of retirees will be largely or entirely dependent on the government and any thought of cutting retirement benefits will prompt a political insurgency that would make this year's election look like a circle of kindergartners singing Kumbaya.

There are people who benefit from the Fed's "guidance."  Speculators, who make fast money bets on what some Fed official or other will say in the next three days.  Derivatives dealers, who write contracts for those who want to hedge or speculate about the Fed's "guidance."  Pundits and journalists, who try to say something profound about every cough or facial tic from one Fed official or another.  Stock and bond market dealers, who profit when the market churns each time a Fed governor smiles or frowns.  In other words, Wall Street is making money off of this.  But the "guidance" isn't making an overall contribution to the well-being of society.

The Fed used to be pretty discrete.  Back in the 1950's and 60's, we had robust growth, low unemployment, and ebullient optimism, all without a stream of prattle from the Fed.  There's no obvious need for the Fed to yack, yack, yack all the time.  We could do without all the false expectations created by inaccurate Fed prognostications.  Would the Fed just please shut up?

Does the Internet Hamper Economic Growth?

The sharing economy--Uber, Airbnb, Zipcar, bike sharing and so on--makes more efficient use of resources.  Cars that might sit around are instead used more often.  Living space that might remain empty provides accommodation.  People don't have to buy a bike any more.  They can just rent the short term use of one. 

But does all this sharing hinder economic growth?  If people use cars, bikes, homes and other things more efficiently, fewer of these items need to be produced and sold.  Manufacturers may see decreased demand.  Jobs may be lost.  Growth could slacken.  The country's tax base might stagnate, just at a time when increased government funding is sought for everything from national defense and security to infrastructure repair and expansion to Social Security and Medicare.

Gig-based employment could have similar implications.  People who work short term gigs tend to earn less than full-time employees, reducing their ability to contribute to the consumer demand that comprises 70% of America's economy.  Employers have little or no incentive to improve the abilities and productivity of gig employees, so improvements in worker productivity could be hampered.  Without productivity growth, we won't have long term gains in employee compensation or national wealth.  Gig employees may be unable to save significantly for retirement, which would place more of the burden of their golden years on public funding.  These increased tax burdens could further impair growth.  As gig-based employment grows, so would these problems. 

The Internet greatly enhances globalization.  Customer support centers in Third World countries can inexpensively serve the needs of corporations in the industrialized world.  All manner of services, from manufacturing to radiology to routine legal work, can be cheaply coordinated and/or delivered from distant, low wage places over the Internet.  Workers in America who provided those services are out of luck.

The Internet provides the communications process that allows the sharing economy, gig-based employment, and globalization of services, to operate.  But greater micro-economic efficiencies such as these may have negative macro-economic implications.  One of the great mysteries of modern economics is why the economy is growing so slowly.  Increased efficiency creates losers as well as winners.  Those losses will have aggregate impact eventually, when they grow large enough. 

The Internet is an astonishingly effective conveyor of information.  But, as regards the sharing economy, gig-based employment, and globalization, owners of assets, holders of capital, and employers benefit more than employees--except employees willing to work for lower wages  The Internet may have enhanced total global economic growth.  But the distribution of that increased growth may well favor low wage countries, leaving industrialized nations with dimmer futures.   

It's impossible to stop the march of technological advance.  But the Internet is almost too effective in cutting costs and creating efficiencies.  When artificial intelligence and robots have driven millions of people out of the labor force, leaving them penniless, economic stagnation may be more likely than prosperity.  We had damn well better come up with a way to maintain social equilibrium in such a circumstance, or the political insurgencies of today will seem like gentle summer breezes.

Is the Fed Undermining Portfolio Diversification?

A basic investment strategy for investors is to diversify.  Typically, investors put some of their money into stocks, and most of the rest into bonds.  Small portions may go into gold or other commodities, or be held as cash.  Stocks and bonds historically have tended to offset each other.  When stocks rose, bonds would fall, and vice versa.  A diversified portfolio would be hedged, ameliorating the ups and downs of the market and making investing less stressful. 

Today, though, central bank accommodation--in the form of ultra low interest rates, negative interest rates and quantitative easing--has distorted this historical relationship.  As the Fed and other central banks print more and more money, both stocks and bonds rise in value.  They no longer offset, and diversified portfolios are becoming unhedged.  If and when the era of easy money ends, both stocks and bonds could fall, and perhaps precipitously.   

By unhedging diversified portfolios, the central banks are heightening investor risks.  Many wealthy and institutional investors, apparently sensing the danger, have been increasing their levels of cash.  But ordinary mom and pop 401(k) investors may not be able to shift gears so easily.  They may face increasing exposure, and perhaps not know it.  If they sustain losses when they expected to be hedged, they could lose confidence in the markets.  The result could be rapid and ugly.  That's what happened on Black Monday, October 19, 1987, when the stock market crashed and fell 22.61% in a single day because many institutional investors thought they'd be hedged by a financial product called portfolio insurance and found out unexpectedly that portfolio insurance didn't work. 

The central banks could reduce accommodative policies in order to raise rates and normalize the financial markets.  But that process could cause investor losses and trigger selling that leads to a market meltdown.  If, on the other hand, central banks keep printing money, they may worsen the problem.  You could shift more assets to cash (or at least refrain from committing fresh cash to the markets).  Otherwise, understand that diversification, like everything else in the financial markets, is starting to look a little hinky.

Is the Central Banking Bubble Bursting?

America's economy is stuck in first gear, China's economic growth is slowing, Europe's economy is dead in the water, and Japan's economy has been lost in a fog bank for decades.  Corporate profits have been declining on a year-to-year basis.  But stocks keep reaching new highs.  Given the backdrop of pessimistic data from the real world, one must wonder how much longer the delirious jollity of the markets can continue.

It's no secret that the frothiness of stocks stems from the service-minded attitude of the world's major central banks:  they aim to please.  Accommodation is the word of the day.  Money will be printed early and often, and served on a silver platter with a flute of champagne.  The central bankers are not about to take the champagne away, even though some Federal Reserve officials occasionally mutter something or other about raising rates.  The markets know this--the futures market seem to view rate rises as likely as pigs flying.  So the central bank bubble persists.

It's true that the central banks' tools are becoming dull.  Quantitative easing--the purchasing of bonds by central banks--is playing out.  Vast amounts of government bonds have been bought up, and now corporate bonds are being targeted.  Private sector retirement savings are being pummeled by the lack of sources of reliable long term earnings.  Pension fund deficits are like festering sores, annuity payouts are shrinking, long care insurance policies are becoming extortionately expensive, and interest payments on personal savings are going the way of the passenger pigeon.  With shrinking retirement prospects, people are saving more so that they can limit the need for dog food in their retirement diets.  As a result, both current and future consumption are constrained.  Since consumption is 70% of the U.S. economy, the Fed is seeking short gains in aggregate economic statistics by sacrificing long term financial prospects.  We've had eight years of ultra low interest rates with no end in sight, and recovery from the resulting income losses will take many years, if it ever happens.

More recently, the monetary tool that has become au courant among central bankers is the negative interest rate.  Negative rates are a counter-intuitive policy where borrowers are paid to take out loans.  They are supposed to stimulate lending by penalizing commercial banks for holding deposits.  However, despite being all the rage among central banks in Europe and Japan, they haven't worked out. It seems that people, concerned by the weirdness of negative rates, aren't borrowing but instead are saving more.   See http://www.cnbc.com/2016/08/09/bonds-and-debt-negative-yields-are-doing-the-opposite-of-what-they-were-intended.html.  Negative interest rates signal that the world is not well.  People are hunkering down and building up financial reserves in case times get worse.  This, too, dampens consumption and current economic growth.

But the deleterious effects of ultra low and negative interest rates are more likely to cause further economic stagnation, not a sudden collapse of stock prices.  The reality is that central banks aren't subject to market forces the way the rest of us are.  They are, however, subject to a lot of political pressure to keep current economic statistics looking good.  They know that the political process is largely dysfunctional, and fiscal proactivity isn't on the agenda. So they keep exchanging small near term benefits for large long term costs without any immediate consequence.  The bubble won't burst simply because they are making a bad long term deal. 

Could the central banking bubble burst?  The breakup of the EU might do the trick.  A return of significant inflation would be a major risk factor.  But it's hard to predict the likelihood of either.  In the meantime, stock prices could remain manically frothy.  Central banks can't defeat market forces when the market works against them, as the Bank of England found out in 1992 when it tried to support an overvalued pound against market forces pushing the pound down.  But right now, the financial markets want the central banks to be accommodative.  They applaud the idea.  Since the central banks face no reality checks, they can keep printing money indefinitely.

So, should you suspend belief and keep buying stocks?  Certainly, seeing stocks go ever higher just about every day is encouragement to drink the Kool-Aid and invest more.  But staying well-diversified, with a healthy dollop of cash, may be the sanest choice in an insane world.

Did Ted Cruz Make Trump More Liberal?

Ted Cruz's up your's speech at the Republican National Convention may end up pushing Trump toward the political left.  By advocating "vote your conscience," Cruz encouraged far right members of the Republican Party to abandon Trump.  To make up for this loss, Trump may shift to the left to win over voters in the political middle.  Indeed, he could be doing so already, with a favorable nod toward the gay community in his acceptance speech last night, and with his daughter Ivanka's promise that he would address the gender gap in pay.

If Trump wins in November, a possibility even though polls indicate that it's Hillary Clinton's election to lose, then as President he may prove to be more liberal than he now seems.  That's because Cruz and other far right members of Congress will probably obstinately refuse to compromise with him, just as Cruz wouldn't compromise at the convention.  Trump is a wheeler and dealer.  If he can't do deals with the far right, he might do deals with moderate Democrats.  This wouldn't be hard, since Trump has been a moderate Democrat at times in his life. 

It's debatable whether Ted Cruz helped or hurt himself by digitally saluting Trump at the convention.  But he may have given Trump more latitude to go more liberal.  And if Trump wins, Cruz may have empowered moderate Democrats. 

How the Libertarian Party Could Win the White House

Polls persistently show that many, if not most voters, reach for one of those little white airline bags every time they think of the two leading Presidential candidates.  Never before have so many voters been so nauseated by so few candidates.

But if you look away from the mainstream press for a moment, you'd find out there are two other parties fielding Presidential candidates.  The Libertarian Party has nominated Gary Johnson, former governor of New Mexico, for President, and William Weld, former governor of Massachusetts, for Vice President.  The Green Party has nominated Jill Stein for President and Cheri Honkala for Vice President.  The Green Party has only a tiny presence in national politics.  But the Libertarian Party, seemingly a minor player, might actually have a shot at the White House.  Here's how.

To be elected President, a candidate in the first instance has to win a majority of the electoral votes (i.e., 270 of the 538 total electoral votes).  The Twelfth Amendment to the Constitution provides that if no candidate has a majority, the House of Representatives then selects the President from the top three candidates. 

If the two leading candidates are running neck-and-neck in electoral votes, a third party could deny each of the two top candidates a majority by winning one, two or a few states (and thereby denying the electoral votes from those few states to either of the leading contenders).  Even though the third party might not have anywhere near a majority, it could force the election into the House.

The contest between Hillary Clinton and Donald Trump is likely to be close; neither seems to be able to open up much of a lead over the other.  More importantly, Clinton's unremitting tawdriness and Trump's unerring aim at his own feet ensure that many voters will yearn for an alternative.  Johnson and Weld are experienced politicians will real electoral credentials, having respectively served as governors of their home states.  They are polling between 5% and 10% nationally.  But, in some conservative states, they might be able to become real contenders.  The Libertarian agenda of small government and low taxes might resonate strongly in states like Wyoming, Utah, Idaho, Kansas, Oklahoma and Texas, all of which gave primary victories to Ted Cruz over Donald Trump.  If Johnson and Weld won one or more of these states, and the electoral breakdown between Clinton and Trump is close, it's possible no candidate would have a majority of the electoral votes and the election would go to the House.

In the Republican-controlled House, Clinton would be toast.  Period.  Trump would have supporters.  But he'd have detractors, too.  The Libertarian platform would appeal to many Tea Party and other right-wing members of Congress.  Both Johnson and Weld were Republicans when they served as governors, and perhaps many members of the House would prefer them to the unpredictable Trump, who in the past was sometimes Democratic and sometimes Independent.  Johnson and Weld would have to demonstrate flexibility and open-mindedness.  The zealotry of many past Libertarian candidates has ensured the party would be marginalized.  But, having had much real-life experience in politics, Johnson and Weld might talk turkey well enough to win over a majority of the House.  And Speaker Paul Ryan's extremely tentative, to say the least, support of Trump would probably not present much of a barrier to a Libertarian victory if most of his Republican colleagues wanted to vote that way.

Of course, many mainstream Republicans in the House might well balk at supporting the Libertarian candidates.  But when they consider the alternative--Mr. Maniacal Mouth--they'd probably give Johnson and Weld a pretty close look.  All this may sound like an overly elaborate speculation on a very long shot.  But, given how weird this election has already been, it just might be the way things turn out.