Investing In A Kakistocracy

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The Greek word “kakistocracy,” which I learned from Peggy Noonan, describes a state or government run by the most unscrupulous or unsuitable people – in other words, the world we live in today. Corrupt, dishonest and incompetent politicians, regulators and bureaucrats were put in charge by self-absorbed, selfish and ignorant citizens. The current presidential election marks a low-point in American history; now the country is holding its breath (and its nose) waiting to see which lesser evil gets the nod. The country needs a political lobotomy. I certainly would feel better if my brain were put on ice until this demolition derby crashes into November.

Caravaggio’s Medusa, A monster, born of Greek gods, whose gaze would turn mortals to stone. photo credit: m.schifrin

Of the many destructive features of our kakistocracy, one of the most disturbing is the continuing failure of progressivism to help the very constituencies (the young, the poor, and minorities) whom it claims to serve. Mark Levin’s latest book, Plunder and Deceit, is now out in paperback; everyone should read it. While best known as a conservative firebrand, Mr. Levin is also a serious constitutional scholar and thinker. In Plunder and Deceit, he convincingly argues that young people and minorities are hurting themselves by supporting a failing progressive agenda that threatens their economic futures. Even worse, promises of more government entitlements run in lock-step with a steady erosion of the institutional boundaries designed to protect individual liberty and autonomy. Presidents of both parties resort to signing statements and executive orders to bypass Congress’s Article I lawmaking authority; the Supreme Court legislates from the bench; and the Federal Reserve adopts unconventional monetary policies that far exceed its statutory mandate. Both political parties massively expanded government over recent decades and both promise further expansions of government and further erosions of the liberty and freedom if elected.

In addition to Mr. Levin’s book, I also strongly recommend Heather Mac Donald’s The War on Cops: How the New Attack on Law and Order Makes Everyone Else Less Safe. In addition to debunking the Black Lives Matter movement, Ms. Mac Donald convincingly demonstrates how politicians and the mainstream media paint a distorted portrait of the criminal justice system and the police. She also describes in great detail the unspeakable conditions in America’s inner cities, where broken families and drug use render it impossible for minorities and the poor to have a chance at a decent life. This book is particularly timely in view of Donald Trump’s attempt to reach out to minority voters and question why they should vote for the same Democrat party whose policies produced such poor results over the last half century. Whether Mr. Trump would actually be better for minorities is a stretch, but speaking out about failing policies is an important first step.

The political reaction to persistent policy failure is profoundly disturbing. The best argument for each presidential candidate is the rank deficiencies of the other. We like to say we deserve better, but until each of us accepts responsibility for what is happening, nothing will change. Until the biased and corrupt media is called to account for its disgraceful political coverage, and until incompetent and corrupt politicians are held to account for their failures, nothing will change. It is going to be difficult to govern a country that is repulsed by its leaders. Just ask Venezuelans.

Leaving aside their personal flaws, neither presidential candidate offers realistic solutions to policy problems or a personal example capable of inspiring the American people to make sacrifices. Confucius wrote: “Three things are necessary for government: weapons, food and trust. If a ruler cannot hold on to all three, he should give up weapons first and food next. Trust should be guarded to the end; without trust we cannot stand.” The political oligarchy betrayed the American people by nominating these two candidates. The country already suffers from profound intellectual and moral deficits that corrupt public policy and render it virtually impossible to constructively address public policy challenges. You can draw a straight line from those deficits to the charnel houses in our inner cities and the chaos destroying the Middle East and disrupting Eastern Europe, the South China Sea and much of Latin America. America is losing its mantle as mankind’s last best hope. Imagine where the world would be if the country was led by such sorry souls in 1939.

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For the moment, Hillary Clinton is leading in the polls. That could change in what remains a very unpredictable political environment though the electoral map still favors her. My concern is that a Clinton victory could leave the country facing simultaneous constitutional and economic crises during her first (and likely single) term. A constitutional crisis could result from ongoing disclosures regarding the Clinton Foundation, Mrs. Clinton’s mishandling of her emails while Secretary of State (including her destruction of thousands of documents), and her repeated lies about her actions. While she may be able to run out the clock on the election and block calls for a special prosecutor once in office, her behavior will render it extremely difficult for her to govern a country that does not trust her. She has done irreparable damage to the rule of law and will govern under a moral cloud. This will be debilitating if an economic crisis materializes during her tenure. The combination of a political and an economic crisis could trigger a market debacle. The question will then become whether we will let the next crisis go to waste like we did the last one. And until a new set of leaders and thinkers steps forward and pushes aside the corrupt confederacy of fools running things today, the answer will likely be yes.

No doubt critics in any age consider their leaders part of a kakistocracy. Maybe our age is no worse than earlier ones. Considering how much America has accomplished, I would like to think that is the case because the current crop shows little sign of having what it takes to clean up the mess they created.

What should an investor do?

Sell risk assets. Stock prices are severely detached from fundamentals. And in the junk bond market, investors are chasing zombies because numerous companies are not generating enough cash flow to reduce their debts or repay them when they mature. Instead, they are just living on fumes and waiting for the day of reckoning, when their debt matures and they can’t pay it back.

Currencies? The US Dollar strengthened a bit in August with the US Dollar Index (DXY) closing recently around 97 after drifting down near 94 in mid-August. The currency markets, like the rest of the financial universe, are relatively quiet as the Japanese Yen (~103) and Euro (~$1.10) continue to frustrate macro investors who have every reasonable expectation that they should weaken. Gold (~$1257/oz.) has also been quiet but remains attractive as central banks show no sign of ending their assault on fiat currencies. With news that the U.S. federal deficit is projected to rise next year to $560 billion, we are reminded that there are only four ways to repay the $200 trillion+ of global debt that weighs on the global economy – growth (not going to happen, as Donald Trump would put it), default (going to happen), inflation (already happening despite what central banks claim), and currency devaluation (already happening but only in the early stages).

Inflation and currency devaluation are going to be the main dramas of the financial world in the coming years. In order to battle these, investors need to buy gold and save themselves.

Excerpted from the September issue of The Credit Strategist