Howard Marks memo to Oaktree investors for the month of November 2016.
I’m starting this memo a week before Election Day. I promise to try to stay away from the merits of the candidates and the question of who will win, and instead confine myself to the important messages that we should take away from the election and the actions we should push for as a result. The outcome of tomorrow’s election won’t change these things as far as I’m concerned.
Of course, the big story of this election year has been the unprecedented, unconventional rise of Donald Trump. Trump threw his hat into the ring with a complete lack of experience in elected office or other public service, and without an established campaign organization. In fact, he had no established party’s ideology. He adopted some Republican elements but rejected others. And yet he has been able to attract a large group of voters, probably about 50 million strong.
He did this by assembling backing from an unusually diverse mix of elements. These included dedicated Republicans who weren’t about to vote for a candidate of another party; the many Clinton haters who’ve had 24 years to gel since Bill’s first inauguration; people who were attracted to Trump’s celebrity, reputation for business success, outspokenness and colorful manner; and supporters of the right. But this tells only part of the story.
The aspect I consider most important for the future relates to the Trump supporters – and some of the most active and vocal ones – who are motivated by an anger regarding “the system” that is neither purely emotional nor illegitimate.
Many are older, white, non-college-educated men who might be described as “demographically dislocated.” When these men were born, white males ran America; their communities weren’t mixed and becoming more so; and the cultural shifts occasioned by the civil and women’s rights movements, technological change and mass immigration were unimagined. Certainly the shift to the America of today – with all these things quite different – might be jarring and unpleasant to the people I describe.
At the same time, many Americans – and often the same ones – are experiencing the effects of job loss and diminished economic prospects. Fifty or even thirty years ago, men without college degrees could easily obtain good-paying jobs and the pride associated with being able to maintain their families at a good standard of living. One earner per household was enough, and one job per earner. Strong labor unions ensured adequate pay and benefits and protected workers from too-rapid changes in work rules and processes.
Now the number of unskilled jobs has been reduced by automation, foreign manufacturing and increased globalization of trade. Unions are much less powerful in the private sector (name a powerful union leader of today who comes to mind). Men of the sort described above – older, white and non-college-educated – are likely to have lost jobs, know someone who has, or seen the impact on their communities.
Importantly, until 2000, most Americans felt their children would live better than they did. Now this is no longer true:
Here’s a quote from Thomas Friedman in The International New York Times of June 30 that I used to sum up in “Political Reality” (August 2016). As I wrote there, I think it does a great job of capturing the situation:
What we have is a country – in fact, a world – that is changing rapidly and in ways that are unpleasant and disorienting for large segments of the population. The present is different from the past, and the future looks worse than it used to. Slower economic growth is producing less opportunity overall, and a number of forces are supplementing slow growth in diminishing the outlook. Rising income inequality is directing an increasing share of the gains to top earners. Older people lacking higher education are particularly ill-equipped to deal with the changes.
I think this is an apt description of conditions in the U.S., but it seems equally applicable to much of the developed world. In an opinion piece on October 26, starting from the German point of view, Joachen Bittner of the International New York Times described a broad group he called Wutbürgers, or “angry citizens.” I think they’re rising everywhere:
The point of all of this is that Trump is importantly supported by dislocated, disoriented voters who are angry about a number of unquestionably significant trends that are impacting them and their communities. Regardless of the outcome of the election, they and their sentiments will remain a powerful force.
Here’s how I concluded the relevant section of “Political Reality.” I’ll let it do the same here:
A Call to Action
As Bittner wrote, voter anger can be a potentially-powerful force for change. It is my hope that the presence of this anger will make it clear to our elected leaders that change is needed, rather than that they should dig in their heels further to fight the opposing party.
As I recall, it was in the 1980s that a massive ideological gulf opened between the Democrats and Republicans, with the liberal views Carter had espoused while in office (1976-80) contrasting sharply with the strict conservative philosophy Reagan brought to his presidency (1980-88). After the quieter presidency of Bush the Elder, Bill Clinton held office in 1992-2000, and the attitude of the right approached revulsion, whether based on his liberal agenda or his personal conduct. Very negative feelings also befell George W. Bush in 2000-08 (who was named president after an election decided by the Supreme Court, and who took us into war in the Middle East) and Barack Obama in the last eight years (with what the right considered his overreaching plan for health care).
Over the last 36 years, then, politicians have become more combative and less willing to compromise – and certainly unwilling to take their lead from the occupant of the White House if he’s from the other party. It often seems the members of both parties have devoted themselves primarily to denying the other any accomplishment. And in our system of government – where the two houses of Congress and the presidency can be under the control of different parties, and where in the Senate it can take 60 votes out of 100 (not 51) to advance legislation – it’s easy to prevent progress. The result has been gridlock and a total lack of forward movement.
Some people – and especially conservatives who think the size and role of government should be limited, and libertarians who generally oppose “coercive institutions” – think gridlock is a good thing. They think the less government does, the better. This was a particularly popular sentiment around the time of the Reagan presidency, when conservative ideology was in its heyday.
But we cannot cope in this complex, rapidly changing world without some solutions. Inaction can’t always be depended on, especially given that we’re not starting from the ground zero of virgin territory. Government has taken action in the past – for example, setting the rules for Social Security – and it legitimately may have to rewrite those rules when circumstances change: when there are fewer people working per retiree, or when people live longer. You can’t say “I prefer gridlock” and assume the system will remain solvent.
We need good decisions made and action taken on not just Social Security and other entitlements, but also the health care system, trade agreements, infrastructure spending and other fiscal stimulus, our defense posture and – yes – appointments to the Supreme Court. This year, Republicans refused to deal with President Obama’s nominee to fill a Court vacancy. That vacancy will remain for the new president to fill, and two to three more are likely to open up in the next four years. Will they be dealt with constructively – by whichever party doesn’t occupy the White House? Or will there be continued obstructionism and a lack of decision making.
The writer of the 2014 Washington Post piece cited above, regarding diminished optimism, attributes some of this to the slowness of the economic recovery since the financial crisis of 2008, and some to increasing inequality, meaning fewer and fewer people are participating in the gains. And then she goes on to cite another possible reason:
Thus I believe that citizens are angry not just because of recent trends, but also because the government hasn’t done enough to stem them or lessen their impact. Even a “conservative” who favors a limited role for government may want some action taken if he has lost his job due to globalization or automation. Trump promised to help, and it has won him a lot of votes.
It is my hope that constructive action will be taken. Here’s what Blackstone founder and former Secretary of Commerce Pete Peterson wrote in his book Running on Empty:
The Importance of Bipartisanship
I think we’re on the way to a geometry proof (remember high school?).
- The voters are angry about the level of government inaction.
- Positive steps must be taken if we’re to solve today’s pressing problems.
So what’s the next step, the next essential ingredient? To me, it’s bipartisan compromise.
When I was a kid, the leaders of the two parties in Congress worked with the president to solve problems and achieve legislative compromise. Here’s what I wrote on this subject in “A Fresh Start (Hopefully),” after the last election in 2012:
Flaws in Our Democracy
There’s a good chance that this year’s election result will demonstrate the presence of elements capable of rendering our elections less than perfectly democratic. The main culprit is the Electoral College. Here’s more from “A Fresh Start” in 2012:
- In all but a few states, 100% of the electoral votes go to whoever wins the popular vote there, regardless of the margin.
- Most of the 50 states – this year it was roughly 43 – are considered “uncompetitive,” meaning one party or the other enjoys a substantial, dependable majority.For that reason, a vote for a Republican is totally meaningless in a Democratic state like California, as is a vote for a Democrat in Republican Utah.
- On the other hand, the electoral system gives voters in a few states disproportionate influence.Since the uncompetitive states’ electoral votes are not in play, elections are determined by only the few so-called “swing” or “battleground” states.In fact, this year many people thought the election might be determined largely by who won in just one state: Ohio.
- Perhaps most glaringly, a candidate can be elected president with a majority of electoral votes despite having received fewer popular votes than another.
The existence of the Electoral College can lead to other possible complications. In “Political Reality” in August, I raised the question of what happens if no candidate receives a majority of the 538 electoral votes:
Lastly under this heading, I want to touch on the role of money. In our elections (a) the vast bulk of campaign funding is provided privately, not publicly, and (b) the Supreme Court has ruled, in effect, that the amounts donated largely cannot be limited. The result, in my view, approaches the undoing of “one man, one vote.” While each person’s actual vote is the same, his or her influence on the outcome is not. Here are just a few data points, according to Business Insider (October 31):
- Nearly $6.6 billion is the amount candidates, parties, and outside groups are raising and spending in trying to move things their way in the 2016 election cycle, the Center for Responsive Politics estimates on its website, org. It’s a new record. It’s up by $86.5 million, adjusted for inflation, from the 2012 presidential cycle, which had also been a record.
- The biggest increases in money flows, compared to 2012, came from outside money groups “that purportedly work independently from candidates,” the report said. They’ve greased this election with $1.3 billion so far (through October 24), $190 million more than at this point in 2012, accounting for 26.8% of total spending.
- And it’s getting more concentrated: “The top 100 families” contributed $654 million to candidates, political parties, and outside groups so far, or 11.9% of the total raised, up from 5.6% in the 2012 election cycle.
- The top ten families have given a total of $281 million so far this year.
It wasn’t many years ago that contributions were limited to a couple of thousand dollars per candidate per race. Now $100,000 isn’t an uncommon ask, and there are legitimate (but possibly cynical) ways to donate millions. Given the amounts involved and the private sourcing, I find it hard to believe that elected officials are able to entirely ignore donors’ interests and preferences when they do their jobs. I’m not talking about corruption, just a not-quite-level playing field. This area is ripe for change. But given that the Supreme Court ruled that political donations are “speech” and thus can’t be regulated, change would require a constitutional amendment or a different decision from the Supreme Court.
The Outlook for the Parties
One thing that’s uncertain as we move forward from here is what the future holds for the two main parties.
Many voters crossed long-standing party lines during this campaign:
- Working class Americans, traditionally Democrats, were attracted to Trump by his anti-establishment, non-politically-correct, “Make America Great Again” approach.
- Big business, traditionally Republican, failed to support Trump, perhaps because of his anti-trade positions – even though he might well be a more pro-business president than Clinton.
- College-educated white Republicans – and especially women among them – backed Clinton, presumably because of Trump’s controversial behavior and Clinton’s role as the first woman candidate.
Will these new party allegiances hold? Or, if they arose largely because voters felt either attracted to or repelled by one of the 2016 candidates, will some or all of these developments reverse when the candidates are different?
The leaders of both parties were challenged this year by angry members. Will those members stay with their parties, or will they be less rooted in the future and “up for grabs”? The make-up – and the cohesiveness – of both parties is in flux, and thus the next election may be another that deviates from the usual path.
The Democrats have their issues. It’s one of Trump’s assertions that the Democratic party has been taking its working class members for granted, talking up the connection at election time but failing to come through with solutions, especially for displaced workers. (Democrats will counter that it’s because Republicans have been successful in implementing gridlock so as to stymy programs like retraining.) The fight between moderates and liberals for control of the Democratic party – made clear in the divided primary results between Clinton and Sanders – is far from over. Sanders supporters may decide that the party leadership isn’t liberal enough.
But I think it’s the Republican party that faces greater challenges. Over the last few decades, the party has been thrown together from largely unrelated and disjointed elements. As I described in “Political Reality,” the traditional Republicans of 60 years ago – fiscally responsible, pro-business, socially moderate and strong on defense – have been joined more recently by conservatives, the Tea Party, Evangelical Christians, anti-gun-control voters, anti-abortion groups, and now the economically dislocated. The glue is weak; rather than by ideology, they have been unified primarily by the fight against Democrats.
Will all these groups stay within the party? Perhaps some of the last will “vote with their feet” with regard to House Speaker and party leader Paul Ryan, who first refused to endorse Trump, then did endorse him, then described Trump’s raunchy 2005 video as “troubling” and said he wouldn’t campaign for him or support him, and then voted for him and expressed support but did so – pointedly? – without mentioning his name. After Ryan responded to the video by disinviting Trump from a joint campaign event in his home state of Wisconsin, he was booed by some in the crowd. Will Trump supporters remain Republicans if Ryan continues to lead the party? Will Trump supporters elected to the House support Ryan in his leadership of their caucus?
Ryan’s experience wasn’t unique: numerous Republican politicians had problems with Trump’s policies or actions but needed his supporters, who constitute a large part of Republican voters. The conflict between principle and pragmatism is very real, and the painfulness of their dilemma has been clear. It has produced flip-flopping and confusing stances (raising the question of whether it’s possible to support a candidate but not endorse him).
If Trump’s supporters desert the Republican party (or the political process) due to disenchantment with the behavior of its leaders, the party may have a hard time pulling together a meaningful following in future elections.
The Republicans’ plan after the defeat of Mitt Romney in 2012 centered around increasing its appeal to women and Hispanics and other minorities. In this campaign, however, that effort probably went into reverse.
I think the Republican party faces real issues. And my point here is that our country needs two strong parties, not an elected dictatorship. With two strong parties there can be an active debate of ideas, and neither is able to operate unopposed in a Washington devoid of meaningful resistance. The complete opposite of gridlock – free rein – isn’t desirable either.
On November 2, John Cassidy wrote in The New Yorker of:
It’s very much worth noting that the electoral map showing who’s expected to win which states has the West Coast, the Northeast and the Upper Midwest quite solid for Clinton and a broad swath down the middle of the country for Trump. The regions’ differences from each other are very significant, with the people in Trump country more likely to live rural lives, to have been born in the U.S. (and often in the same town in which they now live), and to have worked in manufacturing. These differences contribute to the divide described above.
The political arena this year seems like a battlefield, divided much more than usual by antagonism, incivility, anger and downright hatred. Elites, establishments, experts, incumbents, insiders, internationalists and political correctness all came under attack, with no one to defend them. Slow economic growth – accentuated by continuing automation and international trade – is likely to continue to leave dissatisfaction within the working class. And after having seen behavioral norms wiped away in the first x-rated campaign – and doubts raised about the impartiality of the FBI and even the fairness of our elections – large numbers of people may be left alienated. When the election is over, these things are likely to remain the case.
But as I look forward, I see the need for constructive, bipartisan governmental action. Is that wishful thinking? Winning future elections could become a function of producing solutions, and that in turn could lead to cooperation and compromise between the two parties. I’ll use a rarely seen word to describe my dream: comity. Its definition makes it perfect for this use: “courtesy and considerate behavior toward others.”
The environment described above doesn’t feel like one that encourages comity or one in which the parties can function internally and work together. Therefore we might have to hope that politicians will conclude not only that the future of the country requires bipartisanship, but that their own success does as well.
Unlikely? Perhaps. But after a post-election memo in 2012 that proved far too optimistic, I say, “why quit now?”
November 7, 201
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