THE OPTIMIST CONTRARIAN - PART II

WHEN THE "UNPRECEDENTED" IS ACTUALLY PRECEDENTED

The word “unprecedented” may be the most misapplied word in the English language. Today, we are seeing this everywhere. The pandemic is unprecedented, the level of divisiveness among Americans is unprecedented, the amount of fiscal debt is unprecedented, technological disruption is unprecedented, and yes, our politics and the recent election are unprecedented.

Why are so many things characterized as “unprecedented”?? The answer is actually simple. Given that the average lifespan is currently ~80 years and careers are roughly half that, people personally experience and witness very little. Therefore, the vast majority of events appear to be unprecedented. This can have a dramatic impact on the markets. 

This phenomenon occurs in both bear and bull markets. If investors believe a negative event like the pandemic is “unprecedented”, the future will suddenly appear uncertain. If the future appears uncertain, fear creeps into the market. If fear creeps into the market, it falls. If the market falls, investors make poor decisions in a panic. On the flip side, if investors believe a positive economic or technological trend is unprecedented, the future suddenly become limitless. If the future is limitless, every investment attached to that trend becomes attractive. If every investment becomes attractive, capital flows increase. If capital flows increase, the market goes up. And, if the market goes up a lot, investors make poor decisions in a bout of euphoria. 

How can we combat this tendency, especially in a period that feels unprecedented on many levels? By simply paying attention to other people’s experiences. Let’s start with a few of the most noteworthy headlines of the day. 

“UNPRECEDENTED” POLITICAL DIVISION

Just a few miles from the front step of my house, the “unprecedented” situation on Capitol Hill is receiving a disproportionate amount of the national attention. Nearly all we hear from the media is that this is “the most divided our country has ever been”, that “both parties are taking unprecedented actions”, and that “the country is headed into unchartered territory” that could “end the Republic as we know it” and “bring down the economy in the process”. Really? I don't believe so. Why? Because we have been here before...when the country was infinitely more fragile.  

In David Rubenstein's book, “The American Story: Conversations with Master Historians”, the Carlyle Group co-founder highlights a series of interviews with famous historians at the Library of Congress. In doing so, he places a spotlight on the fact that much of what we are living through is far from unprecedented. In fact, almost all of it is precedented.

First, today’s level of slandering, accusations, and division is nothing new. In fact, while we tend to think of our founding fathers as more civilized and upstanding than the current generation, they were anything but:

• “During John Adam’s presidency, members of Congress often attacked each other with fire tongs on the Senate floor.” - David McCullough
• “John Adams characterized Alexander Hamilton by saying ‘He has a superabundance of secretions, which he cannot find holes enough to draw off’.’” - Ron Chernow
• “Thomas Jefferson’s supporters often referred to Hamiton as the ‘creol bastard,’ which was especially hurtful because he was bi-racial and illegitimate.” - Ron Chernow
• “Martha Washington called Thomas Jefferson, ‘The most despicable of all mankind’.” - Cokie Roberts
• “During Alexander Hamilton’s time in Washington’s administration, members of the cabinet regularly hired surrogates to write scathing articles about other cabinet members in order to undermine them.” - Ron Chernow

Accusations and slandering were just the start. 

While it often might feel like the American Republic is on the brink of collapse due to the controversies surrounding the recent election, the Mueller Report, the Squad, the Tea Party, the Trumpers and Anti-Trumpers, QNON and ANTIFA, our massive debt, and media divide, the fact is see have seen this story before during much more tenuous times. In fact, the next time you hear someone say, “This is not what our Founding Fathers had intended”, consider this: 

• “During George Washington’s first term, while he and his Secretary of the Treasury (Alexander Hamilton) were negotiating with the British during the French Revolutionary War, his Secretary of State (Thomas Jefferson) was simultaneously (in France) making promises and back door agreements with the French behind Washington and Hamilton’s backs.” - David McCullough
•  “When Aaron Burr had his duel with Alexander Hamilton, he was the Vice President at the time. Then, after killing Hamilton, since he was wanted in multiple states he fled to Washington and presided over an impeachment trial of a Supreme Court justice in the U.S. Senate.” - Ron Chernow
• “The United States was literally bankrupt when George Washington was sworn into office -- American debt was trading at 10-15 cents on the dollar. Any other regime after a revolution would have repudiated the debt. However, Hamilton felt that as a part of American pride and honor, the debt had to be paid off in full and at par, which it did. The trouble was that U.S. soldiers owned a large portion of this debt as IOU’s for their service, but had sold it to speculators at extremely depressed values. The speculators made a fortune when bond prices recovered, while veterans were left with little to show for it.” - Ron Chernow
•  “If you think the press is bad today, when Thomas Jefferson was running for re-election, the newspapers wrote that he had ‘pimped’ his best friend’s wife (Dolly Madison) and her sisters in exchange for votes.” - Cokie Roberts

These examples are from one thirty year period….think about the countless other examples over the subsequent two centuries

UNPRECEDENTED PANDEMIC, VACCINES, AND TECHNOLOGY

This madness is not isolated to Congress. It extends well beyond Washington D.C. 

One group thought it was unprecedented that they were asked not to congregate in large groups for a Thanksgiving, while another through it was unprecedented to disobey such orders. Yet, as this article is from 1918 highlights, we have been here before (i.e. The Spanish Flu). 

The same could be said for masks and the conflicts over wearing them. 

Or the debate surrounding vaccines. 

Or concerns about technological advances creating access to too much information. 

You get the point. So, what does all of this have to do with future equity market returns, fixed income yields, or the Fed Funds rate? Very little. However, it does reveal a lot about human behavior and why it is so valuable to have the proper perspective about it. As David McCullough made the case during his interview with Rubenstein at the Library of Congress, 

“History is human. That is what it is about. ‘When in the course of human events’. History is about people and it is the people that we need to know and understand. Why they did what they did. Why they were the way they were. What they were up against. What were their advantages (and disadvantages). To understand history you have to know who we were, how we got to where we are, why we are the way we are, and where we might be going.” 

TAKEAWAY 

Despite today’s countless challenges, I am optimistic about where things are headed. Very optimistic. Why? Because the reason this country has persistent conflict and debate is because democracy encourages it. It inspires conflicting opinions. It encourages Americans to take stances and vote for the direction they want the country to follow. Other countries may appear less conflicted and contentious on the surface, but with that comes other consequences....consequences that can lead to much more significant strife. Personally, I will take our system, largely because out of our conflict emerges solutions, leaders, and progress. 

But maybe Tim Russert, the former host of Meet the Press, summarized it best when he said,

“I interview politicians for a living and people can get jaded, cynical about the process. I must admit I have my moments. But, all of that is trumped by ‘What a Country’.”