Why nothing works - We cannot decide whether we are Hamiltonians or Jeffersonians

 

Why Nothing Works: Who Killed Progress and How to Get It Back by Marc Dunkelman is one of the more interesting books on politics that I have read this year. It is thought-provoking and can help explain the problem in getting things done in the US. It may not solve the problem, but it offers a plausible framework. 

The progressive movement, now well over 100 years old, is driven by conflicting philosophies about the role of government. These two approaches, Hamiltonian and Jeffersonian, represent very different views on how government should be used to solve problems. The Hamiltonian approach is a top-down, big-government approach that seeks to offset large private-power and control projects through experts. The Jeffersonian approach to government looks at large institutions and power as corrupting. The power should be dispersed and controlled by the people, not by experts or large institutions. 

How can you get something done if top-down control by Hamiltonians is viewed with suspicion by the Jeffersonians? You may not be able to have ot both ways, and vacillating between the two will lead to inaction and program failure. The train to nowhere in California is all about the Big project, Hamiltonian government micromanaged by Jeffersonian rules and regulations to get local input. 

No one seems to want either extreme, but the middle ground leads to an environment where Nothing works.

The Doom Loop - Explaining the dollar

 

The Doom Loop: Why the World Economic Order Is Spiraling Into Disorder by Eswar Prasad is a good book for explaining the current trouble with a dollar for anyone who wants a non-technical read on the subject. It focuses on the intersection of economics, finance, and geopolitics rather than on the theory of international finance. 

The book’s main focus is that we are caught in a destructive feedback loop driven by a changing geopolitical environment. The movement away from US hegemony in globalization is now being replaced by a fragmented system with more dispersed economic and financial power. It is not that we should go back to the old system, but globalization caused fissures that cannot be replaced. The backlash to a global hegemony of rules and governing institutions means that a single currency cannot dominate the world and create a stable world order. 

Can the dollar be replaced? The answer is no: the dollar cannot dominate, which means there will be more financial instability in a world order that cannot be controlled. 

What are equity markets discounting? it is not risk

 

The Iran conflict is not over, yet the markets are optimistic. Perhaps it is because we don’t know what to call this oil crisis. Is it a war? A dispute? A current pause? The SPX was up over 10% for the month. The high beta names were up over 15%. For the sector extremes, the communication services sector was up over 18%, while the energy sector was down 3.45%. Surprisingly, emerging markets were also up over 11% for the month and strongly higher over the last 12 months at 32%.  Even bonds were slightly higher for the aggregate index.Yet the market is facing a significant commodity shock, with the DJCI up 31% so far this year.

Is there anything to worry about? Central banks? Growth? Inflation? The markets are either looking through any negativity or do not believe it even exists. This is a path that should concern any investor. 

Periods of Stagflation - there have always been with us

Despite strong performance in equity markets, there is still considerable talk of stagflation. The stagflation story is not just a 70's problem. It can happen in other countries and almost any time. It is more likely that we have a supply shock that can affect both prices and growth. The longer the oil crisis in the Middle East lasts, the greater the likelihood that we will see stagflation. Stagflation has generally been short-lived because the underlying cause changes. An energy crisis is averted through a new supply or a solution to the initial problem. 

Right now, we are not close to the 2% inflation target, and the cost of higher energy is just starting to bite. The likelihood of a stagflationary period in the second half of the year is increasing.