September 25, 2017

Stocks gave up a little ground on Friday, but recovered in the afternoon after Senator John McCain announced that he couldn’t support the Graham-Cassidy version of Obamacare repeal and replace.

The Graham-Cassidy bill, which isn’t quite dead yet but certainly on life support, is really more repeal and punt versus repeal and replace. Essentially, the bill transfers a large majority of the money used under Obamacare to support the private exchanges and coverage to people with significant at-risk conditions to the states to create their own medical insurance programs subsidizing individual markets. Proponents suggest this will allow, indeed force, the states to become innovative and create more efficient programs. By implication, they say that the Federal government is either incapable or unsuited to the task of controlling costs or being innovative.

What you would certainly end up with is 50 different programs. Policies designed for residents in Pennsylvania could and probably would be very different from those in New Jersey. So, what would a Pennsylvania resident who got sick and needed to see a doctor in New Jersey do? The answer clearly lies in language of the laws of New Jersey and Pennsylvania. While it is obviously self-serving, every form of health care provider or health care insurer was against the passage of Graham-Cassidy. If the bill is still destined to come up for a vote, and that might happen until a third Republican formally announces opposition, it will have to be done by early Friday in order for the vote to take place under reconciliation with a majority of just 50 votes, plus Vice-President Mike Pence. If no vote happens by Friday, the only way the flaws in Obamacare can be fixed will be via bipartisan legislation because, for technical reasons, the window for using reconciliation as a vehicle to pass an Obamacare repeal ends Saturday at midnight. Given the Yom Kippur Jewish holiday that starts at sundown this Friday, midday Friday is almost certainly the last moment for a vote. Between now and then, open hearings on the bill have to be held and possibly be scored by the Congressional Budget Office. We can argue about the merits of the bill, but the process of trying to ram legislation through without adequate debate seems rather flawed.

With the announcement of the McCain vote, the odds of the bill passing went from less than 50:50 to almost none. Friday evening, President Trump traveled to Alabama to give one of his periodic stump speeches in support of Senator Strange’s campaign to fill the seat left vacant when Jeff Sessions became Attorney General. As I have noted many times, when events don’t go Trump’s way, he likes to pivot to change the conversation. Friday night, he chose the opportunity to belittle NFL players who protested during the playing of the national anthem. He got the response he wanted. No one was talking about the failure to repeal Obamacare over the weekend. The conversation was all about whether Trump or the NFL players were right. As one might expect, the comments were polarizing. Some strongly support the players (including many team owners) and athletes in other sports, especially professional basketball, spoke out loudly. But while the Golden State Warriors were uninvited to visit the White House, the Pittsburgh Penguins decided to go. NASCAR, which is probably the sports franchise most aligned with Trump’s rural base, supported the President’s message. Clearly, this discussion is very polarized, and I’m sure that is what the President intended. It was designed to shift attention, and it did just that. Expect Mr. Trump to pivot yet again this week and try to move the dialogue elsewhere. It could be tax reform. It could be North Korea. But pivot, he will.

Does any of this affect the investment world? Clearly, maintaining the status quo in healthcare is a possibility for the health care and insurance industries. But that is just a narrow answer. From 30,000 feet, it is hard to see how divisiveness helps economically, but it may not hurt either. Divisiveness has shown up worldwide in many different ways. It showed up in Ferguson, Missouri. It showed up in the Occupy Wall Street movement a couple of summers ago. It showed up in France with the rise of Marine Le Pen, and it showed up over the weekend in Germany when its extreme right wing political party won its first seats in government.

Last week, data showed that household net worth was at record levels and has grown at about a 7% compound rate since the recession. But those gains almost all come from higher home and stock market values. Many Americans don’t own their own homes (roughly 40%) and many don’t own any stocks. For them, life remains a struggle. History shows rather conclusively that as the split between the haves and have-nots increases, the stress eventually leads to unintended consequences. Those consequences are all very different. This morning there is already commentary trying to liken Germany’s alt-right movement with the rise of Hitler in the 1930s. While there are enough similarities to make a semi-logical case for such a conclusion, the evidence shows that history rarely repeats itself exactly. There are multiple cases with very different outcomes in Latin America where the disadvantaged class worked to elect leaders that gave very different results. Contrast Brazil and Venezuela, for instance.

One can also weave the rise in terrorism into the same argument. Once again, the trend is worldwide, but the outcomes vary from nation to nation.

At this juncture, I can’t begin to point out directly any significant economic consequences of the schism between the haves and the have-nots, the divisiveness injected by the current political rhetoric, or any implications of increased terrorism. But all have to be watched. Remember, that Black Swan events (extreme outliers with extreme consequences) by their very nature are not obvious beforehand. Hopefully, the stronger words of Presidents Trump and Kim don’t evolve into anything more than a war of words. But as the screaming escalates, the possibility of an all-out brawl has to rise. Calling for calm is a right thing to do, but it isn’t the solution. That requires dealing with the underlying problem. It means better education, more job training, a proper safety net, etc. Those solutions don’t happen overnight, but neither did the problems.

What we can say is that all the evidence, from the divisive name calling in Washington and North Korea, to the rise of extreme parties on the right in France and Germany, suggests the risk of disruptive consequences is rising. We may choose to ignore the signals for now due to the lack of obvious near term consequences, but we have to remain watchful. We read history to learn how big problems germinate from small seeds, but not all seeds grow into big problems. It is just as likely that the heightened discourse in our country leads to a cathartic, rather than a chaotic, climax. At least we can hope so.

In the meantime, the economy and the stock market march on. Next week we will see a lot of data for September. This week, at least economically, unless the Republicans can rescue health care from the death bed, there will be little in the way of new news. It is the last week of the quarter, so expect some window dressing among portfolio managers that may impact both the winners and losers year-to-date.

Today, Will Smith is 49. Heather Locklear is 56. Mark Hamill is 66. Michael Douglas turns 73. Finally, Barbara Walters is 88.

James M. Meyer, CFA 610-260-2220

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