The Contango Capital Advisors Investment Strategy Group, a subsidiary of Zions Bancorporation, provides regular updates on the economic and financial environment.
By George Feiger
President & CEO of Contango Capital Advisors
Thomas Jefferson asserted that “a democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.” This commentary acknowledges that the financial crisis has brought out the mobs. However, democracy can sometimes be a force for economic progress.
Extraordinary short-sightedness, a triumph of instant gratification over common sense and the lure of apparently easy money have created in Europe and in the US different but analogous challenges of debt-bloated societies and undeliverable social promises. Our financial structures, having attempted suicide by greed, are severely wounded and unable to support normal business activity. The US has, in common with the Europeans, a deep disconnect between what the people want and what the people can get. Much needs to be restructured, in a fundamental way.
Talk Is Cheap
It is the job of the political process to reconcile what is wanted with what is achievable. In neither Europe nor the United States have political leaders stepped up. They say only what they think the people want to hear. In Europe, this means promising to save the Euro – but without imposing enormous but necessary sacrifices on the taxpayers of the “north” – and without dismantling the corrupt and inefficient social structures of the “south.” In the US, one party promises to cut most government expenditures without harming anyone really, while the other proposes to tax more without further hobbling the economy.
A growing realization that these claims are empty appears to be transforming people into mobs. Riots and strikes are spreading in Europe. Here, the Tea Party is being joined by Occupy Wall Street in a rejection of our normal political processes for resolving social problems. Yet amid the chaos there is, for the first time, a real glimmer of hope, at least for the US. Our mob seems to be smarter than theirs and starts from a better place.
The only way to have both balanced budgets and substantial social benefits is to generate economic growth. Expenditure cutting, like cost cutting in a business, though essential, soon reaches a natural floor. Our politicians, under enormous pressure from waves of public disapproval, appear at last to be turning to fundamental reform of the tax code.
Drastic simplification of the code is the only way to lower marginal tax rates for everyone and thereby provide a strong stimulus to growth while collecting more tax revenues by getting rid of the mountain of tax preferences that allow much economic activity to escape taxation altogether. Because we have an entrepreneurial economy not heavily encumbered by unions and bureaucratic processes, we can be confident that real tax reform will generate real economic growth.
A Misguided Mob
The mob in Europe shows no such perspicacity. They are fighting to keep excessive benefits and labor-market-strangling rules. In lieu of tax reforms, they propose to punish the bankers and speculators, followed (in the north) by imposing draconian expenditure reductions on the south. Structurally, the fact that there are 17 governments in the Euro Zone makes a policy of dramatic tax and benefit rationalization virtually impossible to put in place in any case. This has already become evident in the difficulties of organizing the much more immediately urgent task of bailing out the banks.
Our bet is that we will achieve enough tax reform in the US to restart the economic machine whereas Europe will continue to struggle for at least the next decade. We are holding our US equity positions (focused on global blue chip companies) and are waiting to rebuild our emerging market and resources portfolios. Europe, on the other hand, needs to get a lot cheaper to draw us in.
The opinions expressed above are solely those of Contango Capital Advisors and do not necessarily reflect the views of Zions Bancorporation, its affiliates or its management.
IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA1011-0163