The true prophet is not he who predicts the future, but he who
reads history and reveals the present.
--Eric Hoffer, American moral and social philosopher
I could almost hear my history teacher espousing Eric Hoffer's
words last week as I was asked by a particularly prescient media
type if trust and character would really command a "premium"
price/earnings multiple for the stock market. My response was, "Of
course," and as an example I referred him to a quote from John
Pierpont Morgan, who built his family's fortunes into a colossal
The referenced verbal exchange took place when an aging J.P. Morgan
testified before a House of Representatives' committee
investigating the financial interests of the "House of Morgan." A
tough lawyer named Samuel Untermyer queried him. The conversation
went like this:
Untermyer: "Is not commercial credit based primarily upon money
Morgan: "No, sir, the first thing is character."
Untermyer: "Before money or property?"
Morgan: "Before money or property or anything else. Money cannot
buy it... because a man I do not trust could not get money from me
on all the bonds in Christendom."
While Morgan's language is from an era gone by, the essential
insight is as clear today as it was decades ago. I recalled the
Morgan/Untermyer exchange as I read Friday's
Wall Street Journal --
in particular, "Robbery at JPMorgan." The article began,
"Government lawyers are backing up the truck again at
) to extract another haul from the country's largest bank." Recall
that JPM is one bank that did not need taxpayer assistance during
the financial fiasco of 2008, or ever since. To me, that speaks
volumes about the character of JPM's CEO, Jamie Dimon. This lack of
government dependence, combined with Dimon's remarks about how the
Dodd-Frank financial reform act is hurting the economy, is likely
what put Dimon in the government's crosshairs.
This also explains why the government is beating up on JPM again
over the "London Whale's" $6 billion trading loss, even though
public costs. The irony is that Jamie Dimon is one of the few bank
CEOs who avoided the credit excesses. He also, at the pleading of
the government, rescued Bear Stearns and Washington Mutual (WaMu).
The FDIC chairperson at the time, Shelia Bair, said, "[The WaMu
situation] could have posed significant challenges without a ready
buyer.... Some are coming to Washington for help; others are coming
to Washington to help." Now it appears Washington is suing JPM for
helping. I have no doubt about Jamie Dimon's character. I do,
however, doubt the character of some of the folks inside the DC
Beltway, on both sides of the political equation, who are about to
close down the government.
As of this writing, it looks like a governmental shutdown is a
. But having lived in DC, I know that, many times, these things are
overdramatized. Tonight marks the end of the US fiscal year;
without an agreement on a continuing resolution (
), the government will indeed shut down at midnight. Following that
comes the much more important debt ceiling debate to prevent a US
Treasury default on October 17. Since 1970, there have been 17
"shutdowns," and guess what -- we have survived every single one of
Interestingly, the stock market has historically done worse the day
and week after the shutdown than it did leading up to the event.
Moreover, in 11 of those 17 instances, the
(INDEXSP:.INX) was higher one month later. Like I did with all the
tapering noise, I tuned out the noise (hints, leaks, etc.) and paid
attention to the data, not the rumors; I am doing the same thing
here. That "tuning out the noise" was why I was adamant there would
be no tapering at the September FOMC meeting. I think the same
holds true with this "shutdown" and/or "default" situation. The way
Washington works is all about political interest and political
survival. As Senator John McCain told the
New York Times
last week, "We will end up not shutting down the government, not
defaulting, and not defunding Obamacare. I've seen how this movie
ends, but I don't know all the scenes."
Speaking to this "political interests/survival" issue, the
president is not up for election again, the Senators and Congress
folks are. It's pretty easy to figure out who wins that game of
chicken. Moreover, the budget deficit is collapsing at a much
faster rate than even the non-partisan CBO suggests. That trend
reduces support for tax increases and spending cuts.
As the astute GaveKal organization notes:
The big spending reductions implemented since the 2011 budget
crisis have left little scope for further significant reductions in
discretionary spending. Fiscal conservatives now recognize that the
only programs large enough to transform the budgetary outlook are
Social Security, Medicare and defense - but these programs tend to
be strongly supported by elderly and conservative voters. That, in
turn, implies a political transformation. The Republicans are no
longer trying to extract major spending reductions in exchange for
their budgetary votes.... Republicans are now using budget votes to
advance a political cause, the abolition of Obamacare, which is
purely symbolic because it offers no scope of compromise with the
president and therefore no chance of enactment.
Understanding these points makes the upcoming battle predictable.
Rather than destroy our country's credit with a default, and a
long-term closing of the government, this charade will be resolved
over the next few weeks. The Republicans, rather than be blamed for
the whole thing, will "cave" and the shutdown/debt ceiling issues
will be resolved just like what happened with the fiscal cliff,
which at the time I said was also a non-event.
While this is not as much of a non-event, we will get through this,
just like we got through what the media termed the fiscal cliff
"Armageddon." When we do, the equity markets may do what they did
following the drama of the alleged fiscal cliff "crisis." Back
then, the S&P rallied 100 points before experiencing a decent
The call for this week
: I am in the Washington, DC, area consulting with political types,
seeing accounts, and speaking at events for our financial advisors.
I began this commentary with the quote, "The true prophet is not he
who predicts the future, but he who reads history and reveals the
present." If you study the history of governmental shutdowns, there
have been 17 of them since 1970 (see S&P 500 performance chart
below), and it becomes clear the shutdown and potential default
will get settled over the next few weeks.
If so, the stock market's attention should revert to the improving
economy, gasoline prices at their lowest level since January,
improving earnings, better economic numbers out of China... well,
you get the idea. Interestingly, it has been the mega cap stocks
that have been the weakest, which is why the
Dow Jones Industrials
(INDEXDJX:.DJI) has been weaker than most of the other major
I still think the near-term directional battle will be fought at my
longstanding 1684 "pivot point" basis the S&P 500. This week
should provide the answer. One of the good things about the recent
decline is that you get to see which sectors are holding up the
best. Based on my methodology, financials, industrials,
consumer/noncyclicals, and consumer/cyclicals are currently the
strongest sectors. This morning, however, it looks like the opening
prices are going to slice right through my 1684 "pivot point." But
it is the closing price that counts.