Back in the late 90’s, many people wanted to become day traders by selling one overpriced technology stock to buy a different overpriced stock. People thought of investing as a short-term gamble. When we look at an investment, we look at it over a three to five year time horizon. Sometimes, an investment will work out sooner than the three to five years – such as our recent call on energy – and sometimes it will take longer. When it takes longer, there are times to add to the position if it underperforms in the short-term – such as our emerging markets position late in 2014. So far this year, both energy and emerging markets are outperforming the market as a whole.

What does this mean for portfolios?

Unfortunately, we have seen too many times when investors make decisions about their portfolio that are based on emotions and lack of patience. When both of these factors come into play, people make investing mistakes that are often detrimental to their financial success. Establishing a well thought out, long-term investment strategy and sticking to it are keys to long-term financial success.

Book of the Month – Seven Bad Ideas – How Mainstream Economists Have Damaged America and the World, by Jeff Madrick

This is the third economics book we have read over the past twelve months that stipulates Milton Friedman and the school of supply side economics has been a failure over the last thirty years. There are two reasons you may want to read this book: 1) Any economic policy should be critically challenged and one should always have an open mind when it comes to economic thought; and 2) many times economists become advisers to politicians and their thoughts and ideas may become public policy. For example, one of the books we recommended a few months back was “The Global Minotaur” by Yanis Varoufakis.   Yanis is now the Economic Minister for Greece. If one had read his book, they would not be surprised by his fight for debt forgiveness and war reparations from Germany. He is a firm believer that Germany has benefitted the most from the Euro and it should re-distribute that wealth to Portugal, Ireland, Greece and Spain.

With several recent books written in an attempt to discredit supply side economics, including this one, one has to question whether these books accurately portray supply side economics.   By critically looking at the ideas in this book, we believe they are wrong in calling the last thirty years a failure of supply side economics.

Supply side economics has two major aspects to it – lower taxes and reduced government spending. You can’t say that supply side economics was at work under Reagan and Bush.   Yes, they both cut taxes, but government spending increased – remember the slogan “The Bridge to No Where” in 2006 – under both administrations. There have only been two times in modern history when supply side economics was truly at work – after World War II and the mid 90’s. In the mid-90’s, President Clinton worked with a Congress led by Newt Gingrich to cut both spending and taxes. This period was one of the best growth periods in our country’s history and the last time we had a government surplus. Supply side economics was also in play shortly after World War II. During that time, President Truman wanted to continue FDR’s New Deal, but with the sudden end to the war and twelve million troops coming home, he did not have time to implement his plan. Congress moved fast against conventional Keynesian theories and quickly cut both taxes and government spending. In 1946, the civilian workforce jumped from thirty-nine million to fifty-five million people – the largest one year increase of private sector jobs in US history. It was the start of the greatest growth period ever and we had a government surplus for the next five years.

In our recent Newsletter – The Harvester – we presented evidence that suggested overregulation is a drag on economic growth. Cutting government spending usually results in a cut in government regulation which is something our economy needs today. Reducing government spending, we believe, is the part of supply side economics that is missing from the discussion in these books.

Sincerely,

Your THOR Team