Chapter 23
More Gray and Purple, Less Gridlock

When a government can not get anything done it crushes confidence, and a lack of confidence is bad for investments. This was apparent when political gridlock caused the credit rating of the United States to be downgraded in 2011. Politic extremism has almost made the word compromise a curse which is bad because compromise can lead to progress.

Politics has always been intertwined with the media and the two reflect each other. In the United States some of the early newspapers started as a sideline revenue source for commercial printers. They evolved into very partisan mixes of politics, news, and gossip. In many countries certain news outlets are very clearly identified with certain political parties. Despite the guise of an unbiased news media (especially over the public broadcast airwaves), the media is increasingly showing its biases as they each struggle to carve out an audience in a more crowded field of cable news stations, blogs, and tweets. This can fan the fires of extreme political views with an unwillingness to even take the best ideas from the opposite side of the political aisle.

The media can reflect what people want and those who want extremely biased views of their news typically want the same features in their politicians. This can lead to gridlock. It can also lead to a cycle of alienation and then retaliation, especially when the electorate is fairly close to being evenly split in its political affiliations. For example, if one political party with more extreme views has clear control it may result in much more biased policies that alienate a large portion of the public. If there is a change in power this often results in an inordinate amount of time being spent by the newly elected government trying to unwind the previously placed partisan policies of their predecessors.

Children are often taught that the majority rules. However, does a simple majority say much on what the government should enact as a policy? If a politician favors some extreme policy and wins an election with 50.5% of the votes, how tenuous will the life of any controversial bill be that is passed and how much of a mandate of support for an extreme policy view is that slim margin of victory? Can people really plan for the policy to be in place over a long period of time if 49% of a population disagrees vehemently with the policy? More compromises can accomplish great things and be more efficient. In the 1960s in the United States Hubert Humphrey reached out to Everett Dirksen in the U.S. Senate; they were in different parties and on opposite sides of the debate, but they hammered out a compromise and the Civil Rights Bill passed. Likewise, Tip O’Neill, the former Speaker of the House and a Boston liberal democrat was able to reach agreements with President Ronald Reagan, a conservative republican, and get several bills done including the social service reform.

Extreme beliefs and radical views can sometimes be vital to accomplish big things. Winston Churchill was unwavering in his view of Adolf Hitler; if there had been much more accommodation by the United Kingdom, history might have been very different. However, most modern politics and most situations can benefit from compromise. Unfortunately, the chronic need to get noticed in the digital age seems to require more extreme messages and often the message is that compromise is bad.

Willingness to compromise can help avoid shocks. Should the Brexit vote have been so black and white? A decision to leave one of the world’s largest free trade zones is a radical decision, even if the European Union has a growing tendency to wander into regulatory overreach. Perhaps a stronger attempt to negotiate what the United Kingdom needed in the relationship with the European Union should have been undertaken. Perhaps the vote should have signaled that they demanded that they needed to negotiate diferent terms not exit. A little more gray may have been better than a choice of just black or white.

In the United States there are huge swaths of the country that on political maps are colored either red (republicans) or blue (democrats). It looks like a military map with armies staking their territories. Too many politicians only want to listen to their own view and refuse to take any ideas from people on the other side of the aisle. This is easier when there is a lack of diverse political views in a politician’s home district and they can be assured of reelection. It would help if there was an increased understanding that compromise is necessary and can be positive, there are many areas of common ground, and it would be good to have a bit more purple on the political map.

Economies and asset valuations tend to do best when governments can show that they can get things done as well as exhibiting a level of stability and predictability. Warring factions glaring at each other across a demilitarized zone of gridlock is not helpful for asset valuations and is not a recipe for rapidly responding to economic ills when they appear.

Periods of government inactivity can lead to investor complacency about political risk. The status quo never stays in place and radical change in political policies can come ripping into market valuations. From Roosevelt’s New Deal to the recent Brexit vote, policies can crush old valuation models and create new trends, if you adapt quickly and do not get trapped into anchoring bias based on old policies you can often recover from an investment standpoint when there is a radical shift. Mapping out the potential impact from various political scenarios before they happen can be valuable and should be done alongside any financial analysis.

Selected Ideas from Part 6