Skip to main content

Harvest Rock Advisors, LLC

Pardon Me

Something should be done about these ridiculous presidential pardons that occur at the end of every presidential term.  I know it would take a Constitutional amendment, but what the heck were the Founding Fathers thinking about?

It’s Alexander Hamilton’s fault.  During the Constitutional Convention, Hamilton, who wanted the presidency to have almost monarchy-level power, pushed for broad presidential pardon powers and prevailed.   

The objective was to allow for the correction of judicial errors and to show mercy, not to bail out cronies and crooks.  However, the pardon has been exploited by presidents from all political parties since 1787.

George Washington set the precedent by pardoning the ringleaders of the Whiskey Rebellion as he left office in 1797.  Andrew Johnson pardoned the entire Confederate army at the end of the Civil War (!), while Jimmy Carter blanket pardoned all Vietnam draft dodgers. 

With good intentions, Gerald Ford pardoned Richard Nixon for his Watergate misdeeds in 1974, but the controversy over it cost him re-election.

However, the worst pardon of all time belongs to Bill Clinton.  He granted clemency to Marc Rich, a billionaire fugitive, crook, and tax cheat.  Clinton felt obligated to pardon Rich due to gratuitous campaign contributions to him and Hillary.  Ergo, a pardon was born, masking as a shameless bribe and abuse of power.

Trump made some seriously bad pardon decisions as well.  Granting clemency to cronies Paul Manafort, Roger Stone and Steve Bannon stinks to high heaven. 

I was thinking about pardons as I crafted our 2021 outlook seeking blanket clemency should our expectations fail to materialize…Crickets.

So much to ponder heading into 2021, let’s start with politics.

We have been inundated with worry from apoplectic clients on the right side of the political aisle claiming the new Soviet US has begun.  Our clients on the left side are just giddy about Trump’s disgraced exodus.  Both tribes are horrified by the events of January 6th and what it may reveal about the future.

“Pardon me” if we don’t see drastic change coming in short-term tax and fiscal policy. 

Biden must deal with a deadlocked Senate and a thin majority in the House.  The Democrats could easily lose both houses in the 2022 midterm if Biden veers too far left, so please exhale my Republican friends.

Furthermore, given the fragile state of the economy, there will be trillions of new government spending but no federal income tax increases until 2022 at the earliest.

For 2021, all economic forecasts are vaccine dependent, which makes sense.  The virus is now running amok, but the new J&J vaccine is on the way and there’s a betting chance a national vaccination campaign will finally get organized soon and achieve herd immunity in the second half of 2021.

Then what?  The liberation of Americans from home incarceration should lead to economic boom times starting in late 2021.  Trillions of dollars are now sitting in bank accounts, waiting to be spent on travel and other indulgences.   

That is likely to mean a return of inflation - e.g. rising prices for goods and services - for the first time in a generation.  

The Fed Reserve is now making up monetary policy as they go along.  Since 1980, the Fed’s policy stance is to proactively raise short-term interest rates to head off inflation before it arrives.  Now, they have decided to wait until measured inflation reaches a pre-determined target level before acting.  

I see rising prices all around, so I’m not sure what data the Fed is watching.

Accordingly, after the economy normalizes it’s prudent to bank on a future episode of uncomfortably high inflation followed by the Fed scrambling to raise interest rates in pursuit. 

The mounting federal government debt from the pandemic spending to keep our society stitched together is also troubling.  Total federal debt rose 11% in 2020 to over $20 trillion and it is still spiraling upwards.

The US dollar value is already feeling the effects of US ballooning deficits and debt, dropping measurably over the past several months.  We believe it has much more sliding room. 

As for the stock market, it feels like 1999 all over again.  Tesla, really?  Tesla is so grossly overvalued that it has become the AOL of 2021.  Tesla was just added to the SP500 Index in late 2020.  An overvalued AOL was added to index in late 1999, which portended the peak of the last tech bubble.

Tech stocks have totally distorted the US stock market and margin debt is now at an all-time high.  The tech sector now comprises 38% of the S&P500 index yet only represents 6% of the US economy.   

New IPO listing of non-profitable companies are rampant and rabid retail investors are driving their stock prices into orbit. 

The S&P500 Index’s total return for 2020 was a solid 18.4%, yet only six mega-cap tech stocks generated 14% of this return; the other 494 stocks collectively gained just 4% - what a bubble.

The coming tech stock bear market will be nasty and the tripwire could be rising interest rates.  At some point, a steep yield curve gums up the valuation math that has supported tech stocks and the tumble will begin.  

That exact same scenario happened in the early 1970s and the growth bear market was as bloody as the 2000 tech crash.    

Another fuse could be new anti-trust regulations that are coming for tech monopoly stocks.  We’ll find out soon enough.

From our perch, a secular (long-term) bond bear market has begun.  Moreover, the rotation from growth to value stocks that started with the excellent vaccine news last November is real and will be sustained indefinitely.

If you share our view about rising inflation, a steeper yield curve, a falling dollar, and a tech stock bubble, it’s time to rotate from growth to value stocks of all sizes that own real assets.  To name names, real estate, infrastructure, energy, commodities, financials, and cyclical industries/sectors are all teed up to prosper in 2021 and beyond.

Until next time, be safe and well…Tim

Check the background of this financial professional on FINRA's BrokerCheck
Check the background of this financial professional on FINRA's BrokerCheck