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This week: First Debate; Politics 24/7; Zeitgeist Investing; Supreme Court and stare decisis; Reading List.
There was no glory for either side in the first Presidential debate, as there usually isn’t in trench warfare. Biden maintained his focus for the duration, albeit at his usual low-burn level. Trump was Trump but looked downgraded as all incumbent presidents tend to look in first debates. The President was still throwing red meat to his base when he should arguably be trying now to appeal to independents and to the last remaining undecided. Perhaps, we will have more to say next week.
Politics dominates the zeitgeist (spirit of the time) and it has invaded everything in our lives. A political angle and motive are assigned to everything that we do or say. And each of us is reduced to a list of features that come from our innate identities rather than from our deliberative conscious choices. It is increasingly assumed that a person’s opinions, preferences and tastes are prejudiced or conditioned mainly by their race, religion, age, gender, sexual orientation etc.
A corollary to the above is that a person who expresses an opinion or choice that does not fit within the prevailing stereotype of their identity group is more and more seen as a sell-out, a phony, a cultural interloper, an opportunist or intellectual fraud.
Schools, universities and corporations have become notoriously politicized. One wayward comment can have a faculty member or corporate employee fired (or cancelled), derailing their and their dependents’ lives for many years or perhaps forever. The new political reframing of everything leaves no room and has no tolerance for negligence or the occasional flippancy in a person’s speech or writings. Everything must now be said in the right way and in the proper tone, or not be said at all. As a result, censorship, self-censorship and appeasement are spreading rapidly.
For the politically-obsessed, a person’s identity has become a roadmap to their mind. This is reductive of our individual ability to think independently. Worse, it is ultimately oppressive and destructive. In a saner period, we will again dissociate thought from identity and make room for diverse views, even those that we find offensive or adverse to the dominant tide (real or imagined) of social change.
In keeping with this theme, it would be surprising if politics had not also entered the decisions of investors. Are politically correct assets now priced more highly than others, irrespective of their projected cash flows and profits? Empirically, the answer seems to be yes.
Last week, the market value of Zoom Video Communications exceeded that of Exxon, an unimaginable feat by a company that was an unknown until recently. Exxon reigned for a long time as the most highly valued company on the US stock market until it was dethroned by Apple several years ago. Since then, it has fallen further out of favor due to a decline in the price of oil and investors looking at fossil fuel companies with an increasingly critical eye.
There seems to be no upward limit to the valuation of the “right” companies and no downward limit to the valuation of the “wrong” companies. Of course due to the pandemic, Zoom is riding an unprecedented demand wave while Exxon is hit hard by the economic slowdown. But if we look dispassionately at profits past the pandemic, what should we make of Zoom’s PE of 175x expected 2021 earnings compared to Exxon’s 20x (and Exxon’s 10% dividend yield)? In addition to fundamentals, these valuations result from a double squeeze, one upward on Zoom resulting from the massive pandemic-related stimulus pumped into the market, the other downward on Exxon resulting from its excommunication by scores of politically-minded investors.
This momentum on one hand and self-censoring on the other explain why some companies are very overvalued and others undervalued. Peer pressure also plays a role in chronically pushing stocks outside of their reasonable valuation ranges.
Zeitgeist investing has come of age in 2020. The last time that we saw this on this scale was in 1990-2000, a period that celebrated “new economy” companies but that was followed by a decade-long resurgence of the old guard sectors. But who today is willing to bet on the next reversal, and more to the point, when? There will be a time.
Supreme Court and stare decisis
Last week, we mentioned Amy Barrett and Barbara Lagoa as two frontrunners being considered by President Trump for nomination to the Supreme Court. We speculated, wrongly as it turned out, that the President would go for Lagoa because of her Florida connection. A friend cast doubt on our prediction and argued that “Trump always goes for the base”, true insight that was validated once again by the President ultimately choosing the more conservative Barrett.
In addition to the key issues raised by the media on its front pages (Roe v. Wade, 2nd amendment, ACA, etc.), Barrett (if confirmed) may influence the Court in an overriding important way, which is the treatment of precedent case law as effectively new law. This is known among jurists as stare decisis, latin for “standing by what has been decided”.
The doctrine of stare decisis is the ‘doctrine of precedent’ and it requires courts to follow historical precedents when ruling on cases that are sufficiently similar to those precedents. Not everyone is a supporter of the doctrine since it empowers a given court to alter the intent of a law passed by elected legislative bodies, not only for the case before that specific court at that specific time, but in theory for all future cases that are similar. The main criticism of stare decisis doctrine therefore is that a law can over time be modified by the courts to such an extent that its original letter and spirit are lost over the years.
Conservative judges like Judge Barrett have in the past been more circumspect or even hostile to stare decisis and have opted instead to focus on the wording and meaning of original laws. Liberal judges have usually been more inclined to interpret those laws and to set new precedents. Here is an excerpt from a recent article in the Wall Street Journal:
“Chief Justice Roberts has followed some precedents he says were wrongly decided, asserting that a swing in legal interpretations with each change in personnel would make the court resemble a political institution rather than a judicial body. By contrast, Justice Thomas has argued that precedents should be discarded if they run counter to his view of the Constitution’s original meaning. Judge Barrett has at times been critical of stare decisis. In a 2003 law review article, she suggested the doctrine can deprive individuals of due-process rights by making it difficult to challenge legal precedents they believe are wrong.”
This and other issues add up to a prime urgency for Democrat voters. Should Trump win in 2020, it is possible that he will have the opportunity to name one more Justice to the Supreme Court. If such nomination is needed to replace Justice Breyer (now aged 82), Trump will have cemented the Court’s move to the right with a nominal 7-2 majority by 2024.
More here on How Trump has already transformed America’s courts with 217 judicial appointments to other courts.
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