THE FINANCIAL PHILOSOPHER

Why this financial crisis can be a 'gift'

"What is to give light must endure burning." ~ Viktor Frankl

I believe the financial crisis has created opportunities that go far beyond monetary; therefore, I encourage you to read a guest post I wrote titled, Financial Crisis: The Greatest Gift in a Generation, to find out what some of these potentially life-changing opportunities are...

Perhaps you have experienced some of them yourself? 

I wrote the post for Mary Jaksch, who is the author of one of my favorite blogs, called GoodlifeZen.

Enjoy the post and check out Mary's blog while you're at it!

Cheers...

What Would The Greatest Thinkers Think of the Financial Crisis?

What would Lau-tzu say about lending practices?  Would Confucius use a credit card?  Would Michel de Montaigne listen to Jim Cramer? What would Shakespeare say about spending?  And what would Ayn Rand say about government bail outs?

"The reading of all good books is indeed like a conversation with the noblest men of past centuries who were the authors of them, nay a carefully studied conversation, in which they reveal to us none but the best of their thoughts." ~ Rene Descartes

Human behavior has not changed in three-thousand years or perhaps, if at all, in the history of mankind.  The perspective I receive from reading the thoughts of the greatest thinkers who lived dozens, hundreds or even thousands of years ago is amazing.  If humans behaved the same in 600 BC as they do now, what makes us think it will ever be different -- or if the way we act will ever change?

Reading the thoughts of the greatest thinkers reminds us that human behavior never really changes -- only the circumstances and settings change -- and provides insights into how we may affect our own behavior in light of the predictability of that of others.  Our only control is of our own thoughts, desires and emotions -- and even that control is limited to the degree of our self-awareness and emotional intelligence...

"Government 'help' to business is just as disastrous as government persecution... the only way a government can be of service to national prosperity is by keeping its hands off." ~ Ayn Rand

Much of where we are today in the financial crisis is the doing of the federal government.  Of course, no one twisted the arms of consumers or forced them beyond their will to buy homes, cars, clothes and self- indulgence, but the federal government certainly made it more possible.  Historically low interest rates and an arguably over-friendly business environment gave complacency and greed just enough room and energy to manifest into the monster it inevitably would become...

And now that same government will "save us" from the monster it fed, nourished and unleashed...

"You have power over your mind -- not outside events.  Realize this, and you will find strength." ~ Marcus Aurelius

If the federal government bails out financial firms with $1 trillion of our tax dollars, what control do we have over this?  Of course, we may cast votes to elect our government representatives but those in office now are those who will make the decisions now -- not those for whom we cast votes in the next election or elections to follow.

What may we control?  Our thoughts, our emotions, our desires, our asset allocation, our attention allocation, our investment selection, our actions and our passivity are all within our control to some degree.  The actions, or lack thereof, of others and entities outside of ourselves are not within our control.  How we prepare for, or how we react to, outside events is where our strength will be established and determined.

"He who establishes his argument by noise and command shows that his reason is weak." ~ Michel de Montaigne

What would Montaigne say about Jim Cramer or any talking head that essentially sells ad time and books with noise?  Their "reason is weak" and their purpose is not founded upon altruism; therefore, we should be careful of frantically searching for answers in the media.

If anything, we could look to the noisemakers as examples of how not to actand as a proxy for the extremes of foolish behavior in financial markets and the world beyond.  In fact, the precise opposite actions and reactions of the noisemakers have proven to be prudent more times than not.

"Have more than thou showest, speak less than thou knowest." ~ William Shakespeare

The current financial crisis is a result of behavior completely opposite to these famous words from Shakespeare.  In western culture, we have both the desire and the capacity to buy now and pay later -- we wish to show more than we possess -- our display of material wealth is actually a display of our credit capacity and our desire is stronger than our will.  Because we can buy it now, we do buy it now, with little consideration of consequences.  This display is not one of financial power -- it is a display of our borrowing power -- and the lack of power over ourselves.

"Freedom from the desire for the answer is essential to the understanding of a problem." ~ Jiddu Krishnamurti

What happens now?  Where will this financial crisis lead us?  Is the worst behind us or is the worst ahead of us?  These questions in themselves are distractions from solutions to the problem.

We always look for answers from other people -- from other sources outside of ourselves.  If we stop asking questions, the silence itself allows us to listen to the real source of answers -- that which is within ourselves.

"Wealth and rank are what people desire, but unless they are obtained in the right way they may not be possessed." ~ Confucius

Our society has become a status and debt society.  If we may not possess wealth and rank then we will borrow it to inflate our egos and our economies until they become too large to contain.

I do believe that "wealth and rank" may be achieved in "the right way."  Of course there are examples to the contrary but those who begin with a passion for something other than money, then money often follows that passion; and when our altruism inspires us to give away money, it often attracts more money -- not because of the love of money -- but because of the pursuit of a passion other than money.

"There is no calamity greater than lavish desires.  There is not greater guilt than discontent.  And there is no greater disaster than greed."~ Lau-tzu

The cycle of greed is coming to an end.  Of course, the end of this cycle will not mark the end of greed -- it will only mark the end of this particular manifestation of greed. 

Do you remember Enron?  They were the ultimate symbol of the particular form of greed and hubris that ended the last market cycle.  This market cycle's poster children will likely be Bear Stearns, Lehman Brothers, and AIG -- or perhaps others loom... 

"I tell you that virtue does not come from money but from virtue comes money and every other good of man." ~ Socrates

This quote contains the core of my financial philosophy:  Money does not bring meaning -- it brings short- term rewards, which is a human and flawed pursuit.  The path to a meaningful existence is not the path of least resistance -- the shortest distance between two points is not necessarily a straight line... 

It's been said thousands of times in thousands of different ways but the truth remains that our life is a journey and our fulfillment, meaning, actualization, or whatever word you want to attach to the true source of our well-being, is about the journey itself -- it is not about the destination -- if there even is a destination.

If we pursue meaning in our lives, money may follow.  If money does not follow, it will not matter because we are already "rich" -- we find contentment in our pursuits -- and what happens outside of our control is just a production of the natural course of things.

Related Posts:

Weekend Wisdom: Going Through the Emotions

The 'Diminishing Marginal Utility' of Wealth

How Long is Your Lever?

Images: "The Wise Man" by Jim Warren

 

Reflections on Wisdom: The End of the Beginning

"The perfect man uses his mind as a mirror.  It grasps nothing, it rejects nothing.  It receives but does not keep."  ~ Chuang tzu

Please join me for some personal thoughts on life, learning, and moving forward...

Not that I expect any readers to notice, I have evolved, both personally and professionally, over the past few years to the degree that I am convinced that financial success, if defined correctly, has little to do with financial knowledge.  Financial success, and success in any and all areas of our lives, however, has everything to do with self-awareness.  That is why, therefore, I will continue to blog about investing and personal finance but I will place virtue and self-awareness before money because, after all, that is the proper order of things.

I do nothing but go about persuading you all, old and young alike, not to take thought for your persons or your properties, but and chiefly to care about the greatest improvement of the soul.  I tell you that virtue is not given by money, but that from virtue comes money, and every other good of man, public as well as private.  This is my teaching, and if this is the doctrine which corrupts the youth, I am a mischievous person. ~ Socrates, quoted by Plato, 'The Death of Socrates'

On a similar note, I would not necessarily turn away from money and status but they do not even register into my objectives or priorities.  For example, I just received news that I passed the Certified Financial Planner (CFP) board exam.  The CFP may indirectly result in more money and status but I've learned more important lessons from my reading and writing about philosophy over the past 18 months than the six courses and five-thousand pages of CFP material I studied over the same time frame.  Knowledge is power but knowledge is not wisdom.

"Health is the greatest possession.  Contentment is the greatest treasure.  Confidence is the greatest friend.  Non-being is the greatest joy." ~ Lau-tzu   

I am also happier that I passed my annual physical exam this week than the 10-hour CFP board exam I passed last month.  Without our health, who cares about anything else?  Expanding the picture even larger, there are hundreds of thousands of people in Myanmar and China who have lost a loved-one in the past several days.  If that doesn't bring perspective, I don't know what does...

"When the mind is thinking it is talking to itself." ~ Plato

Regarding the blog, I've discovered that my posts are primarily internal conversations  with myself.  In the beginning, I started this blog as a marketing tool to direct traffic to my firm's website.  It slowly evolved as a means to crystallize my thoughts and share these internal conversations with other people.  My objective now is to continue seeking self-awareness and to lead others to know themselves, as well.

"A man only learns in two ways, one by reading, and the other by association with smarter people." ~ Will Rogers

I should also say that I have learned much from the readers whose comments have provided much knowledge and wisdom that has provoked great thought and reflection for me.  Thanks!

On a smaller note, I have stopped the Weekend Wisdom category of posts.  There is no reason to have some kind of catchy phrase in the post titles that only confines the title to a particular time of week.  Also, the posts have evolved to be no different than any other post published at any other time of the week...

"What the caterpillar calls the end of the world, the master calls a butterfly." ~  Richard Bach

Whether you are a new or long-time reader, thank you for being here!  I look forward to enhancing the experience for you and for me as we continue to move forward.  I will continue to leverage timeless wisdom for your financial success, but more importantly, for your path to a meaningful existence...

Thanks for sharing the end of the beginning of The Financial Philosopher.  I have so many ideas to share and plans to grow the blog into an even more effective means to learn more about myself and to help you learn more about you...

Cheers...

   

The Cycle of Greed: A (sub)Prime Example...

"He who is greedy is always in want."  Horace (65BC - 8BC)

I could not help but comment on the The Wall Street Journal (WSJ), June 27, 2007, front-page story, "How Wall street Stoked The Mortgage Mess."  The article illustrates yet another example of, what I have described as, the cycle of greed, which threatens to destroy the same force it has created...

The "Cycle of Greed" as illustrated by WSJ:

   

I selected a few choice paragraphs from the WSJ article and made some strategic edits to illustrate my view:

Twelve years ago, Lehman Brothers Holdings, Inc. sent a vice president to California to check out First Alliance Mortgage Co.  Lehman was thinking about tapping into Alliance's lucrative business of making "subprime" home loans to consumers with sketchy credit.  greed.

The vice president, Eric Hibbert, wrote a memo describing First Alliance as a financial "sweat shop" specializing in "high pressure sales to people who are in a weak state." greed. At First Alliance, he said, employees leave their "ethics at the door."

The big Wall Street investment bank decided First Alliance wasn't breaking any laws.  Lehman went on to lend the mortgage company roughly $500 million and helped sell more than $700 million in bonds greed backed by First Alliance customers' loans.  But First Alliance later collapsed.  Lehman landed in court, where a federal jury found the firm helped First Alliance defraud customers.

Today, Lehman is a prime example of how Wall Street's money and expertise have helped transform subprime lending into a major market force in the U.S. financial markets greed.  Lehman says it is proud of its role in helping to provide credit greed to consumers who might not otherwise have been able to buy a home, and proud of the controls it has brought to a sometimes-unruly business.

And the cycle continues...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and financial planning.

When Will The Spending End?

"Money, you have lots of friends hanging 'round the door.  When it's gone and the spending ends, they don't come no more."  -- Billie Holiday (1915-1959)

After reading an article in The Wall Street Journal (WSJ), I could not resist posting an addendum to my previous post on housing and the American consumer.  The WSJ article of May 3, 2007, MasterCard Posts 70% Profit Gain As Consumer Card-Usage Increases, speaks directly to my comments regarding the American way of spending more than we make and the nearly endless and arguably dangerous capacity to do so.  Notice that I said "nearly endless..."

MasterCard's 70% profit gain attests to a shift in spending vehicles -- not a shift in spending behavior.  The WSJ article comments that "MasterCard's results have been bolstered by strong consumer spending, despite the housing slowdown and high gasoline prices in the U.S."  I believe the article should have said that MasterCard's results have been bolstered because of the housing slowdown not despite a slowdown.  Consumers are simply shifting from the mortgage equity money tap to credit cards.  As housing and Mortgage Equity Withdrawal (MEW), what I call the "money tap," dries up, the American Consumer will not simply change their spending habits.  Americans will vehemently perpetuate their lifestyle with every ounce of energy and spending vehicles available. 

As much respect as I have for (most) economists and (some) financial media pundits, quantitative data does not make up the entire "big picture" of the economy and financial markets.  Consumer spending is primarily a behavioral issue -- a qualitative concern -- not a quantitative one.  As the mortgage equity money tap runs dry, Americans will predictably turn back to credit cards to finance their lifestyle.  And why not?  After all, salaries are on the rise, the stock market is doing well, and we re-financed all of our credit card debt with equity from our homes.  Our credit cards have low or zero balances!  On a personal note, I've noticed a resurgence of zero percent "teaser" rate offers for credit cards filling my mail box.  Most of the offers are for one year -- just long enough to max out those credit limits right around the same time adjustable rate mortgage (ARM) teaser rates "reset" and push mortgage payments significantly higher!

In financial markets, most everything, arguably, begins and ends with the consumer, which partially explains the push forward for stocks. I'll agree that new records for the Dow are difficult to ignore but a long-term investor does not make investment decisions based on economic and market conditions today, tomorrow, or even this year.  While I would not be surprised if the market pushes even higher, perhaps to the 14,000 mark on the Dow Jones, smart investors look to the next economic and market cycle as we slowly and methodically prepare for the end of the current cycle.   A disconnect from reality and investor euphoria are classic signs of the beginning of the end.  We just do not know the precise moment the unfolding begins...

Currently, I believe the "disconnect" exists between economic and market fundamentals and the most recent rise for stocks. The U.S. economy, as measured by Gross Domestic Product (GDP), slowed to 1.3 percent annualized growth in the first quarter of this year (any reading under 2.0 percent is below the Federal Reserve's "comfort zone.") Meanwhile, investors are consistently "shrugging off" bad news and fixating on good news to enthusiastically push stocks even higher.

Long-term investors (those with a logical reason to invest in stocks) should stay invested in this market but not completely invested.   As I've consistently stated in this Blog, market timing is a loser's game while time in the market is prudent.  With that said, smart investors can balance the short-term euphoria with a long-term perspective by slowly shifting assets from the more speculative areas (small-cap stock, emerging markets, "hot" sectors) to less speculative and defensive areas (large-cap stock, multi-sector bond, health care).  At the same time, those things we know with certainty such as our investment objective and time horizon should dictate asset allocation -- not market movements.

Another post in my "Invest Like a Philosopher" series, which will more specifically address asset allocation, is forthcoming.

In the mean time, enjoy the view from the back seat because we're in for a long journey.  Let "the fools" worry over the day-to-day "media noise..."

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.

Less Than Thou Showest

"Have more than thou showest, speak less than thou knowest." -- William Shakespeare (1564-1616)

It seems Americans have this logic backwards as we continue in our desire and quest to "show more" while we increasingly "have less."  The wisdom of "spend less than you make" is as old as philosophy itself -- yet we continue to defy its logic.  So, why do we do it?  We spend more than we make because we are human, because we are American, and because we can! 

• As humans, we are an amazingly adaptive species capable of incredible creativity, productivity, and senseless consumption all at once.
• As Americans, we are fortunate enough, for better or worse, to be given the freedom and capacity to succeed wonderfully or fail miserably. 
• A prime example of this freedom and capacity as well as its potential for success and failure is highlighted in the recent housing and mortgage struggles in America...

So, just what is the deal with housing and the so-called "sub-prime" mortgage issues and what impact does it have on the economy and financial markets?  First, we should briefly define the issues, then we will address the causes and potential effects and, of course, place everything into a philosophical context to leverage the negative for positive gain as investors...

When you read or hear about "the housing industry," you should think home builders, contractors, sub-contractors, construction workers and home improvement retailers, such as Lowe's and Home Depot, as well as their suppliers.

The mortgage industry is, of course, related to housing because they finance the homes that are built as well as the existing homes that are purchased.  More importantly, the mortgage industry has provided the means for Americans to perpetuate their "superconsumer" appetites by tapping into home equity with "cash out" refinancing, home equity lines of credit and home equity loans.  The "sub-prime" mortgage market, which offers loans to people with weak credit histories, is coming under pressure as mortgage defaults and foreclosures are on an upward trend.  It's not difficult to see the "domino effect:" 

• Defaults have harmed sub-prime lenders and, in some cases, forced them into bankruptcy protection;
• Foreclosures are adding more homes to the already rising inventory of homes for sale, placing more downward pressure on home prices. 
• Mainstream banks and lenders are making their credit standards more strict, which removes more would-be buyers from the picture, further perpetuating the problem.
• Over the past few years, rising home values and a rising (Bull) market for stocks made Americans feel wealthy,  which encouraged the American consumer to spend more (known as the "wealth effect").

The economic big picture concern is that the housing industry supports a significant piece of the U.S. economy while the home equity "money tap" is slowly being shut off in the mortgage industry: 

• Since consumer spending represents two-thirds of our economy, any threat to consumer spending is a threat to the economy itself. 
• A major driver of economic growth is debt, which is the same thing as money (Bull markets are significantly supported by money supply). 
• New money is created by new debt.  If that money tap runs dry, the party will be over...   

Every economic cycle is created and destroyed by the same phenomena:  The rise and fall of the previous economic cycle was created by the technology boom and the "irrational exuberance" and greed of stock investors and corporate executives.  The rise (and potential fall) of the current economic cycle was created by the home wealth effect and the real estate money tap. 

For a good visual perspective, check these charts from one of my favorite macro-economic Blogs, The Big Picture:

• This chart shows trends of Mortgage Equity Withdrawal (MEW), which I refer to as the "money tap," as compared to income.  You can see that, as the last major economic cycle ended, the money tap was turned up as interest rates plummeted down to 50-year lows in response to the end of the last economic cycle.
• This chart shows MEW as a percentage of Gross Domestic Product (GDP), a measurement of growth in our economy.  You can see that, without MEW or what I call "the money tap," GDP would be low or negative.  Could this be a glimpse into the not too distant future?

Readers of my blog know that I like to use the wisdom and logic of philosophy and history to leverage that knowledge to our benefit, primarily in the area of investing:  Any student of history can look at economic cycles as a guide to strategic asset allocation.  In a rather simplified and brief overview, the beginning of economic cycles are typically characterized by falling interest rates and investor fear caused by the fall of the previous cycle (think of the year 2000 to 2003).  The latter stages of an economic cycle are typically characterized by rising interest rates and investor euphoria, which, arguably, is occurring now.  We're not quite at "irrational" yet but investors are more optimistic than is warranted (see a previous post, "The Storm of Irrational Exuberance").  In the latter stages of an economic cycle, as we are now, prudent investors will reduce exposure (but not completely abandon) the more speculative areas (small-cap stock, "hot" sectors, emerging markets, high-yield or "junk" bonds) and increase exposure to less speculative areas (large-cap stock, defensive stock, such as Health Care, and higher credit quality bonds).

Most importantly, we must be careful not to become foolish and try to "time the market" by making radical moves with our long-term investment portfolios based on short-term "media noise." 

I like to tell my clients and Blog readers that "history does not repeat, but it does rhyme."  Timing the market is a fools game but "time in the market," supported by smart, strategic, and sound asset allocation that is based on macro-economic trends, is the way of a "financial philosopher..."

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.

Boomer Bust: 'Quiet Before The Storm'

Fed Chairman, Ben Bernanke, warned yesterday of a "vicious cycle" of rising debt and an impending "fiscal crisis" if lawmakers in Washington do not implement proactive measures to reign in spending on social programs, specifically Social Security and Medicare.  Currently and in the near-term, U.S. government spending deficits appear to be reasonable, which Bernanke likened to the "calm before the storm."  I applaud the chairman's efforts in making the obvious more obvious:  We are headed toward economic disaster unless something is proactively done now to reign in deficit spending and our enourmous national debt.  Unfortunately, our government is not a proactive mechanism.  Our financial security can only be up to us as individuals...

"The government consists of a gang of men exactly like you and me.  They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office."  -- H.L. Mencken (1880-1956)

We are all smart enough to know that logic and reasoning almost never weigh into the political decision-making process.  Politicians, no matter what their party affiliation, have only one goal once they are elected -- to get re-elected!  President Bush, in his failed initiative, proved two years ago that a political solution to Social Security will be fruitless because government can not and will not act proactively.

What's more, government is a self-perpetuating entity -- it exists only to increase the need of its existence.  Social programs are wonderful political tools to "scare" voters to the booth. Without the perceived need for Social Security and Medicare, the value of politicians and government would be diminished, especially for those "baby-boomers" who represent the largest block of voters!

Unfortunately, the expected governmental reaction to Social in-Security and Medi-scare will be when they are such a large problem that Americans will be begging for any solution, even if it is more painful in the short-term.  Then politicians will follow through to raise the age of benefits in line with increasing life expectancies, lower the benefit amounts, raise taxes, sharply cut government spending or some combination of those four.

In the opinion of your humble scribe, I believe the most intelligent solution to the Social Security mess (and similar to the Medicare problem) is to follow through with the so-called "ownership society" that Bush promoted in 2005. Politicians should once and for all tell Americans (those that do not already know) that Social Security is not a retirement plan and that our retirement security is 100% the responsibility of each individual --but that would diminish the need for government, so we are back to square one...

OK, so let me step off of my soap box.  I should get to my dose of "philosophy" to aid you in your financial well being...

"The character inherent in the American people has done all that has been accomplished; and it would have done somewhat more, if the government had not sometimes got in the way."  -- Henry David Thoreau (1817-1862)

The American consumer (largely the baby-boomers) funded the largest economic expansion in the history of our country and continue to fund economic growth now.  As an investor, I would like to see this continue but we will need to slow our spending and increase our dismal savings rate if we want to stay economically strong in the long-term both as individuals and as a nation.  For now, at least, individual investors can rest with the comfort that politicians are highly predictable -- they are self-serving, ego-centric, power-hungry people.  Knowing this, we can assume that government will continue to "get in the way" by increased spending and higher deficits.  The only consolation we have in the government's inabilities and inaction is that we can be assured that this behavior will continue; therefore, our consolation is that we can plan (and benefit) accordingly. 

   

"Governments never learn.  Only people learn."  -- Milton Friedman (1912-2006)

For investors, the bottom line equates to smart diversification and strategic asset allocation based on what we know in the economic "big picture."  In short, an investor can play the "baby-boomer effect" by increasing exposure to health care and financial sector stocks.  As this massive demographic sector (born between 1946 and 1964) begins retiring over the next several years, we should expect an increased demand for health services for this aging generation as well as financial services to help them with planning and investing.  Foreign stocks could also add diversification as capital investment and investor dollars increasingly find their way overseas.  As for bonds, foreign issues will also be a benefactor and, hence, a smart place to invest, given our unfolding scenario over the next few decades.

Is the economic sky falling?  No.  Should we make radical moves as investors in preparation for an eroding U.S. economy?  No.  What we should do is what the government will not -- spend less than we earn, make proactive investment decisions, and listen to logic and reason.

It would be remiss of me not to say that at least we are free to seek the knowledge and wisdom as well as take the actions to advance ourselves despite the inabilities of our government.  In the end, our fate should not be decided by any person or entity other than ourselves.  Our government is certainly flawed but I can not think of any better alternative...

"Many forms of government have been tried and will be tried in this world of sin and woe.  No one pretends that democracy is perfect or all-wise.  Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."  -- Sir Winston Churchill (1874 - 1965)

Kent Thune is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.

   

Let's Hope for Gridlock

"Politics is not the art of the possible.  It consists in choosing between the disastrous and the unpalatable." -- John Kenneth Galbraith, US Economist (1908-2006)

With the election looming this Tuesday, I felt compelled to put in my two cents on the election with regard to the economy and stock market.  I believe John Kenneth Galbraith hit the nail on the head in the preceding quote.  Unfortunately for Americans, politicians will tend to strive in achieving that which is "disastrous" and never have the courage to do what is "unpalatable." 

Politicians are only interested in perpetuating their power, which means that they will work for short-term gains with little or no attention paid to the long-term results.  For example, tax cuts will often stimulate the economy in the short run but if government spending goes unchecked,  the long-term result is a higher national debt.  In your personal finance, would you choose to reduce your income and increase your spending at the same time?  The economy, overall, is healthy.  But at what expense?  Our national debt averages nearly $30,000 per US citizen.  I believe Mr. Galbraith would agree that this kind of political behavior (Republican or Democrat) is what he meant by "disastrous." 

The "unpalatable" type of political activity would be to fix Social Security or Medicare, which are the 800 pound gorillas lurking in the corner.  The risk of losing office is too great for our lawmakers to attempt real change.  I have to give George W. Bush credit for attempting to fix Social Security.  He just did not have a "palatable" solution.  The "disastrous" result is to push the most important economic issues of today further into the future for other politicians to "fix" tomorrow while our children and grandchildren pay the bill.

As for the stock market, no political party can claim the stock market performs better under their watch than the other.  In fact, the stock market performs best when the Congress and White House are run by different parties.  The greatest economic expansion and Bull Market for stocks occurred under a Democratic President (Clinton) and a Republican congress during the 1990's.  In fact, of the thirteen instances in history since 1961 that the two major parties split power between branches of government, the stock market rose in all but two of those periods with an average gain of 23 percent.  In the ten instances since 1961 that one party ruled both the executive and legislative branches, the stock market's average gain is 11 percent.  Take a look at this chart to see my source and to come up with some of your own conclusions...

For the sake of the economy and stock market, let's hope the Democrats take just enough seats in Congress to force gridlock but not enough to do any real damage.  That way there will be no "disastrous" legislation from either party passed for at least two more years...

Kent Thune is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.