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Kass: Partisanship Trumps Progress

This blog post originally appeared on RealMoney Silver on July 25 at 7:50 a.m. EDT.

"Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule -- and both commonly succeed, and are right."

-- H.L. Mencken

Grandma Koufax used to say that the reason she didn't read fiction was because nonfiction (and the news) were often far more bizarre and interesting than the stories that were made up.

There is no finer reflection of Grandma's view than in watching the debt ceiling fight.

As I have previously written, while recent economic releases suggest an anemic trajectory of economic growth, an economic double-dip still seems unlikely. Nevertheless, the recovery's sluggish pace exposes it to mistaken public policy (something we are getting in spades these days).

My view continues to be that a contagion in confidence is one of the most powerful headwinds to business expansion and economic and employment growth.

Look, Debbie, I understand that after I departed the House floor, you directed your floor speech comments directly towards me. Let me make myself perfectly clear, you want a personal fight, I am happy to oblige. You are the most vile, unprofessional and despicable member of the U.S. House of Representatives. If you have something to say to me, stop being a coward and say it to my face, otherwise, shut the heck up. Focus on your own congressional district! I am bringing your actions today to our Majority Leader and Majority Whip, and from this time forward, understand that I shall defend myself forthright against your heinous characterless behavior ... which dates back to the disgusting protest you ordered at my campaign headquarters October 2010 in Deerfield Beach. You have proven repeatedly that you are not a lady, therefore, shall not be afforded due respect from me!

-- Congressman Allen B. West (R-FL), email to DNC Chairwoman Debbie Wasserman Schultz in response to her statements on the floor of Congress

At the core of this loss of confidence is the increased recognition of the ineptitude and partisanship of our politicians (see the exchange above), which has been vividly demonstrated in the Washington, D.C., debt ceiling circus over the last several days.

But the problems run deeper than the current debate as evidenced by the absence of major deals and solutions on trade, jobs and other key issues.

Something has happened to encourage scripted talking points and to discourage compromise between our two political parties as debate has become vitriolic and acidic.

A divided and dysfunctional government more concerned with those talking points than thoughtful policy has likely already brought much damage to the aura of the U.S. -- for instance, in our credit worthiness and in the perception of a lack of seriousness regarding a decisive attack on our fiscal imbalances.

This isn't the government we are watching, it's junior high school.... We're governed by self-absorbed, reckless children.... The budget war reflects inanity, incompetence and cowardice that are sadly inexplicable.

-- Nicholas Kristoff, The New York Times

As I recently wrote:
Our impatient and undisciplined politicians have opted for the expediency of reflation to counter a decade-plus-long accumulation and egregious use of debt. In turn, a more painful adjustment period seems possible in the not-too-distant future unless fiscal discipline is imposed in the near term.

The cost of 2008-2011 policy is a mushrooming and outsized deficit. Since the generational low in March 2009, the U.S. dollar has dropped by about 15% against the euro, as market participants have dismissed the notion that the hard decisions to reduce the deficit will be implemented. At the opposite side of our plunging currency is the message of ever-higher gold prices. (Warning: Dismissing the meaning of $1,570-per-ounce gold might be hazardous to your financial and investment well-being.)

Similar to most of you, I have watched both the Republican and Democratic politicians traipse on CNBC to discuss the budget and our debt ceiling issues over the course of the last month. They seem to argue on totally partisan and ideological lines and disagree on almost everything.

It is no wonder that investors, small businesses and consumers have all lost their collective confidence. These performances by our representatives underscore my view that the general perception that our politicians are inept and partisan (now mentioned twice for emphasis!) has possibly eclipsed fundamental economic concerns, on one hand and, on the other hand, what Jim describes as positive microeconomic conditions.

"A fool and his money are soon elected."

-- Will Rogers

Make no mistake, investors' rage and contempt against our politicians' lack of judgment (that borders on foolishness) runs deep -- and is bipartisan. It originally surfaced in the Democratic tsunami in the November 2008 elections, then in the formation of the Tea Party and ultimately morphed into a repudiation of many incumbents (Republicans and Democrats) in subsequent elections.
In the past, I have written on the role served up by our politicians on the decline and fall of P/E multiples -- it, once again, "bears" repeating (with some further modifications).
When I was growing up on Long Island in the 1950s and 1960s, there were three television stations (ABC , NBC and CBS ); there was no CNBC , Bloomberg , HBO , CNN or C-Span .

During this period (40 years ago), Americans had the deepest respect for politicians, and by the time President John F. Kennedy was elected, you could say politicians were idolized, viewed with awe (at times) and put on a pedestal.

Our politicians were not that visible in days of old. Interviews in Life Magazine revealed their personal lives, but, similar to The Wizard of Oz , they remained very much behind a curtain of secrecy.

Of course, that was a half century ago.

In the interim interval, the three stations morphed into nearly 1,000, as cable television, satellite TV, the Internet and other influences changed the communication landscape. In the process, our politicians became much more visible. Congressional hearings were featured live on cable, and those politicians' strengths and weakness were slowly revealed.

In time -- just as the Tin Man, The Cowardly Lion, The Scarecrow and Dorothy found out -- we began to get a more complete picture of our politicians as the onion of reality was peeled more and more through that greater exposure, and what we have seen in this disclosure of our legislators has increasingly become (at best) disappointing and (at worst) downright scary.

The peeling of that onion has naturally revealed a group of politicians that are human (like all of us) but who, in many cases, seem to reside in a governmental ivory tower and appear to lack a complete understanding of business and economics. Unfortunately, what we have seen in these televised hearings over the past decade is governmental grandstanding and political partisanship.

This is all of particular concern in 2010 as our government (in order to take us out of the Great Recession) has taken a greater hold on our lives than ever economically and financially. Our representatives have failed in a number of important long-term policy decisions and hardly ever take responsibility for their actions. (Cutting out dependency on foreign oil always comes to my mind.)

Going forward, it seems to this observer that it is too easy (and likely) for our representatives to make policy mistakes given their lack of collective business experiences and partisanship.

I am worried about a continued contraction in P/E multiples.

My advice?

Raise cash as the inmates have taken over the asylum.

The valuation of our capital markets (stocks and bonds) is now significantly exposed to a broken and partisan government and an absence of raging centrists in Washington, D.C.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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