CFI Observer June 2018 Link

October 5, 2018


Letter from the Chairman…


“The only function of economic forecasting is to
make astrology look respectable.”
– John Kenneth Galbraith


The two areas of most concern to CFI at present are trade tariffs and the escalation of deficit spending. Two hundred years ago, the English economist David Ricardo warned that governments should not fund tax cuts with borrowed money. Borrowing for capital projects in pursuit of future prosperity is laudable.  Borrowing simply to cover spiraling expenses isn’t. We understand the need to go into debt in times of national emergencies such as WWII, but not for political gamesmanship.


Here’s the thing. U.S. debt, as a percentage of GDP, is poised to eclipse where it was during WWII. According to the Congressional Budget Office, our expenditures will put us a whopping $1 trillion further into debt by 2020, two years ahead of projections.


When it comes to trade wars, real or threatened, history should be our guide.  William McKinley (then Chairman of the House Ways and Means Committee and later to become our 25th president) was his era’s foremost advocate of trade tariffs. He engineered the passage of protectionist legislation covering no less than 4,000 items. Then he saw the light.  America’s industrial and agricultural productivity, having surpassed domestic demand, required access to foreign markets. Dubbed “reciprocity,” bilateral tariff reductions became strategic objectives.  That was too wise to last and we soon reverted to more protectionism and, especially after WWI, isolationism. In 1922 Congress passed the Foroncy-McCumber Act and then doubled down with the infamous Smoot-Hawley Tariff Act in 1930.  This led to a 66% decline in international trade, deepening and prolonging the Great Depression. The profound influence tariffs have had on all of America’s wars (especially our Civil War) is fascinating, but that’s a tale for another time.


What concerns us now is how rising deficits and the threat of trade wars, absent any semblance of statecraft, will impact interest rates.  Trade conflicts can increase costs, starting with commodities, inflating prices pretty much across the board in time. This is usually a short term phenomenon, however. Reductions in the velocity of money, dislocations, jobs losses, and shrinking trade inevitably produce a recession. Downward pressure on interest rates results followed by fears of deflation that can push rates even lower.


Central banks have infused an ocean of liquidity into the global markets in the last several years in hopes of stimulating recovery from the most recent recession. This continues to be sufficient ammo to digest, at least for now, all the new debt being issued. As a result, rates have stayed low by historical standards.* The exception to this is the short end of the curve, where the Fed is expected to continue pushing short rates up. Long term rates seem unwilling to budge until the threat of inflation comes out of the shadows.  Acknowledging that not all swans are white, this is unlikely to occur anytime soon.


If you would like to learn more about the disconnect between economists and politicians, I recommend Princeton Professor Alan S. Blinder’s (former Vice-Chair of the Fed) new book: Advise and Dissent. It is very readable and enlightening. Chapter 8, which deals with trade, tariffs, and the myths surrounding them is particularly engaging.


*This is particularly true of the California municipal market. Demand has pushed rates well below national counterparts. Most maturities on new issues in California are many times oversubscribed.


The contents herein are for informational purposes only, and under no circumstances are they to be construed as a recommendation of a solicitation. The information and opinions herein are subject to change without notice and CFI does not undertake to advise the reader of changes in opinion or information.

CFI Observer June 2018 Link

Pension Acronym

Cheat Sheet

ARC: Annual Required Contribution

ADC: Actuarially Determined Level

COLA: Cost of Living Adjustment

CSME: Cost Sharing Multiple Employer

FNP: Fiduciary Net Position

GASB: Governmental Accounting Standards Board

OPEB: Other Post-Employment Benefits

TPL: Total Pension Liability

UAAL: Unfunded Actuarial Accrued Liability



Charles Fish Investments, Inc. (CFI) founded in 1984, is a Registered Investment Advisor with the Securities and Exchange Commission under the Investment Act of 1940 and notice filed with the California Department of Business Oversight. The firm, which is wholly-owned by its employees, is not affiliated with any broker/dealer. CFI's revenues are derived exclusively from the fees received for the investment advisory and/or management services provided.

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