Cumberland Advisors Market Commentary – Impeachment, Markets & 2 Dead Men

Author: , Post Date: January 31, 2020
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Our strategic, market-oriented view of the impeachment proceedings sets aside the personal views of those in our company. Among our 45 people we are as diverse in our opinions as you would expect. We have Democrats and Republicans, conservatives and liberals, and we have civil discussions among us, which go on constantly.

Market Commentary - Cumberland Advisors - Impeachment, Markets & 2 Dead Men

Personal views are set aside when managing portfolios. It is necessary to be as neutral as possible and to focus on markets and monetary policy and the hundred different indicators we follow closely. While we constantly watch politics and governmental impacts, our professional money managers know the importance of disciplined rational analysis. Since we are human and have emotions, we also employ a number of quantitative measures. Three are employed in our carefully defined Quantitative Portfolio strategies. The rest of our strategies use the quant measures as one of the inputs, alongside momentum characteristics and fundamental valuation techniques. The professionals at Cumberland utilize these strategies to manage about a dozen different types of portfolios, always attempting to personalize the application of the strategies to the needs of the individual client, family office, or institution.

I share this introduction in order to get to the intensely controversial subject of the impact of the impeachment proceedings on markets. Many clients have asked our views on this subject.

Our strategic view is that the most likely outcome is that the US Senate will not validate the House articles of impeachment with a sufficient vote to remove President Trump from office. The threshold for impeachment is very high, and the political composition of the Senate makes removal of this president highly unlikely. Of course, this outcome could change with further revelations, as it did during the Nixon impeachment process. We shall see what is revealed and cannot forecast a surprise prior to its arrival. In the Nixon case the tapes were not known until late in the impeachment process, and the 18½-minute gap in one tape proved to be crucial evidence that put Nixon’s impeachment firmly on track and led to his resignation. Will such a revelation occur with Trump? We don’t know, so any market strategy based on such a development is purely speculative.

But while the verdict on impeachment may affect markets, that will not be the only impact. There will also be lasting impacts from the way the media have portrayed impeachment and the way the public has responded.

Trump is criticized by his detractors as having stonewalled on impeachment from start to finish. His supporters cheer him on in this attitude and constantly blister the Democrats for trying to unseat a duly elected president. You can turn on CNN and watch the impeachment proceedings from start to finish, or you can flip the channel to Fox, where you might think the impeachment proceeding doesn’t exist or is a complete sham. Thus is the state of our divisive media reporting and our polarized body politic. In our shop we deal with this split by following all major news outlets; and now, with the coronavirus outbreak, our attention has broadened to non-US media outlets beyond the ones we normally cover.

There are two people lurking in the background who are having a profound influence on the current president’s defense. Both are dead.

The first is Senator Joseph McCarthy (https://en.wikipedia.org/wiki/Joseph_McCarthy). If younger readers don’t know him, I recommend a history lesson on what a senator-led witch hunt looks like and how it progresses. I vividly recall some of it when I was a lot younger and my family watched the first TV broadcasts of the Army–McCarthy hearings (https://en.wikipedia.org/wiki/Army%E2%80%93McCarthy_hearings).

I won’t recount details here, but I implore readers to take some time to examine this fraught period in American history. It will help put the current period in perspective. Compare McCarthy’s tactics and the repetition he employed to turn false accusations into a narrative that was accepted by much of the country. And examine his ultimate demise. I recommend this history because it provides lessons for both the Democrats and the Republicans.

The second ghost in the present proceedings is a dead lawyer by the name of Roy Cohn. Here is the Wikipedia link: https://en.wikipedia.org/wiki/Roy_Cohn. Books have been written about the influence of this man. He rose to national prominence as Senator Joseph McCarthy’s chief counsel during McCarthy’s powerful reign in the US Senate.

Wikipedia summarizes the rest of his career as follows:

“After leaving McCarthy, Cohn had a 30-year career as an attorney in New York City. His clients included Donald Trump; New York Yankees baseball club owner George Steinbrenner; Aristotle Onassis; Mafia figures Tony Salerno, Carmine Galante, and John Gotti; Studio 54 owners Steve Rubell and Ian Schrager; the Roman Catholic Archdiocese of New York; Texas financier and philanthropist Shearn Moody, Jr.; and business owner Richard Dupont… Cohn was known for his active social life, charitable giving, and combative personality. In the early 1960s he became a board member of the Western Goals Foundation [a private domestic intelligence agency]. Although he was registered as a Democrat, Cohn supported most of the Republican presidents of his time and Republicans in major offices across New York. He maintained close ties in conservative political circles, serving as an informal advisor to Richard Nixon and Ronald Reagan. Cohn’s other clients included retired Harvard Law School professor Alan Dershowitz, who has referenced Cohn as ‘the quintessential fixer.’” (https://en.wikipedia.org/wiki/Roy_Cohn#Legal_career_in_New_York)

“Federal investigations during the 1970s and 1980s charged Cohn three times with professional misconduct, including perjury and witness tampering. He was accused in New York of financial improprieties related to city contracts and private investments. He was acquitted of all charges. In 1986, a five-judge panel of the Appellate Division of the New York State Supreme Court disbarred Cohn for unethical and unprofessional conduct, including misappropriation of clients’ funds, lying on a bar application, and pressuring a client to amend his will.” (https://en.wikipedia.org/wiki/Roy_Cohn#Later_career_and_disbarment)

The last point I would make here is that the national majority view has ultimately prevailed in the course of American history. Once Americans focus on and understand the issues, they tend to coalesce into a large, powerful political force. This was true in the Nixon impeachment after the tapes revealed information that galvanized the nation. It was also true in the Clinton impeachment, but in that case the revelations of Clinton’s bad behavior never turned the country in anger against the president. Disappointment yes, but anger enough to remove the president from office? No.

I also note that the country had strong feelings at the time of the Andrew Johnson impeachment. Word of mouth and the written word were the available forms of communication in an era that had yet to see the explosive deployment of information, true and false, via electronic social media.

Johnson was a Democrat from Tennessee who, as vice-president, stepped into the presidency after Lincoln was assassinated. He opposed the post-Civil War Reconstruction Acts, which protected the rights of freed slaves and prevented former Southern leaders from regaining control of the state governments. Johnson repeatedly blocked enforcement of the acts and expressed his defiance of the Radical Republicans who supported the acts. Matters came to a head in 1867, when Johnson suspended his Republican secretary of war, Edwin M. Stanton, who supported Reconstruction. He did so in defiance of Congress, which had just passed the Tenure of Office Act, prohibiting the president from dismissing important government officials without the permission of the Senate. (https://www.pbs.org/wgbh/americanexperience/features/grant-impeachment/)

Johnson was thereupon impeached by the House, but the Senate failed to remove him, falling short by a single vote. It is historically interesting to examine what happened to those Republican senators who supported Johnson. They included Senators James Dixon (CT), James Rood Doolittle (WI), William P. Fessenden (ME), Joseph S. Fowler (TN), James W. Grimes (IA), John B. Henderson (MO), Daniel Sheldon Norton (IA), Lyman Trumbull (IL), Peter G. Van Winkle (WV), and Edmund G. Ross (KS), who provided the decisive vote. After the trial, evidence emerged that both votes to acquit and votes to convict had been acquired by bribery. Nevertheless, in three successive votes on articles of impeachment, the voting remained constant: 35 “guilty,” 19 “not guilty.”

Not one of the Republican senators who voted for acquittal was ever again elected to office. Although they were under intense pressure to alter their votes during the trial, afterward public opinion rapidly shifted against Johnson and those who supported him.
(https://en.wikipedia.org/wiki/Impeachment_of_Andrew_Johnson#Verdict)

We continue to watch the impeachment events unfold as we watch markets remain focused on earnings, monetary policy, a major virus outbreak, and other factors. We are watching American political history being made before our eyes. As we publish, the markets seem to still be discounting a Trump success in the Senate, regardless of further revelations that may emerge.

We shall see.

David R. Kotok
Chairman and Chief Investment Officer
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