Author: David R. Kotok, Post Date: October 1, 2018

Readers are invited to check out the background of this case scheduled for SCOTUS at the end of this month: Here is the Wikipedia summary: “Gamble v. United States is a pending United States Supreme Court case about the separate sovereignty exception to the Double Jeopardy Clause of the Fifth Amendment to the United States Constitution, which allows both federal and state prosecution of the same crime as the governments are “separate sovereigns”. Terance Martez Gamble was prosecuted under both state and then federal laws for possessing a gun while being a felon; his petition arguing that doing so was double jeopardy was denied due to the exception. In June 2018, the Supreme Court agreed to hear the case.”

Market Commentary - Cumberland Advisors - SCOTUS

A further excerpt from Wikipedia states:

“According to The Atlantic, the U.S. federal government contends that “overturning the dual-sovereignty doctrine would upend the country’s federalist system”, and that the increasing number of federal criminal laws means that it is important that states be allowed to “preserve their own sphere of influence and prevent federal encroachment on law enforcement”. The American Civil Liberties Union, the Cato Institute, and the Constitutional Accountability Center filed a joint amicus brief on the case, arguing that there is no textual basis in the Double Jeopardy Clause, which states that “[n]o person shall be … subject for the same offense to be twice put in jeopardy of life or limb”, for the doctrine, and that the rising amount of federal criminal laws and state-federal task forces means there will be more dual state-federal prosecution. The case has been analyzed in the context of the Special Counsel investigation into the Trump campaign; if the separate sovereigns doctrine is overruled, a pardon for federal crimes from Donald Trump may prevent state prosecution. United States Senator Orrin Hatch filed an amicus brief in the case, arguing against the separate sovereigns doctrine; a spokesperson for him denied any relation of the brief to the investigation, saying that Hatch wants the doctrine to be overturned due to “the rapid expansion of both the scope and substance of modern federal criminal law.” According to Columbia Law professor Daniel Richman, state and federal charges usually have “no overlap, or almost no overlap, that would ring Fifth Amendment chimes in the absence of the dual sovereign analysis”, and so the impact of overturning the separate sovereigns doctrine would be minimal.”

There are numerous accusatory comments about this case and there are various explanations offered as to why there is a sense of urgency to complete the SCOTUS process so that a full nine-judge SCOTUS is in place to decide this case. The SCOTUS docket is public as are the briefs and arguments. So, too, are the many viewpoints expressed on the internet. We will leave it to serious readers to research and decide for themselves.

Readers have asked us about the Kavanaugh saga and its market impacts. Given the galvanizing media show and the intensity of political partisanship, this seems to be a fair question. First, my personal views about SCOTUS nominee Judge Kavanaugh are my own and are private and have not been shared publicly. I have refused to offer them in any interview.

In our 45-person firm, the range of views on Kavanaugh spans from intensely opposed to strongly in favor, with some “I don’t care” and “I can’t do anything about it” and “it is all a sick system” views among our folks. Yes or no on Kavanaugh does not make the agenda for our morning strategy conference calls.

Market reaction to the SCOTUS appointment process is a different subject. We are in the independent investment advisor business. That means government actions require constant scrutiny; and government, by definition, is political, whether its representatives are elected or appointed. Judges, Fed governors, SEC or other board appointees, cabinet secretaries or advisors, all define government and all influence markets.

Here is a research piece, “Q3 2018 Municipal Credit Commentary,” written by our colleague Patty Healy that references two SCOTUS decisions. Each has a large impact on financial markets and alters risk analysis and portfolio composition:

Note, in Patty’s analysis, how important the five-vote SCOTUS majority is in order for the Court to resolve issues. Having an odd number of justices on the Court is critical to governance. Recall how SCOTUS deferred certain decisions when it was four–four with a seat unfilled. There is a reason why the highest court in our rule-of-law society operates with nine justices (though it might be able to function with five or seven). We have a decision-making process; and when that process is disabled, our nation pays a severe price.

Financial markets have largely ignored the pro-Kavanaugh versus anti-Kavanaugh debate. They have looked at the Fed and trade war risk and earnings forecasts and reports. That tendency is likely to continue.

Financial market agents, however, don’t like the nasty, divisive behavior of the political operatives to whom we’re constantly exposed. Ask financial market professionals about political behavior, and they will set aside party preferences and give you an earful on how broken our system is and how ugly it has become.

In markets, financial agents have no methods to deal with anonymous allegations, secret transmissions, and revelations after hearings are over and decades have passed. Financial agents are used to factual reports and audits and opinions rendered as accounting certifications from independent and unconflicted professionals.

There has been real harm done by the many-months-long SCOTUS process. When Republicans screamed harshly and rudely, they harmed us. When Democrats walked out of hearings like petulant children, their behavior harmed us. The SCOTUS process showed us our politics at its worst.

There are also longer-term debilitating impacts. Capable, well-placed financial markets agents are increasingly loath to take on civic duties, accept appointments, expose their personal lives to scrutiny, and watch the mainstream and social media dismember them.

In my view the real casualty from this SCOTUS process is how it has further discouraged participation in government and therefore governance. That reluctance to serve can undermine our nation, our freedoms, and our financial well-being.

Markets are not pricing in the longer-term deleterious effects of failing political systems. Market agents don’t know how to estimate the cost.

Maybe market agents are looking beyond the political ugliness perpetrated by Democrats and Republicans and betting instead on the enduring stability of the United States in spite of the corrosive acts of those who govern us. Maybe that is the explanation for market inaction during this SCOTUS debacle.

But that perception is only a guess. There is no way to know exactly why markets have ignored the SCOTUS saga so far. We who are in this business are all just guessing.

Let me add this postscript to my SCOTUS commentary. Like you, I have heard statements from US Senators of both political parties. Democrats and Republicans alike assert that one of the witnesses lied. Both sides cannot be right. In fact, both may be wrong. The study of memory and experience is an academic discipline that has evolved rapidly in recent years. Please take a few minutes to listen to this TED talk by Daniel Kahneman, a globally recognized expert and lifetime student of behavioral economics: “The Riddle of Experience vs. Memory,” We thank Datatrek for the citation.

And finally, I want to thank those Democrats and Republicans who have remained well-behaved, maintained decorum, and respected the process of governance during this trying episode in our national political life. You exemplify how things ought to be done in our democratic republic.

David R. Kotok
Chairman and Chief Investment Officer
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