Wednesday, November 16, 2016

The Importance of Being Electoral

What??? Hillary Clinton had a majority but still lost? It may seem unbelievable and unfair, but's as fair as it's been for more than 200 years.

A Visit to Electoral Land

For those of you who need a quick US civics lesson I'll give you the long story short. In the US Electoral system, voters don't choose the President and Vice President directly. Instead, they vote for Electors who gather in each state (the first Monday after the second Wednesday in December) to cast their ballots for President and Vice President.

Each State is assigned a number of Electors equal to that State's number of Congressional representatives plus two, being the number of Senators. Presently there are 538 Electors nationwide. The number change every 10 years as the US Census measures the national population and demographic.
In the early days of the US electors were not chosen by popular vote. In most states the Electors were chosen by the state legislatures. Clearly this meant there could a wide gap between who the people wanted for President who was actually.

Over time this all changed and by 1870 all states had gone to a where the Electors are actually chosen by the people so that in practice, the Electors are really proxies for the people. What makes the Electoral college system unique is that instead of simply counting the nationwide totals, the state by state totals are counted. It's not enough for a candidate to win big in a handful of large states. Instead, a candidate must win across a wide spectrum of the electorate in several states.

Electoral Implications

A small swing in a handful of states seem to decide the elections. This may appear to be the case, but that's only when the elections are really really close. We've see the colors of the electoral map change dramatically in a short space of time. In 1964 the entire map was blue. In 1972 the entire map was red. Whenever an election is close, by definition a small percentage of the population decides the race.

The system forces candidates to address people across the country. If polling were nationwide a candidate could theoretically sweep regions with large populations and win the nation-wide vote. This would basically leave rural America at risk of being ignored.

The marginal balance shifts to smaller states. In a national wide system a candidate could win heavily in a few heavily populated states and in the process ignore voters in less populated states.

Population and demographic changes are taken into account over time. Look at California, for example. For many years the state accounted for less than 5% of the Electoral College. Over the last few decades the population has increased sharply and now California is more than 10% of the Electoral College. Similarly, Texas and Florida have become more important in recent years. New York, on the other hand is less important than it used to be.

Minority matters. The election we've just witnessed is a case in point. It rarely happens, but from time to time a candidate wins enough states to obtain a victory in the Electoral College. Democracy is not about 51 people getting their way all the time and 49 people always losing. If year after year 49 people lost while 51 won over time the 49 would lose faith in the system. They could become effectively disenfranchised and systematically abused. From time to time the minority needs a break! They need to get their turn at the helm for the good of the greater whole. Much as I don't like Donald Trump, maybe, just maybe, he'll really fight for the minority that elected him and America will really be better. Or maybe he'll turn out to be a disappointment and a disaster. If so, then so.  At least the minority can't argue they didn't have a chance.

States have rights. America is one nation, but one nation composed of 50 individual, sovereign states, each of whom can determine its own affairs. If the people of Maine want to divide their Electors proportionally instead of winner take all, that's their choice. If the people of Alaska want to legally bind their Electors to vote according the will the of the majority, that's there business and their right.

The College Provides A Safety Valve. There are 21 states at the moment where Electors can break from the popular will. Almost never do Electors vote as anything other than a proxy for the results of the electorate. But maybe, there will be a day when we will thank ourselves that possibility of Electors overriding the electorate exists.

At the end of the day, bizarre as it may seem, the Electoral College makes sense and serves America well. The Founders of America were deeply suspicious not only of central authority, but also of the madness of a crowd. The naive interpretation of democracy is majority rules. But majority rules can very easily mean majority dictates, majority is tyranny. Letting the minority win from time to time is maybe the price to pay for a stable democracy.

The other thing the Founders were afraid of was the possibility an election could be somehow manipulated so that the Presidency was not won but stolen. In those days the system was particularly vulnerable to the possibility that one or a few states could spoil the process and produced lopsided results on a national level.

Today the problem still exists, but the root cause is different. Make no mistake here the possibility of national elections being hijacked is just as real if not more in the 21st century as it was in the 18th century. We live in an age where sound bytes matter far more than serious reflection. We live in an age where masses of people can be swayed by an increasingly powerful media able to propagate ideas and spin them virally in a few clicks.

The crowd has a life of its own and the crowd is far more connected to each other than ever before. One day the crowd will turn into a stampede. When this happens, it will be really comforting to know there exists the possibility for one last bastion of sanity, a few souls, a few Electors in a few states who are brave enough and courageous enough to put forward their conscience and change the balance before it is too late.

On the back of Donald Trump's election there have been calls for a change in the system. Those calls emanate from the frustration that democracy didn't deliver the result they wanted. When that happens they are naive enough to believe the problem was that the majority didn't win, so therefore democracy lost. I submit differently. I submit democracy won.

We may not all like the result. But rest assured, our system and the checks and balances we put on executive power mean the as a nation we are far strong than any one person in any one office, even if that office is the Oval Office.

I'll be a conservative stick in the mud, habit driven toad and take my chance with the Electoral College.

Michael Sonenshine is CEO of Symfonie Capital LLC. He manages the Symfonie Lending Fund, Symfonie Angel Ventures and the SymCredit P2P Lending Platform.

Tuesday, November 15, 2016

Trump's First Appointment Stirs Controversy

 Photo courtesy Kirk Irwin / Getty Images
Donald Trump's appointment of Stephen Kevin ("Steve") Bannon as Chief Strategist and Senior Counsel has met widespread criticism. But it may also turn out to have been an incredibly savy and smart move. We shall see.

Donald Trump the candidate was at times deplorable, nasty and vindictive. His tune changed completely last week and many people had hoped that really the rhetoric was gone and Donald Trump had reconciliation in store. He insisted he would be the president for all the people, saying it was time to for America to bind its wounds.

All the good will he may have earned over the last few days has probably just gone out the window. His appointment of Steve Bannon brings someone into the White House who is the darling of the "alt-right", a loose collection of far right political groups. Mr. Bannon has earned a reputation not only for his extremist views, but also for brass knuckle, nasty politics, back stabbing, double dealing, dirty tricks that stoke fear and mistrust in Washington. If the President elect somehow feels he needs a person at his side who can threaten political opposition through the use of right wing media channels, he must feel awfully weak and vulnerable.

Delve into the detail. This can be an incredibly smart choice.

As worrisome as the appointment can be, it is possible this is a politically smart, sophisticated and savvy choice. Steve Bannon obviously has the tools at his finger tips to influence opinion among the significant portion of the electorate that voted Mr. Trump into office. Potentially in four years their support will be needed again. Also in just 12 months time mid-term congressional elections will loom on the horizon. The House of Representative and one-third of the Senate run for election every two years.

Yet if Donald Trump wants a successful presidency, and we must believe he does, he must address political and economic realities that may lead him to make very different decisions and adopt very different policies than he promised on the campaign trail. In fact, he might struggle to get much of his agenda through the current Congress and his Supreme Court appointments may have to be more moderate than his supporters would prefer.

Reality might be that Donald Trump needs Steve Bannon not to defend from the left, but to defend from the right. Steve Bannon built a career on his ability to sell ideas to the far right. The counterpart to Steve Bannon on the left is David Brock, founder of Media Matters for America. According to political columnist Joshua Green, Brock’s attitude toward Bannon "isn’t enmity toward an ideological opponent, as I'd expected, but rather a curiosity and professional respect for the tradecraft Bannon demonstrated in advancing the Clinton Cash narrative."

Who is Steve Bannon?

Since 2012 Mr. Bannon was the Executive Chairman of conservative news and media website He was named to that job following the sudden death of Breitbart's founder Andrew Breitbart.

Mr. Breitbart was an American journalist who was among a generation of writers developing internet based news media websites including The Huffington Post and The Drudge Report. Journalists such as Nick Gillespie and Conor Friedersdorf have credited Breitbart with bringing new voices to debates about politics and culture. Breitbart developed itself as a conservative, sometimes right-wing counterpoint to the mainstream media.

In October of 2015 political columnist Joshua Green posted a commentary on Bloomberg Businessweek calling Stephen Bannon one of the most dangerous political operatives in America. The article focused on Mr. Bannon's stewardship of Breitbart, Mr. Bannon's work as founder of the non-profit Government Accountability Institute (GAI), and the tactics Mr. Bannon uses to discredit his political opponents both on the left and on the right.

Ben Shapiro, who left Brietbart in March 2016 after nearly four years as editor-at-large of, wrote recently in the Daily Wire "Bannon....turned Breitbart into his personal domain, making himself a regularly bylined columnist (certainly rare for a major media company) and installing himself as a radio host on Breitbart Radio on Sirius XM....he used his role as Breitbart CEO to turn the outlet into Trump Pravda, creating a stepping stone to close connection with Trump."

According to writer Hada Gold as CEO of Breitbart, Bannon regularly ordered subordinates to write stories that supported his allies and tore down adversaries.

In various news media accounts former employees accused Breitbart executive chairman Stephen Bannon of having "turned a website founded on anti-authoritarian grounds into a de facto propaganda outlet for Mr. Trump."

Here are 8 things you should know about Steve Bannon:

1. He graduated from Virginia Tech in 1976 and holds a master's degree in National Security Studies from Georgetown University.

2. He was an officer in the United States Navy, serving on the USS Paul F. Foster (DD-964) as a Surface Warfare Officer in the Pacific Fleet.

3. He holds an MBA from Harvard Univeristy, having graduated withhonors (cum laude).

4. He built a career as an investment banker with Goldman Sachs and then founded his own boutique M&A firm, Bannon & Co, which specialised in the media and entertainment industry.

Through Bannon & Co., Mr. Bannon negotiated the sale of Castle Rock Entertainment to Ted Turner. As payment, Bannon & Co. accepted a stake in five television shows, including Seinfeld. Société Générale purchased Bannon & Co. in 1998.

5. He was an executive producer in Hollywood.

He has executive produced several feature films and worked with notable with actors such as Sean Penn, Anthony Hopkins, Val Kilmer and Ed Harris. He's also written, produced and directed several political documentaries. Notable among them are Fire from the Heartland: The Awakening of the Conservative Woman, The Undefeated (account of the career of Sarah Pallin), The Hope & the Change(about Democrats and Independents from across America who supported Obama in 2008 and were ultimately disappointed).

6. He was Chairman and CEO of right-wing conservative web-site

Under Mr. Bannon's leadership flourished and developed following among far-right conservative groups, also known as the "alt-right." Content and commentary were posted on the site that drew criticism as being white-supremecist, anti-semitic, and bigoted.

According to Ben Shapiro, former editor-at-large of "I quit Breitbart News when it became clear to me that they had decided that loyalty to Donald Trump outweighed loyalty to their own employees....he has shaped the company into Trump’s personal Pravda…Bannon turned Breitbart into his personal domain, making himself a regularly bylined columnist (certainly rare for a major media company) and installing himself as a radio host on Breitbart Radio on Sirius XM. Finally, he used his role as Breitbart CEO to turn the outlet into Trump Pravda, creating a stepping stone to close connection with Trump. "

7. He is the co-founder and executive chairman of the Government Accountability Institute (GAI)

GAI is a non-profit organisation that specialises in deep forensic analysis and inveIstigative journalism of public figures. According to GAI findings have been used in books written and sold commercially by GAI executives a network of media partners.

Writing about GAI for Bloomberg Businessweek Joshua Green says GAI "is set up more like a Hollywood movie studio than a think tank. The creative mind through which all its research flows and is disseminated belongs to a beaming young Floridian named Wynton Hall, a celebrity ghostwriter who’s penned 18 books, six of them New York Times best-sellers, including Trump’s Time to Get Tough. Hall’s job is to transform dry think-tank research into vivid, viral-ready political dramas that can be unleashed on a set schedule, like summer blockbusters. “We work very long and hard to build a narrative, storyboarding it out months in advance,” he says. “I’m big on this: We’re not going public until we have something so tantalizing that any editor at a serious publication would be an idiot to pass it up and give a competitor the scoop. ”

It's worth noting that Mr. Bannon is open about the purpose of GAI and its commercial uses. GAI is not so concerned about finding scandal or highlighting political hypocracy in any particular corner. Rather, it is concerned about providing the factual and investigate basis for journalists, and then finding the best (i.e. most profitable) way to put that story out to the public.

8. He targeted the political demise of House Speaker Paul Ryan and other Republicans

According the political news website in December 2015, weeks after Ryan became Speaker, Bannon wrote in an internal Breitbart email obtained by The Hill that the “long game” for his news site was for Ryan to be “gone” by the spring.

The curious thing about this is that in the same breath that President elect Trump announced Mr. Bannon's appointment, he appointed Reince Priebus to the Chief of Staff position. Mr. Priebus is the Chair of the Republican National Committee. Importantly, he is the former chairman of the Republican Party of Wisconsin, where he is credited with helping to bring nationally known figures such as Paul Ryan, Speaker of the House, and Scott Walker, Governor of Wisconsin, into power on the state level and prominence on the national stage.

So in the same breath Mr. Trump brought one of Paul Ryan's political opponents, he brought in one of Mr. Ryan's long time political allies.

We can expect one of two outcomes - either a political fight will get shelved and people will professionally focus on serious issues of government or the White House will be an place filled with mistrust animosity, and Machiavellian style politics.

The Bottom Line on Bannon

Steve Bannon is a controversial figure who caters to right wing groups that espouse racist, sexist views that many Americans find offensive and appalling. He's also been highly critical of the Republican party as well as the main stream media in general.

Critics also say the appointment of Mr. Bannon flies in the face of Mr. Trump's recent statements that he wants to heal the divide in America. They say that Mr. Bannon reflects the politcs of hatred that fueled Mr. Trump's campaign.

The even more sinister view is that Mr. Bannon will bring Nixon-style dirty trick's tactics back into the White House amounted to an abuse of presidential power. We shouldn't forget that Mr. Bannon is as much a business man as he is a political opinion maker. It's hard to imagine Mr. Bannon is not likely to find plenty of ways to use his new posting to his advantage, politically and economically.

On the other hand, there's something we can find reassuring in the appointment of Mr. Bannon. Mr. Trump can credit Steve Bannon in part for helping him win the election. Isn't it better to have the guy Mr. Trump is indebted to in plain view rather than lurking in some dark alley?

Having Mr. Bannon in the White House actually makes him less of a threat because he will clearly be under scrutiny and can be more easily publicly confronted.

It also possible that Steve Bannon's job is not to threaten President Trump's opponents either on the left or with the Republican party, but instead to sell President Trump's policies to the group of supporters most likely to be disappointed.

The appointment of Mr. Bannon highlights one of the beauties of an open society where there is freedom of speech and freedom the press. The alternative to free speech and free press is to drive opposing and hateful views underground and behind closed doors where they can fester and where they can haunt us where and when we least expect. I'd much rather know who my opponents are so I can confront them and defend myself than live in fear about what hides in places I can't see.

Breitbart senior editor and political author Peter Schweizer points out that political corruption and cronyism exists throughout the political spectrum. In 2016 he authored Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich,. Just a few months earlier in the fall of 2015 he authored an e-book Bush Bucks: How Public Service and Corporation Helped Make Jeb Rich.

“To me, Washington, D.C., is a little bit like professional wrestling,” he told Joshua Green. “When I was growing up in Seattle, I’d turn on Channel 13, the public-access station, and watch wrestling. At first I thought, ‘Man, these guys hate each other because they’re beating the crap out of each other.’ But I eventually realized they’re actually business partners.”

My father, may he rest in peace, always told me "the truth lies somewhere in the middle." One terrorist is another man's freedom fighter. What worries me most about Steve Bannon is that the White House of 2017 will begin to look like the White House of 1972 and that Capital Hill will see visit the days of the McCarthy hearings or that we are likely to see a repeat of the Clarence Thomas / Anita Hill saga brought little and cost much.

What gives me hope is the notion that Steve Bannon will find the language and tools to generate support for a President Trump who finds support on both sides of the aisle and negotiates compromises that take America forward.

For me the issue not that Hillary would have been better, but that even if his intentions are good, Donald Trump's White House will come to represent the worst of America. In these difficult days we can't afford politcal theatre and a media circus organised by people who profit not matter what the outcome. Sadly, I struggle to see anything redeeming or decent in this appointment.

Michael Sonenshine is CEO of Symfonie

Saturday, November 12, 2016

5 Take-Aways from Trump's Election

Like many political observers I was surprised by Donald Trump's victory. I didn't expect him to win the Republican primary to begin with. So in the coming weeks I'll be buying the first beer for a few of my friends who rated the Donald's prospects of winning higher than I did.

Not only was I wrong about Mr. Trump's victory, I was also wrong about the outcome of the Brexit referendum this past June. Being wrong twice on such big event leaves me wondering what I've misunderstood or underestimated.

As a credit analyst and investment manager I also have to wonder how this event will impact the global economy in the months and years ahead.

For the record, I didn't vote for the Donald. I voted for the Hillary. Growing up in New York I followed his career and grew to dislike his business style, how successful his business was.

I detested his campaign rhetoric. The words that come to mind are vulgar, sexist, racist and arrogant. Personality aside, I also believe he doesn't have the skill set I want in a President.

Having said this, I believe he is intelligent and practical. What he lacks in experience he can compensate for in his selection of staff and cabinet. He leans toward economic liberalism and less government intervention and regulation.

My guess is that his policies and his cabinet will reflect these general principles. If this happens America's economy will continue to improve and the lives of many Americans will be better.

I am optimistic he will bring smart, capable policy advisors and cabinet members into the administration, manage them well, listen with respect to Senate and House members on both sides of the aisle, he stands a good chance to take the country in a good direction.

Hopefully he will conduct himself differently, better, as a president than as real estate developer and as a political candidate. I'd love to see him succeed as a president and do great things for America.

My fear is that we'll have an embarrassment in the White House who represents the worst things America can be rather than the best and makes decisions that turn America into a country filled with hate, violence, racism, sexism and everything else I heard come out of his mouth on the campaign trail.

I'll be happy to settle for a neutral, boring, neither good nor bad, President Trump whose presidency goes down in history as unremarkable.

I've come to the view that neither of the victory of Brexit or the election of Trump reflects some fundamental paradigm shift in the way our world will function in the months and years ahead.

This is not to say we should ignore them. Rather, we should put them in perspective for what they are - clear signs that a rising proportion of the electorate rightly or wrongly fees disenfranchised, unheard, frightened and distrustful.

The victories of Donald Trump in the US and the Brexit campaign in the UK reflect the ability of politicians to tap into that sentiment and amplify its voice. In an open, democratic society these sort of victories are healthy. They encourage debate and they force policy makers to listen more closely to the needs of the population.

With this in mind, I highly 5 take-aways we can draw from Donald Trump's victory.

Take-Away Number 1 - Spending More Doesn't Win Elections

Recent campaign filings show spending on Hillary Clinton's campaign was nearly US$700 mn, nearly 2.5 times the $250 mn. Donald Trump spent. Consider the failed campaigns of Donald Trump's Republic rivals. Jeb Bush's campaign spending was nearly $150 mn and he was one of the first to drop off the campaign trail. Other big spenders were Florida senator Marco Rubio ($150 mn) Ted Cruz ($130 mn) and Dr. Ben Carson ($80 mn).

Candidates can plaster the walls with posters and flood the airwaves with commercials incessantly but the law of diminishing returns is immutable. Preaching to the converted offers little value. People grow tired of hearing the message and start tuning it out.

Take-Away Number 2 - There's a Big Gulf Between Rhetoric and Reality

Politicians compete not only by selling their view to the electorate, but also by saying things the electorate wants to hear. Campaigns are political theatre. After the election is over the winners face the very real task of governing and confronting realities.

During the campaign many politicians cast Donald Trump as a villain. He faced harsh criticism from within his own party and at times the exchanges became vituperative and personnel. It was a disgusting and vulgar chapter in America's political history.

Now we face a new world. The election is over. The Republicans who control the House and Senate have a legislative agenda. Whatever legislation they propose must be acceptable to the President and vice versa.

The Republicans have a majority of just 1 in the Senate. Whatever Mr. Trump said about Washington on the campaign trail, he will have to work with his fellow politicians, be they Republican or Democrat or his presidency will be weak and ineffective and he'll spend much of the next four years convincing the electorate to send different politicians to Washington.

Take-Away 3 - Trade Policy With a Big Stick

Trade and foreign policy are the areas where a president's influence and powers are greatest. Mr. Trump has been an outspoken critic of NAFTA and similar free trade agreements. He sees such deals as an attack on US jobs and one of the reasons for the decline of manufacturing in the US.

(image courtesy of

When President Trump sits down to seriously study the history of free trade agreements he will see that the North American Free Trade Agreement (NAFTA), signed by President Clinton was negotiated principally by the elder President George H.W. Bush and that when the deal passed in Congress it enjoyed wide spread bi-partisan support. Historically the Republican party has been the advocate of free trade.

He'll also find that since the passage of NAFTA nearly 25 years ago the US has entered into 20 other free trade agreements under the administrations of the younger President George W. Bush and the outgoing President Obama.

He'll be pleased to know that the Office of the Trade Representative has evolved over the years to the point where it works on trade issues in as cooperation with 19 other Federal Agencies. It has offices around the world with a staff of 200 and 28 advisory committees taking input from more than 700 private sector citizens. Depending on how you look at it OTR either provides the real serious infrastructure needed to implement and administer trade agreements or it is a beehive of lobbyists and special interest groups.

Most importantly, when President Trump sits down to think about America's trading policies he'll quickly realise that trade policy has winners and losers on both sides of the fence and in both camps. It's easy to point a finger and look at how many jobs left the US. But that's only part of the story.

Another part of the story is that many of those jobs might have left the US in any case, free trade agreement or not. Also, many of the goods that Americans purchase cost less than they would otherwise in the absence of a trade agreement. Finally, no discussion about the merits of trade agreements is complete without looking at the jobs that are created, the services that are exported and the earnings of the people that fill those jobs.
Conventional wisdom is that NAFTA's days are now numbered and that the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will not go forward.

Nothing can further from the truth! More likely what will happen is that Mr. Trump will quickly come to understand who in America loses and who in America wins from each trade agreement. He'll look at how many jobs can be created, how many jobs are likely to be lost. He'll look at which industries are likely to suffer and which industries are likely to prosper. He'll look at which goods and services are likely to be more expensive and which are likely to be less expensive. He'll also understand that he will have to work with those winners and losers in the years to ahead and he'll calculate the impact all around including that cost or gain to his presidency.

He'll have some long, tough negotiations with his trade counterparts, which probably is a good thing. There will be political theatre and strong statements from abroad as well as from the President's domestic critics.
Behind the scenes there will be negotiating, more winners and losers. One of Donald Trumps greatest strengths is that he well understands negotiating processes, he understand how to posture and how to present the positions.

In the end, he'll probably win some concessions, not as many as he'd like, but some anyhow. Until we get closer to the reality how much the net gains will be and who in America will win and who will lose is difficult to say. In the end we may have the status quo.

The Donald we saw on the campaign trail painted with an incredibly broad brush. All those jobs left America for reasons for more complex and far more varied than NAFTA. Many of those jobs would have left with or without a trade deal. Even if they had stayed, the cost might have higher prices for those goods - transfers of wealth from consumers to businesses. Or the factories that stayed might not have been able to compete at all without tax breaks and government support - transfers of wealth from the public purse to to private business - the sort of stuff Republicans except when they are on the receiving end.

The key take-away from the election of Donald Trump is that we are likely to see more criticism of the raft of trade agreements, followed by tough, but firm negotiations aimed at actually getting to a deal Donald Trump can present as a winning deal.

NAFTA, TTIP, TPP and the others should not be presumed dead. Rather, they should be more appropriately thought of as patients waiting to see the doctor and opportunities for President Trump to succeed. Interestingly TTIP comes with a potentially interesting kettle of fish. The EU will want to find a way to get to yes on TTIP at the same time as the UK, on the verge of exiting the EU, potentially, will want to develop a trading agreement.

Take-Away 4 - Wave Goodbye to ObamaCare? Not so fast!

President Trump has promised to "repeal and replace" the Affordable Care Act (ACA), also known as ObamaCare. This act was passed at a time when the Democrats controlled the house and Senate and could pass the act without any Republican support. Since that day, whatever the merits and the good intentions of the act are, it has become a source of contention between both parties and a symbol of the divisiveness and lack of bipartisan initiative in America.

Here we are back to the rhetoric versus the reality. Donald Trump's rhetoric was to repeal and replace. Reality is that repeal without something at the ready to replace could create much bigger problems. A more likely outcome is that either the existing act will be amended or the repeal and then the replacement will happen practically the same day.

Millions of Americans now have healthcare access as a result of the Affordable Care Act (ACA). Repeal without replacement for sure imposes cost on those millions of now insured people, many of may be among his supporters. Repeal without replacement also means all the rest of the insureds will bear cost in terms of higher premiums. Repeal without replacement will force hospitals and insurance companies to bear the cost of treating the uninsureds. Repeal without replacement will be a mess!

What I hope is that Congress will change its ugly ways, find a bi-partisan solution to fix the ills of the ACA and make things better in America all around. Whether that is done an amendment or repeal and replace is irrelevant and unimportant.

America spends 17% of GDP on healthcare, nearly 2X what many other countries around the world spend. I don't know whether we should blame doctors, hospitals, insurance companies, pharmaceutical companies, lawyers, regulators or the fact that so many Americans are uninsured or underinsured. It's a collective and complex problem. Fixing the problem means there will be winners and losers, all whom have strong lobbying ability and influence in Washington.

Frankly speaking, I'm not a healthcare expert. What I can say with certainty is that my wife and I are insured in the Czech Republic. I've seen the kind of care we and our friends and my employees get in the Czech Republic and elsewhere in Europe. I've seen the value we get for our healthcare spend and I can honestly say I'd much rather get sick in Prague than in New York.

Even our dog gets state of the art medical care for a fraction of what it would cost in the United States!

Take-Away 5 - Nothing Really Changed on the American Political Landscape

Donald Trump's victory defied conventional wisdom. He ran as an outsider within the Republican Party and spent far less than his rivals. He is socially quite liberal compared to his rivals. His rhetoric was highly offensive to any reasonable person. And yet, the electorate clearly forgave him for all of that.

During the campaign he laid claim to having begun a political movement. It's hard to argue he really has changed anything in America. He rightly recognised that his best chance at getting elected was to present himself as an agent of change, a person who would challenge the status quo and restore something that seems have been lost in amid the complexities of a changing society. That message resounded loudly on the electorate.

It's important to realise the America of today is much different than the America we saw several decades ago. The population is increasingly rapidly. It's estimated that over the next 30 years population will grow by nearly 40% from present levels. Population growth is fastest in the cities and there is a consistent migration to the south and south west. Many towns twenty years ago were quiet villages where everyone knew each other. America today is far more culturally and ethnically diverse than it has been in the past and this trend looks set to continue.

Sheila Suess Kennedy, J.D., Professor of Law and Public Policy in the School of Public and Environmental Affairs at Indiana University Purdue University at Indianapolis, wrote eloquently about this issue in a post on She pointed to American inequality, the diminishing numbers of people who can be categorized as middle class, and the widening gap between wealthy Americans and everyone else and said that progressives (She blogs at

America is still the world's largest manufacturer, with output exceed that of China and India combined. Still, at least one in every six manufacturing jobs has left the country since 2000. Because population tends to concentrate around manufacturing facilities, this change has scarred many communities. Retraining is far easier said than done. The landscape of rural America is filled with people that have been left behind in world that changed around them.

The collapse of the financial sector in the wake of the sub-prime mortgage crises exacerbated the problems. Drive through many cities and towns in America and you'll see homes boarded up that were repossessed. You'll see urban decay. You'll see gang violence. You'll see a communities and police that don't trust each other. Add to this mix terrorism, and a global refugee crisis.

It's therefore no wonder a large portion of the electorate sits up and takes notice when a Donald Trump comes to town, speak to them in terms they understand, points to their fears and insecurities and offers them a solution. They feel Washington has abandoned them and they are probably not far from the truth. Getting things done in Washington for the good of the country is a tall order when Congress votes along party lines and it seems nothing gets done at all.

Irrespective of whether or not Donald Trump really can deliver, nearly half the electorate is ready to listen and desperate enough to give him the chance.

Looking at the electoral maps and the election results over the last few decades, there is little evidence than anything really changed in the American political landscape at least since 2000, other than the arrival of savy marketer adept at making his case in the media. Bill Clinton and Ronald Reagan changed the political map far more than many of their predecessors and certainly more than their successors. Note the following:
  • Donald Trump didn't have a majority of the popular vote. In fact, Hillary Clinton polled 48.5% to Donald Trump's 47.9%.
  • Nearly all the states that voted Democratic in the last several elections voted strongly for Hillary Clinton.
  • Donald Trump's victory came from very thin victories in 3 states he managed to swing - Michigan, Wisconsin and Pennsylvania.
  • It's arguable that Donald Trump's victory can be attributed to a strategic failure on the part of the Clinton camp. While Trump was wrapping up his campaign in Michigan, Wisconsin and Pennsylvania Hillary Clinton was holding rallies in Florida and North Carolina, both states that have large Republican populations and where she lost by wide margins.
  • Barrack Obama won with significantly strong majorities in both of his campaigns. The electoral map was similar to what it was this year, except that Mr. Obama captured Florida, Michigan and Wisconsin, Pennsylvania and Iowa.
  • George Bush defeated Al Gore in 2000. Like Donald Trump, Mr. Bush lost the popular vote by a slim margin. Unlike Mr. Trump George Bush won in Colorado and New Hampshire and lost in Michigan, Wisconsin and Pennsylvania.
2016 - Trump vs. Clinton
2012 - Obama vs. Romney

2008 - Obama vs. McCain

2000 - Bush vs. Gore

1992 - Clinton vs. Bush
(Clinton won states that no Democrat had won since Carter was elected  in 1976)

1984 - Ronald Reagan vs. Walter Mondale
1976 - Carter vs. Ford

Big Strategy Lesson!!!!!

  • Fight the battles you are likely to win rather than those you are likely to lose. If Hillary had focused on Michigan and Pennsylvania she might have been headed to the White House.

  • While you are off trying to capture new ground, you may find your opponent has breached your defenses and cost you the war.
A week before the election an article ran in the Atlantic Magazine addressing this very issue. Hillary Clinton's spending was highest in Ohio, North Carolina and Florida. These were states she either wanted to win or believed she could win. She couldn't have been more wrong! Donald Trump won those state with thin, but comfortable margins.

Her spending was lowest and her campaign stops fewest in the states she really needed to win - in particular, Wisconsin, Michigan, Pennsylvania. These three states gave Donald Trump 46 electoral votes and the presidency. Yet his margins in these states were in all cases less than 1%.

In a genuinely insightful and well written piece, Is Trump Outflanking Hillary Clinton, Ronald Brownstein pointed out the Hillary Clinton was spending time in states that were Republican leaning rather than in states that were traditionally Democratic but could be lost if Donald Trump managed to appeal to marginalised voters who believed the Democratic nominee was out of touch with them.

I'm not a political strategist by training. I'm a credit analyst and an investment manager. At the William E. Simon Graduate School of Business I read many case studies about corporate strategy that drew attention to these similar principles business. Hindsight is always 20/20. It's easy to play Monday morning quarterback and second guess the Clinton campaign strategy.

The Clinton camp underestimated the strength and appeal of Donald Trump's message, which above all played on people's economic and social fears. Some historians are may look back and say this was just the way the cookie crumbled and that her team miscalculated or was unlucky. Others will be more critical. They will look back and say that candidate herself was just too arrogant and too out of touch with her constituency in states that she really should not have lost.

Hillary Clinton's loss is especially ironic, considering that her husband, Bill Clinton, when running to oust incumbent George H.W. Bush in 1992 said the reason he will win the White House in 1992 is because his campaign was focused on the one thing that mattered most to the rank and file electorate in America - the economy.  

(Graphic courtesy,

Michael Sonenshine is CEO of Symfonie Capital LLC. He manages the Symfonie Lending Fund, Symfonie Angel Fund and the SymCredit P2P lending platform.

Monday, August 15, 2016

Central Bank Follies - QE, Negative Interest Rates and Regulatory Capital

This post is long.  It is a compilation of posts on each topic. I'll get to the bottom line up front.
  • Quantitative Easing (QE) keeps banks liquid, but does little else for the broad economy. If anything, it incentivises banks to buy government bonds (and soon to be high grade corporates) rather than focus on core lending activity.  
  • Sub-normal and now negative interest rates distort asset prices.  Investors are crowded out of low-risk assets and crowded in to higher risk assets, all the while reducing their reward / risk ratio.
  • Faced with compressed interest rate spreads banks resort to broad based fees. This is a regressive tax on people and businesses who can least afford it and have little or no alternative.
  • Continual rounds of QE and interest rate cuts undermine the economy by transmitting negativity and pessimism.  If people and businesses are continually afraid of the next looming financial crises they are more likely to reduce spending and reduce investment.
  • Increased drive on the part of central banks to raise banking capital adequacy ratios reduces the overall capital available for banks to lend encourages banks to lend to an increasingly narrow segment of businesses and consumers, ironically, those who need credit least.
  • Risk weighting capital toward collateralised and secured loans forces banks to focus on the credit backstop rather than credit fundamental. Any smart lender should put the ability and willingness of a borrower to pay ahead of the collateral the lender offers.  Collateral is merely a backstop and when projects fail, the collateral is often a poor backstop at best.
  • Reduction in risk taking by banks must be accompanied by support and encouragement for the emergence of alternative lenders - i.e. the P2P lending industry ( sorry if that's a self-interested view, but even if I weren't a P2P lender and if I didn't run a P2P lending fund I'd still feel the same....really!).
Now for the Meat and Potatoes

I'm not a macro economist by training, so take what I say here with a grain of salt.  Still, you don't have to be a rocket scientist to realise that something is wrong in Frankfurt, Washington, Tokyo and London.
They say the road to hell is paved with good intentions.  Central bankers in fact have good intentions.  They see themselves as the guardians of the stability and security of our financial system and in this respect they are not far from the truth.

Mark Carney, governor of the Bank of England, recently remarked that monetary policy has certain limitations.  Central banks can help economies cope with economic shocks that disrupt the financial system.  By adopting sound monetary policies Central Banks create the foundation that underpins money as a medium of exchange.

So why is it that central bankers around the world seem to be continuously inventing new tools and techniques to jump start the world's economies?  Is it possible that we've reached the point where the doctors are over-medicating the patient?

Is it not possible that in their rush to help central banks are now doing more harm than good?  Have we reached the point where monetary policy is producing absurd and perverse outcomes?

It's harder to be the player than the fan, but the more I look at the direction central bank policy around the world has taken, the more I fear the policy ship has gone dangerously off course.

The trends I find most worrying are zero and sub-zero interest rates, the constant effort to push liquidity into the financial markets and the obsession with bank capital requirements.  Let's take them one at a time.

The Obsession with Bank Capital

We are nearly a decade after the onset of the sub-prime mortgage sector that is commonly looked upon as the trigger for one of the world's greatest banking crises since the Great Depression of the 1930s.

Policy makers around the world had little choice but to bailout the banking system. The bailouts meant firstly that banks received infusions of fresh capital. Secondly the inherent riskiness of banking generally was subjected to intense scrutiny.  The conclusion of policy makers was that banks should be significantly deleveraged.  Third, the overall riskiness of bank lending came into question and the inescapable answer was that banks should redefine the way they look at risk so that going forward they make less risky loans.

Of course, with more capital and less leverage banks are much more resilient in the face of loan losses.  But at the same time the emphasis on reducing the perceived riskiness of bank lending actually undermines efforts to reignite global economic growth.

The relentless focus on bank capital has has changed the character of bank lending and in ways detrimental to the global economic recovery.  Risk weighted capital requirements set out by regulators force banks to emphasise relatively low interest rate secured loans in their product mix at the expense of higher interest rate unsecured loans.  Also what's changed is loan to value rates.  Regulations and capital requirements have reduced the amount of bank lending available on a project by project basis.

In principle there is nothing wrong with a lender preferring to make one type of loan over another.  But systematically, in their rush to improve the stated financial condition of the banking sector central banks have given banks incentives to turn a blind eye to credit worthy projects and left wide swatches of the economy underfunded and underleveraged. Ironically, the losers are companies that operate in some of the world's fastest growing and most profitable sectors. Let's look at some examples before we move on.

The software, retail, engineering and design sectors share one thing in common.  Mostly they are asset poor and hence collateral poor.  They require capital to fund inventory and labor for a period until they receive full value for the goods and services they sell.  The faster the sales growth, the more capital they need.  When sales turn down the cycle works in reverse.  They reduce inventory and labor purchases so working capital needs decline and for a period of time they become highly cash generative.  They may be strong companies, well run, highly cash generative.  Yet systematically their access to bank capital is constrained.  The result is that many companies are less profitable than they could be and many banks leave profitable lending opportunities on the table.

Many SME's fall into the same credit trap.  SME's are the back bone of the global economy.  SME's are owned by small groups of private shareholders, often families.  They live from their businesses, so they draw income, leaving little in the way of retained earnings.  We can see many examples of highly credit worthy, cash generating businesses whose access to bank lending is constrained only because bank lending models focus on balance sheet metrics rather than cash generation.  The result again is that many SME's are capital constrained and underfunded and banks leave profit opportunities on the table.

Ironically, many SME's fail not because they have bad businesses, but because they don't have the working capital to meet demands of growth nor the working capital to whether cyclical fluctuations.  But for access to more credit when they most need it, otherwise good businesses with good prospects are forced to shutter their doors.  Who suffers?  Their trade creditors, many of whom may depend on bank financing and their owners, many of whom are the retail mortgage customers banks so happily accept.

So when business turns down the so-called safe mortgage backed loans central bankers seem to relish turn unexpectedly bad. The banking sector can whether the storm, perhaps.  But the real economy, where real people put real bread on their tables each day, is far from secure.

I'll leave the topic of bank capital and and secured lending with one more thought.  Collateral and credit quality don't go hand in hand.  We can find many examples of asset rich companies whose cash flows dry up either because business turned down or the project just didn't work out.  When this happens banks are stuck with assets that are not working, not productive and worth not nearly as much as they would be otherwise.

The Myth of Quantitative Easing

The purpose of quantitative easing is to enable the financial sector to withstand the impact of economic downturn by ensuring banks have ample liquidity to service their creditors.  Let's not forget that banks are creditors far more than equity holders.  They live and die from their ability to borrow money.

Quantitative easing means the Central Banks put cheap money into the hands of banks.  In exchange they pledge or give securities to the Central Banks, depending on whether the Central Bank is buying the security outright or just lending money to the banks.

It's not practical for banks to transfer loans made to borrowers to the Central Bank, so banks instead give government bonds, and now corporate bonds to the Central Bank.  Really all that is happening is a transfer of the balance sheet from the banking sector to the Central Bank.

Banks might make more loans with all the cash they get from the Central Bank except for the fact the Central Bank demands banks have more capital and demands banks put constraints on the types of loans they make.  I've yet to see hard evidence that quantitative easing translates into real growth in bank lending.
Much of the benefit from quantitative easing in terms of liquidity to lend is offset by the loss of lending capital brought about by the relentless drive to shore up bank capital bases and shift risk weighted capital toward collateral based lending.

There's another distortion brought about by quantitative easing in the form of the impact on bank profitability.  Banks used to make money by borrowing from depositors and lending out to borrowers.  Banks made money obviously by making good loans first and foremost.  Second, when loans turned sour, banks protected their investment by actually helping their borrowers through a difficult time if that was what was called for.  Regulation around non-performing loans and the implication off non-performing loans on bank balance sheets has changed this dynamic.  Banks are far less willing and far less able to restructure loans, either proactively or reactively.

So how do banks make money now?  First, they make only the so-called safe, collateralised, low risk loans.  Interest spread compression drives a big hole through bank profitability, especially when banks are blessed with all the brick and mortar and legacy infrastructure.

Faced with the double whammy of interest spread compression and overall loan volume banks charge depositors and borrowers higher fixed fees.  Depositors bear an increasingly big fee burden for the fact they have no choice but to keep their money in the banking system.  They pay transaction fees, account fees, overdraft fees, and any other fee banks can dream up.  Inevitably the people that are burdened with those fees are the people who can least afford to pay those fees.  Bigger customers get fee discounts.  Bigger customers don't go overdrawn. Bigger customers transact larger amounts of money so fees are minimal in comparison to their transaction size.

The second way banks make money is by investing in assets they can readily sell to the Central Banks.  Many of the losses from the Greek debt crisis were avoided within the banking sector because the Central Bank and the European Investment Fund became the last resort buyer of all that Greek debt.  The ECB balance sheet is awash with Italian, Spanish, Portugese debt and French debt.  This is not because Italy, Spain, Portugal and France are bad countries, but rather because it just so happens their is more of their debt available for the ECB to buy than say Czech or Slovak or even German debt.

Without challenging their skills and knowledge as a central banker, is it not ironic the most recent ECB presidents were from Italy and France, two of the European countries with the highest amount of government debt outstanding relative to GDP?

Whether it's Washington, Tokyo, London or Frankfurt the story is the same.  The banking sector's profitability is inexctricably tied to its ability to buy government bonds and sell them or pledge them to the central bank.

We are coming to the end of this rope.  Interest rates on most government debt in Europe is near zero or sub-zero.  Think about that!  It cost an investor money to loan buy government debt.  The ECB is losing money every time it buys another Bund.  Who is on the other side of that transaction?  The man in the street?  The average ordinary citizen?  A hedge fund?

Look again.  The other side of that transaction is filled with banks that survived because they were too big to fail so the taxpayers bailed them out.  The other side of that transaction is filled with banks under marching orders to build or rebuild their equity bases.  The other side of that transaction is filled with banks that make more and more money charging fees rather than making as many loans to as many good borrowers as they can find, collateral or no collateral.

So where do we go next?  Many central banks are running out of government debt to buy.  So now they start with corporate debt.  Of course, the corporate debt they buy will be only investment grade rated, at least for now.  This is nothing short of a transfer of wealth from the high yield borrowers to the investment grade borrowers.  Again, another swath of the economy is left wanting while banks service an increasingly narrow segment of the economy.

What's really worrisome is that when economies turn down investment grade debt often becomes high yield or junk debt.  Corporates have gone bankrupt simply because rating changes collapsed their capital structures.  Enron was investment grade debt until....Lehman was A rated until...AIG was A rated until....And yet, central bankers around that world have brought us to the point where all this A rated paper will find its way to the central bank balance sheet and long before the wheels come off.

The inescapable conclusion here is that QE does far less for the economy than central bankers tell us it will do.  Furthermore, QE is fundamentally distorting risk and capital market pricing.

Negative Interest Rates - The Ultimate Perversion

We've reached the realm of absurdity.  Negative interest rates means savers get penalised and borrowers get paid.  Yet that is what is happening.  Bank fees are a form of negative interest rates  Banks charge their depositors for opening and maintaining bank accounts.  Who pays this tax?  The smallest savers of course!  The people who can least afford this cost.  Yet this is where the world has come to.

When I was growing up many many moons ago interest rates were double digits and banks faced regulations capping the interest rate they could pay for deposits.  Banks were tripping over themselves to get depositors.  Practically every month my parents got a toaster or a clock, a microwave oven or any other kind of appliance simply because they took a maturing certificate of deposit and moved it from one bank to another.  If you walked into a bank to open a deposit you were greeted as if you'd just gave life to the dead.
Today?  You open an account and the first thing you are presented with is all of the money you will pay to the bank who is borrowing your money so that it can buy government bonds that yield next to nothing and place them with the central bank.

The ECB was the first Central Bank to setup this distortion.  Tokyo followed suit.  London and Washington wonder if they are next and say they hope not.  Yet if things keep going the way they are going, we will see negative rates in the US and the UK.

The second distortion created by sub-normal and negative rates is the price of risk.  Faced with essentially a worthless risk-free asset class investors extend inevitably into more riskier instruments than they might otherwise.  As the hunt for yield feeds on itself yield curves compress.  Investors move further out into commodities and equities and the relationship between volatility, return and yield unravels.  Projects that might otherwise offer high returns that reflect their genuine risk offer returns that hide the true inherent riskiness.  This leads to sub-par investment returns in the medium term and is effectively a tax on the economy.

What of the equity markets?  They continue to hit all time highs.  But this too is an illusion at best.  Asset prices are driven by money supply.  In a world of quantitative easing and sub-normal central risk, money supply increases, forcing asset prices higher.  When interest rates start their inevitable march to higher level inflated asset prices will of course collapse.

The Conundrum of Low Inflation

Central banks point to low inflation and low GDP growth and say that as a consequence monetary policy will remain relatively loose.   The argument they put forth is that by lowering interest rates they will encourage businesses to borrow and generate savings for existing borrowers.

The benefit of interest saved, they argue, will be plowed back into the economy in the form of either further investment or consumption.

What central bankers seem to forget is that borrowing for business and consumer mortgage is more like a step function than a question of 0.25%.  The base rate can be zero or 1 or 2 or even 5 and so long as there are profitable projects, business will borrow.  Of course there comes a point where the marginal increase in borrowing rates results in a sharp fall-off in borrowing.  Call that the elasticity of demand for borrowing.
The second issue central bankers don't often recognise is the impact of their actions on consumer and business confidence in the economy.  We are trained to think that hikes in interest rates occur because the economy is strong and perhaps at risk of overheating, and declines in interest rates occur because the economy is getting worse.

The paradox is that the more central bankers lower rates, the more they transmit pessimism and distorted asset prices into the economy. Central bankers - if you are listening - here is the message:
  • Business want to borrow and often pay in excess of 10% even when base rates are zero!
  • The lower rates go, the more pessimism there is in the economy, the more frightened business become, the more risk averse banks become.
  • Low interest rates compress bank earnings and force them to charge higher fees, which is a regressive tax on consumers and businesses.
  • The small extra savings consumers and businesses make when rates go down doesn't get pumped back into spending and investment, especially when the savings occur amid bearish economy outlook and the negative signal of a rate cut.
  • The appetite of consumers and businesses to spend and invest at any given moment or any given short interval in time is finite. It is, in fact, a step function driven by the lifespan of the acquired asset and purchasing power. The interest cost, if any, attached to the purchase is marginal.
The Take Aways

Years from now economists will look back and marvel at the tendency of central bankers to over-medicate in the wake of the financial crises that began in 2008.  In fact, they will blame central bank policy for delaying the recovery.  Why?
  • The obsession with bank capital requirements has reduced the overall level of capital available for lending.
  • The obsession with bank capital requirements and the concept of risk weighting loans skews bank lending to a narrow segment of businesses and consumers.
  • The window of opportunity is to expand capital availability by encouraging the development of alternative P2P lenders.  Governments around the world should be doing everything they can to encourage and foster the development of P2P lending as an asset class.  Britain does this successfully, and this is one reason why the British economy was doing relatively well prior to the idiocy of Brexit.
  • Quantitative easing furthers distortions in asset prices.  Natural investor for safe, long term, fixed rate assets are crowded out of safe assets and crowded into risky assets by  the ever expanding balance sheet of the central bank.  When that bubble burst, the results will be ugly.
  • Quantitative easing It doesn't necessarily increase the appetite of banks to lend.  In fact, it gives the banks overweighted incentive to invest in only those assets they can sell or pledge to the central bank.
  • Interest rate cuts have only marginal impact on real economic activity.  In fact, each successive encourages businesses and consumers to delay purchase decisions, either out of fear that things will get or worse or out of the expectation that interest rates will fall further.
  • Interest rate cuts encourage lenders to look for floating rate rather than fixed rate loans.  The lack of supply of long term fixed rate loans means when interest rates begin to rise wealth is transferred from borrower to lender or in the case of banks - from borrower to equity holder of a large borrower.
  • If central banks want to encourage economic growth then they need to lead a return to normalcy with a signal of confidence.  They need to start raising interest rates.  This will start a virtuous cycle of increasing bank profitability  and give savers more incentive and more confidence to invest.
  • An environment of rising rates will encourage businesses to invest.  First they will be encouraged by the optimism and confidence of the central bank.  Second, amid expectations that rates will continue rising they will want to capture the benefit of low interest rates.  Finally, rising interest rates will feed into rising output prices, which will in turn generate increased profitability and therefore higher government tax revenues.  Rising output prices and risking profitability will encourage hiring and raise labor prices, which obviously will help consumers.
  • Rising interest rates will reduce the banks' incentive to rely on fee income and therefore remove essentially a regressive tax.
Bottom line:  For years central banks have been over-medicating.  Improved bank capital adequacy must be accompanied by the robust development of alternative lending solutions that are not constrained by need for collateral but focus instead on fundamental credit worthiness - willingness and ability to pay.  The trend toward lower interest rates clearly is unsustainable. Quantitative easing is creating asset bubbles and further exacerbating distortion of bank incentive to make real loans rather than buy securities. The longer this goes on, the harder it will be for all of us.
Michael Sonenshine is CEO of Symfonie Capital.  He runs the Symfonie Angel Fund,  the Symfonie P2P Lending Fund and the SymCredit P2P lending platform.  For more info contact

Thursday, June 9, 2016

Trump's Nomination is Not a Done Deal

I'm not a political pundit.  I'm an investment manager.  Don't take what I say here as anything more than one man's view. As always, I welcome comments and criticism.

Let's get a few things straight.  First, I'm not a supporter of Donald Trump.  Second, I'm still eating a piece of humble pie after my post earlier this year when I said I didn't think he would win the nomination.  Third, I continue to believe that even if he really gets the nomination, he won't win the general election.

Let's leave the general election to one side.  There is about a six week window between now and the Republican convention.  A lot can happen now and then. Even so, I'll stick my neck out a bit further and say here that much can go wrong for Mr. Trump when delegates assemble in late July.  Here's what to look for.

A Chorus of Un-Endorsements
Senator Mark Kirk, a Republican from Illinois, was one of the first, if not the first, to step forward and say that after reconsidering his view, he's come to the conclusion that Mr. Trump is unfit to be President.  Take that in context, however.  Mr. Kirk is from a state that tends to vote for Democrats.  He holds the Senate seat that was vacated by Barrack Obama.

Still, Mr. Kirk is not alone.  More than a dozen Senate Republican's have been critical of Mr. Trump especially after last week.  Mr. Trump came under heavy fire after criticising a Federal Court judge on the basis of the judge's Mexican heritage.

While we're on the subject of judges, let's get one thing straight.  Judges don't just make up rules arbitrarily.  They don't run cases on whim or by the seat of their pants.  Being a judge is serious business.  I know this because I come from a family of lawyers and because the course of an international career has introduced me to legal systems not only the US but in several European countries.

In any functioning democratic system Judges are guided by a set of clearly written rules and legal precedents. Judges write lengthy comments that cite the legal reasoning behind their opinions.  Potentially any ruling they make can be questioned an appealed in a higher court.  Mr. Trump's comment about the judge serves only to show how little respect Mr. Trump has for the judicial system and the intellect and professional quality it takes to become a judge, especially a federal court judge.  That alone makes me wonder how good a job Mr. Trump will do when it comes to interviewing and selecting future Federal Court judges.

Senator Kirk is hardly alone in retreating from his pledge to support Mr. Trump if he eventually wins the nomination.  In the wake of Mr. Trump's criticism of the judge, Republican Senator Lindsey Graham of South Carolina said "This is the most un-American thing from a politician since Joe McCarthy. If anybody was looking for an off-ramp, this is probably it. There’ll come a time when the love of country will trump hatred of Hillary.”

Politicians Running for Cover

In presidential elections the "coat-tail" effect is often talked about.  The coat-tail refers to the tendency of voters to vote for an entire slate of candidates, including the presidential candidate and all those in the same party.  When a candidate has long coat tails the slate of candidates tends to do well.

Judging by the number of Republicans either speaking out against Mr. Trump or distancing themselves from him there is evidently a strong feeling among Republican that Mr. Trump will have difficulty at the ballot box.  Particularly those Republicans who are at risk of losing in the general election want to avoid the possibility that Mr. Trump will be a liability rather than an asset.

The Labyrinth of Convention Rules

A few days before the Republican convention starts 112 delegates will gather to determine the final rules for how the convention will operate.  Literally, they set the rules of the game.   The rules must then be approved by the full convention before the nominating process can begin.

Donald Trump's first problem actually began long before he even declared himself a candidate.  The delegates to the convention are largely composed of party leaders, many of whom worked tirelessly for other candidates.  These delegates are bound to support Mr. Trump on the first round of balloting, but they aren't bound to select a package of rules that will not allow at least a challenge to the first round of balloting.

Mr. Trump's second problem began when he started winning primaries with his populist rhetoric and divisive language he created plenty of enemies within his own party.  He may have won the popular votes, but he is far from popular within the party. Many senior and influential Republicans have said they would not attend the convention.  That might be their publicly stated stance, but that doesn't mean these people won't be working behind to scenes to set the stage for a convention that does not finally approve Mr. Trump's nomination.

So Where Do We Go From Here?

The next few weeks will be critical for Mr. Trump.  The party can be as much his friend as it can be his undoing.  Mr. Trump needs to mend fences and adopt a tone and protocol that demonstrates he will not be a liability in the general election.  In short, he needs to lose his ego. He needs to usher in an era of good will, make policy concessions and adopt a tone and style that convinces the political establishment he can be counted on and that he won't jeopardise their interests and their candidacies in other elections.

Mr. Trump should think seriously about having not just a slice of humble pie, but a meal full of humble pie. If, in the coming weeks, if Mr. Trump rebrands, himself, ingratiates himself, takes on a more politically acceptable tone, and makes a bridges a serious set of policy differences he has a good chance of sailing through even choppy waters at the convention.

If not, he will most certainly face a serious challenge at the convention.  Even if he manages to overcome that challenge, the damage done would probably ruin his chance to win the general election.  The Republican party line will read something like "Vote Republican even if you don't vote for Trump."

For those of you who want to read more, here's a selection of articles I found interesting.
Questions?  Comments?  Write to me at

Saturday, March 5, 2016

Why Donald Trump Will Not Be the Next US President

If you like maps, stick with me!  The maps in this post tell nearly the whole story.

Donald Trump continues to make headlines as the Republic front runner for the nomination.  It's still early days, however and headlines don't say much about the real picture.  So let's look at the detail.

About 35% of the delegate count has been awarded.  Mr. Trump has not won a majority in any state so far.  Therefore the delegates are being awarded proportionally.

Mr. Trump has won 331 delegates as at 4 March. Marco Rubio and Ted Cruz combined have 348 delegates (231 and 116 respectively).  Another 38 have gone to Ohio Governor John Kasich (27),  and Dr. Ben Carson (8) and former Florida Governor Jeb Bush (3).

So the headlines call Mr. Trump the front runner.  But the detail is that he has less than the najority.  Mr. Trump is far from the winning the nomination by that count.  Moreover, a tide of opposition to him from within the Republican party is rising.

If things continue to unfold like this, the winner will be determined in August at the convention.  With more than half the delegates pledged to other candidates and the anti-Trump lobby building, Mr. Trump is not likely to get the nomination.

The second reason Mr. Trump won't be the next president is that even if he captured the Republican nomination he still has to contend with Hillary Clinton or Bernie Sanders and political realities underlying the electoral map of the US.

For those of you unfamiliar with the US election system it's worth noting that the US President is not elected simply by majority across the country.  We have an electoral college system in which each state has a certain number of votes, based on population.  In theory a candidate can win with a minority of the general population, but a majority in enough of the large states.

The electoral pattern in the US is that there are a core of Western and Mid-Western states that practically always vote Republican.  There is also core of Eastern  and Western States that have been Democratic strongholds in the recent years.  Then there are a few swing states.  Each of these is small on its own. Collectively they add up to about 20% of the electoral vote.

The plain truth is that in the absence of widespread dissatisfaction with the current state of affairs, the electorate generally prefers to stay the course.  The rider may change but the horse is the same.
That's pretty much the case in the US today.  If anything the overall economy is improved from where we were in 2012. The US dollar buys far more across the globe than it did a few years ago.  More people have jobs today than in 2012. Socially we've seen a general relaxation of attitudes on issues.  All of this favors Democratic candidates.

Since 1936 in the general election many of the largest states have voted Democrat, except for years where there was widespread dissatisfaction with the status quo.  President Eisenhower a Republican, won the 1952 and 1958 elections in nearly every state.

In 1960 young John F. Kennedy narrowly won the election by swinging a few of the the larger states to his side, including Texas, Pennsylvania and New York (together these 3 states are 25% of the electoral college)  Much of the country was behind Richard Nixon at the time.

In 1964 Lyndon Johnson, building on the legacy an President Kennedy won practically every state across the country. Note however, that Johnson lost 4 States in the South that had gone to Kennedy in 1960.

In 1968, with widespread social discontent and a deeply unpopular Vietnam war Richard Nixon swept the nation with a landslide election.  The solidly Republican states swung back to Nixon.

It was no surprise, however, after his presidency ended in shame and scandal that Jimmy Carter was elected in 1976.  His victory came in a way similar to that of Kennedy, with about 15 states swinging out of Republican hands.  Those states were mainly in the South  (Mr. Carter was governor of Georgia) and the industrial Mid-West.

The Republicans regained control in 1980 and held the White House with solid support across the entire country until 1992.  The discontent was so great after the Carter years that even the bulwark Democratic states of the upper North-East swung into Republican hands. In the 1984 general election Democratic nominee Walter Mondale won only his home state of Minnesota.  The Democratic victory in 1964 paled in comparison to the Republic victory 20 years later.

This was the situation until 1992, when President Bill Clinton swung several of the large states back into the Democratic camp.  He even won in California and some Mid-Western States which had historically voted Republican. Part of this result can be credited to the migration of many people from the east coast to California.  By 1992 California had grown to 54 electoral votes from just 32 in 1960. Importantly, Bill Clinton, former Governor of Arkansas, carried some of the key swing states in the South and the mid-West.

The White House changed hands in 2000, when the younger George Bush beat Massachusetts Governor Michael Dukakis. That election was hardly decisive.  Simply a handful of states swung back into the Republic court.  The Democrats carried the bulk of the North-East, the upper Mid-West industrial belt and California.  What changed were the South and South-Eastern states that President Clinton had in his camp.

So what does the landscape look like now?  Well, firstly, the 2012 elections came out pretty much the same as the 2008 election. President Obama lost only the state of North Carolina. This pattern is typical for an incumbent president, providing that president hasn't done anything to alienate the population and provided the over economic and social situation has not changed dramatically.

It's hard to imagine that were Mr. Trump the Republican nominee he would win over the states that in the most recent elections supported Mr. Obama and the Democrats.

Judging by the evidence thus far much of the Republican party overwhelmingly prefers other candidates.  If Mr. Trump managed to gain enough supporters going into the convention, his majority would be at best slim.  Many Republicans who dislike Mr. Trump and hold relatively moderate views would be likely to select the Democratic candidate, providing that candidate's platform and policies were also centrist. This works well for Hillary Clinton, who has a strong base of support in southern states.

So my guess is that Mr. Trump will not make it as far as the Republican nomination to begin with, which is one of the reasons why I ignore almost anything he says.

Just for the record, I'm a registered Democrat, though I don't always vote along party lines.  If Mr. Trump were the Republican nominee I would most certainly not vote for him and if I were a Republican I would not be among those voting for him.

I hold no ill will toward Mr. Trump.  He's made himself a brilliant career in the real estate business. He is clearly savy  and smart. He understands well how to use the media to his advantage.  He's funded his campaign from his own pocket, which, of course, is his democratic right and something to be respected.

It's a good thing that this large, colorful figure has come into the fray.  He's made people start seriously thinking about who should be the next president and why.  But at the end of the day, I think he won't win the election.  Frankly speaking, I find that a rather comforting thought.

Note - the maps above were selected from  Thank goodness for the internet!  You can find practically anything for the asking.