Power Tends to Corrupt and Absolute Power Corrupts Absolutely, Part III — Michael McTague

Michael McTague  |

Image source: Carl Malamud via Flickr, CC BY-SA 2.0

November 2020 — Myth Buster

This final entry in the series (see Part I and Part II) considers at the title itself, taken from the famous statement by Lord Acton: “Power tends to corrupt, and absolute power corrupts absolutely.” This implies that anyone who gains control is likely to misuse it. 

As the coronavirus and the election grip everyone’s attention, the fifty governors of the states had to make their decisions on what kind of restrictions to roll out to protect people. In a democracy, one might assume that a wide number of voices will be heard prior to a choice. In fact, one side of the debate dominates and loves it. According to the New York Times, Michigan Governor Whitmer’s early statewide restrictions were not so tight and gained bipartisan support. However, the later, more heavy-handed restrictions lost their bipartisan flavor. The Puritan element came into play. Whether right or not, the issue is that the Governor moved ahead through statewide executive orders to batten down the hatches. Many voters did not agree. Puritans also found that if they aligned themselves with the saving-life side of the coronavirus debate, it would outweigh the let’s-keep-our-jobs argument. Naturally, many rational people thought that both goals were important. Our purpose, however, is to explore the Puritan mentality and we focus on those who really pushed the shutdown mentality to the limit. 

In the early going, the Puritans held sway. After all, this was a new, deadly pandemic. After a while, the pendulum began to swing the other way, especially as the risk faded and better treatment options arose. We learned that all along, companies made sizeable profits spying on people under the guise of predicting virus hotspots.
With our natural focus on business, we note that an early projection by the New York Times held that New York State would lose at least $10 billion in tax revenue. This opens a topic the Myth Buster looked at in an earlier series on municipal bonds (“Looking for the Fastball, Got the Curveball”). States with many corporate headquarters like New York will fare better than states that rely on property taxes such as New Jersey or that are already burdened by shortfalls such as Illinois. The virus aftermath will lead to hefty spending cuts or deficits at a time when unemployment costs skyrocket. Most states provide twenty-six weeks of unemployment benefits. Under the current circumstances, extensions and supplements will be voted in, some from Washington. The federal government has already rolled out most of the $2.2 trillion CARES Act funds. By contrast, the shrinking tax base strangles state budgets.

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In terms of the Puritan spirit, the more draconian governors will start to lose friends quickly as the mood moves toward fiscal rescue. Only the die-hard Puritans will push their full, total and absolute commitment to shutting things down until the perfect solution is proven.

Puritan Investing Successes and Failures
Market watchers will find a carryover of the Puritan spirit to how mutual funds and pension funds operate. Major funds such as Fidelity, PIMCO and Vanguard make clear, straight down the line choices. Their funds buy and hold Apple, Johnson & Johnson, Ford and other household names. But a taste for the wild side intrigues those searching for wealth. Of the hundreds of funds from which to choose, the idea that one industry, one product, one raw material will excel appeals to investors and investors always find willing providers of the most far-out — dare we say “Puritanical” — possibilities. If you skim mutual fund performance, it is interesting to see who succeeded like a young Horatio Alger and who flopped.

The outliers are the ones who held fast to their predictions – gold will replace cash; Bitcoin is the greatest idea since sliced bread; there will be an oil glut; medical machinery is the future, etc. Like it or not, the fund managers involved must be seen as Puritans. Take, for example, a few who fell to the bottom of the pile: Edelweiss Dynamic Bond Fund – Growth, HDFC Infrastructure Fund – Growth and Sundaram Multi Asset Fund – Growth. Edelweiss places its full confidence in the Indian economy and results have been discouraging. Half way through the year, the fund is down over 50%. HDFC Infrastructure Fund has had a tough year also. This fund is also based on the Indian economy and tries to maintain a spread from large to small companies. Unfortunately, profits sag for giants and shrimps. Among the top performers is Baillie Gifford American. Shopify, the oft volatile Tesla, Amazon and Netflix are among its top holdings. In this case, straightforward choices proved very successful. No one doubts Amazon’s ability to find profit in a storm. The other three stocks fall into the good luck category. The stay-at-home spike that led to binge shopping and TV watching worked its way to their bottom line.

The early, dire predictions of death from the coronavirus also attracted the new Puritans. Millions of likely deaths meant that the lockdowns must be extreme and would have to be put in place by true believers. Huge death totals could last months or more than a year, with infections concentrated in shorter periods, staggered across time in different communities, experts said. As many as 1.7 million people could die in the US, they said. Puritan investors and politicians stuck to their guns. Some were armed with empty shells, others hit the bullseye. 

In this final entry, we see that power does tend to corrupt. The Puritan spirit remains alive and well, although morphed into a newer, secular form. We also found that any scientific pronouncement receives instant acceptance, even though it may fall to the wayside quickly. Please understand that we are not diminishing the awful toll that the virus has taken. We are simply pointing out that the extreme end of the spectrum often isn't the best path. Next month, the Myth Buster will give his annual summary of a very unusual year.


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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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Equities Contributor: Michael McTague, PhD

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None

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