Congress Cashes In
Congress Profits From the “Merchants of Death”
“It is an obvious conflict of interest when a member of Congress owns significant stock investments in a company and then votes to award the same company lucrative federal contracts,” says Craig Holman of the watchdog group Public Citizen.
Obvious to you and me, and to members of Congress for that matter — but it still goes on.
A few days ago, reporter David Moore from the wonderfully named muckraking site Sludge dropped a story that was shocking but not surprising…
At least 50 members of Congress or their households own shares of military contractors — even while those companies “receive hundreds of billions of dollars annually from congressionally crafted Pentagon appropriations legislation.”
We feel compelled to bring this matter to your attention because it speaks to bipartisan corruption. Therefore, it’s in no one’s interest to talk about it on the campaign trail.
From Moore’s report…
The spouse of Sen. Susan Collins (R-Maine), the ranking member of the Defense Appropriations subcommittee, holds $15,000–50,000 worth of shares in each of Boeing and RTX, as well as holdings in two other defense manufacturers. Sen. Jerry Moran (R-Kansas), another Defense Appropriations subcommittee member, holds up to $50,000 in the stock of Boeing, which received nearly $33 billion in defense contracts last year. On the Democratic side of the aisle, Sen. John Hickenlooper (D-Colo.) holds up to a quarter of a million dollars’ worth of stock in RTX…
The most widely held defense contractor stock among senators and representatives is Honeywell, an American company that makes sensors and guiding devices that are being used by the Israeli military in its airstrikes in Gaza. The second most commonly held defense stock by Congress is RTX, formerly known as Raytheon, the company that makes missiles for Israel’s Iron Dome, among other weapons systems.
On the House side, Foreign Affairs Committee chair Michael McCaul (R-Texas) owns up to $2.6 million in shares of General Electric, Oshkosh Corp. and Woodward Inc. One of the Democrats on that committee, Virginia’s Gerry Connolly, owns shares of Leidos Holdings worth up to $248,000.
How times change: In the mid-1930s, Congress held angry hearings into the companies that were labeled “merchants of death” — the arms-makers and banks that maneuvered to bring the United States into World War I.
Nowadays, congressmembers are just fine with such activity — as long as they get their cut of the action.
“Whether or not the official action is taken for actual self-enrichment purposes is beside the point,” says Public Citizen’s Holman. “This type of conflict of interest is already banned for executive branch officials and so should be for Congress as well.”
Legislation called the Ending Trading and Holdings in Congressional Stocks (ETHICS) Act passed a Senate committee in July. Its sponsors are Jeff Merkley (D-Oregon), Josh Hawley (R-Missouri), Jon Ossoff (D-Georgia) and Gary Peters (D-Michigan).
But the clock is ticking on the current session of Congress. Next week the priority will be to pass a fiscal 2025 budget — or more likely a “continuing resolution” that will buy Congress more time to pass a budget later.
Then it’s off for the month of October to campaign. And there are only 20 days in November and December that both the House and Senate are in session. During that brief window, Congress will take up the annual defense-spending bill, called the National Defense Authorization Act. It’s generally considered a “must pass” at year-end.
Don’t look for the ETHICS Act to get the same priority.
Look Who’s Outperforming Now
Amid the mainstream hype about the Federal Reserve powering the Dow and the S&P 500 to all-time highs, don’t overlook this tidbit: Small-cap stocks are outperforming.
Going back to Monday Sept. 9, IWM — the small-cap Russell 2000 ETF — has leapt over 7%.
“That’s twice as much as the S&P 500 and well beyond Papa Dow’s meager 1.67% gain!” points out Paradigm chart hound Greg Guenthner.
“IWM’s relative strength highlights two critical themes taking place beneath the surface: rotation and broadening participation.”
Our experts have been onto the rotation story since early July — the giant “Magnificent 7” names taking a breather and giving room for smaller fry to play catch-up.
“To be clear, the AI-driven rally is far from over,” Greg says. “But a handful of mega-cap names can’t carry a bull market.”
The rotation is well and truly underway now — the kind that can sustain bull runs in the major indexes.
“It’s time to follow the market's lead and expand our wheelhouse to include industrials, materials and even energy stocks,” Greg concludes — “sectors hard to come by in the Nasdaq-100.”
Stocks are taking a breather today… but gold might be on track for a daily and weekly record.
At last check, the major U.S. stock indexes are all in the red — the Dow holding up best, the Nasdaq down about a half percent.
Bonds continue their post-Fed sell-off, pushing yields higher — the 10-year Treasury note now over 3.75%.
Gold is up over $30 to $2,615 while silver has pushed over $31. Whether you realize it or not, gold ‘s year-to-date gain of 26% exceeds that of all the major U.S. stock indexes and the small-cap Russell 2000. (No, it doesn’t exceed Nvidia, up nearly 150% since the first of the year.)
Whether it’s Fed stimulus or Middle East tensions, oil is set to end the week near $72 — the highest it’s been since the day after Labor Day.
Bitcoin is hanging onto its post-Fed gains at $63,127.
Four Outcomes… and Wall Street Is Betting on Only One
Looking toward the rest of the year and into 2025, there are four potential outcomes for the economy…
- Economic growth picks back up but inflation does not
- Economic growth picks back up and so does inflation
- Economic growth continues to slow and so does inflation (a “typical” recession)
- Economic growth continues to slow but inflation takes off again (“stagflation”)
For the moment, Wall Street is placing all its bets on No. 1 — that is, the Federal Reserve has pulled off the proverbial “soft landing.”
But now what? The Wall Street Journal’s Nick Timiraos — the guy the Fed calls whenever it wants to telegraph a message to the markets without calling a press conference — has an intriguing front-page story today.
“Chief among the questions the Fed can’t easily answer now that it is cutting: Where is the Fed taking rates and how fast will it get there?” he writes. “The Fed doesn’t know on either front.”
Confidence-inspiring, no?
The Fed has all but admitted what you’ve known for a decade now, if you’ve been with us that long. And if you haven’t, keep reading…
"Don't ever think for a minute that the central bankers know what they're doing," Paradigm’s macro maven Jim Rickards told me during one of the first conversations we had in 2014. "They don't.”
At the time, Jim was reflecting on all of the experiments conducted by the Fed, European Central Bank, etc. in the wake of the 2008 financial crisis.
"And that's my own view,” Jim went on, “but I've heard that recently from a couple central bankers. I recently spent some time with one member of the Federal Open Market Committee and another member of the Monetary Policy Committee of the Bank of England, which is the equivalent of their FOMC -- both policymakers, both central bankers.
"And they said the same thing: 'We don't know what we're doing. This is a massive experiment. We've never done this before. We try something. If it works, maybe we do a little more; if it doesn't work, we pull it away and we'll try something else.'"
And so it goes here in the 2020s. Throughout 2021, Fed chair Jerome Powell insisted inflation was “transitory.” When it proved to be more stubborn than he thought, he embarked in 2022 on a cycle of interest-rate increases — the steepest in over 40 years, not that he planned it that way at the outset.
Now he and his confreres have “gone big” with the first in a series of rate cuts — the destination and time frame both unknown.
It’s still a “massive experiment,” 16 years past the financial crisis. If the Fed does pull off outcome No. 1 listed above, it will be sheer dumb luck.
An Ill Omen?
While crashing deadline today we don’t have the time to track down the validity of this claim. We pass it along strictly for the entertainment value…
Mailbag: Loose Ends
After we bid farewell to a reader last week who took issue with our harsh assessment of the health care sector, we got a couple of first-hand accounts to affirm that assessment.
“Kudos to Dave's response,” writes a member of our Omega Wealth Circle. “When my mom (age 91 at that time) was in the emergency department at a large south Florida hospital with severe COPD symptoms (pre-COVID), she needed assistance for personal hygiene reasons.
“There were 15 (I counted twice) hospital employees sitting in a 'pit' typing God knows only what into the most advanced laptops I had ever seen. When I asked for help they said I had to get the nurse on duty (note: I had to track the nurse down) as they were not trained or allowed to assist patients. There were 13 emergency beds, all in use... and only one (that's ONE) nurse on duty.
“Needless to say, the needed help did not arrive in time, and we had to wait on another team entirely to deal with the consequences. Hopefully, they typed that up quickly.
“I currently volunteer at a large hospital within a larger hospital system. The amount of overhead versus true care I see on an everyday basis is even more astounding than that detailed above.
“I'm sure this type of inefficiency exists anywhere the government has weighed in for the 'good of the people.’”
“As a nurse, I have to say the majority of health care is fraudulent and preventable,” writes another reader.
“What you eat is more important than you think. Take care of yourself, because no one else will.”
“First off, I think it's a nuanced and insightful point that you make about personnel/staffing in U.S. health care,” writes a third.
“You are absolutely correct, that a sizable portion of people in the ‘health care industry’ are paper pushers, and most of those roles would be completely unnecessary outside of the bloated bureaucratic government/insurance/health care system.
“On the other hand, it is hard to argue with the fact that there is a definite shortage of actual ‘caregivers’ who treat patients, leading to longer wait times for treatment and (unfortunately but logically) a lower standard of care due to overloaded schedules and less time to spend with patients.
“I am curious, though. Why do we have such a noticeable shortage of doctors in the U.S. (even prior to 2020) when doctors in the U.S. are paid substantially more than those in other developed nations? Wouldn't the laws of economics tend to balance supply and demand? Even if more young people in the U.S. were not enticed to become doctors, surely more doctors from other parts of the world would be incentivized to come to the U.S.”
Dave responds: Some of it is surely a function of a giant cohort of the population (boomers) headed into retirement, without enough younger people coming into the ranks to replace them. That’s common to many lines of work.
But other reasons speak to the system’s essence as a cartel. Columbia Political Review cites several factors including “limited seats for medical school and residency.”
Then there’s the fact that state licensing boards are notoriously stingy in granting privileges to doctors from out of state.
Of course, they’d always cite “patient safety” as the justification. But the reality is, as Jacob James Rich wrote for the Reason Foundation in 2021, “Medical boards have used licensing regimes to rake in over $100 million annually in certification and testing fees from aspiring doctors.”
COVID forced a rethink and reform in some states — but not nearly enough to make a difference. And in some cases, the pre-COVID restrictions have returned.
“I Love Paradigm Pressroom,” writes our final correspondent this week.
“English is my second language, from time to time I need to stop reading to look up the meaning of a word, but this only adds to the great enjoyment that reading your magazine gives me.
“Sometimes I cannot keep reading because I cannot stop laughing. I love your style, I love your sarcasm telling the truth of things that many of us are thinking too and want to say it so bad.
You have the platform to say it and I’m grateful you say it with style and respect.
“I hope your company never takes away this excellent service. Great job! Thank you so much. Take care.”
Dave: You’re too kind. Thank you for the unexpected lift to the spirits!
