GW&K Investment Review 3Q 2021


However much we plan, there are always unanticipated consequences. Sometimes the means justify the ends or, even when unlucky, the ends turn out better than foreseen. When the end is beyond our realm of expectations, however, then the consequences can be severe. In my lifetime, I have watched three U.S. presidents lose public opinion and the ability to lead because of foreign policy blunders. Lyndon Johnson chose not to seek reelection over Vietnam, Jimmy Carter lost the election over the failed coup in Iran, and now I see President Biden’s diminished influence, stemming from the events in Afghanistan. I usually avoid political commentary, but I feel compelled to reflect on this latest incident.

We did not need to withdraw 2,500 troops from Afghanistan. We have set up tripwires all over the world, some with United Nations peace keeping forces, and others consisting of us alone. We have done this in the Suez Peninsula and throughout Europe and Asia. It works. When a country leans toward isolation, which the U.S. often does, these tripwires help our allies feel that in spite of shifting political winds, killing an American soldier is a very bad idea. Tripwires work. Alternatively, if President Biden had a deal with the Taliban to pull out completely, then I can’t believe anyone reading this can understand the chaos created by our hasty retreat. It was embarrassing and the consequences will last throughout Biden’s presidency. This subject will not be wrapped around yesterday’s fish, as is so often the case with today’s news. The aftereffects will bleed through again and again.

As I write this, the President again made a blunder by doing a deal with Australia for the delivery of submarines, snatching it from the arms of the French. So angry was the French government, they temporarily withdrew their ambassador to the United States. President Biden has some notion that our Pacific allies are more important than our European allies, that the threat to Taiwan by the Chinese will be the crisis to avoid. But China will likely succeed in bringing Taiwan under its control the same way it did with Hong Kong, over time and with political pressure. The world cannot tolerate an armed conflict between the U.S. and China. Yes, we will have cyber combat, fiscal maneuvering and political rhetoric, but no hot war.

What does this mean for GW&K and our clients? If President Biden’s influence in his party has been compromised, his agenda could be altered. This might well include his spending budget and tax proposals. If he has been weakened, it may be serious enough to jeopardize the slight margin the Democrats hold in Congress come November of 2022. Time will tell. At a minimum, a damaged executive branch along with a dysfunctional legislative branch should translate into less extreme policy. A compromise or stalemate may be a relief for the financial markets that hate change more than anything.

If these assumptions are correct, then the Federal Reserve (Fed) will continue to leave interest rates very low, and a negative real return on cash will provide incentive to investors to continue to accept risk. A client sent me a text quoting hedge fund manager Ray Dalio: “cash is trash.” A material rise in interest rates is a non-starter given the ever-increasing level of national debt. For many years I have compared the U.S. economy’s direction to that of Japan. I never realized how right I would be. Like Japan, we are a mature economy with little immigration and population growth. It will be critical to keep borrowing costs low, if only to keep funds available for other government programs.

One of the other consequences of a weak central government is that the trend of wealth disparity will continue. As real assets grow and liquid assets decline, those able to participate in the capital markets will do well and those unable to will lose out. The disparity between the haves and the have nots will increase.

Another unintended consequence is the push to make major tax increases, both personal and corporate, more equitable. The degree of increase is critical. Some proposals will be non-productive, like taxing long-term capital gains at the same rate as short-term capital gains. The government should keep in place the current regime, which disincentivizes trading and speculation. In fact, long-term gains should be indexed to inflation, so the longer one owns a property the lower the tax rate.

The other tax idea I find poorly considered is the proposal to drop the estate tax exclusion per individual from $11.7 million to $5–6 million. With the exclusion amount cut in half, many more people will find themselves with a taxable estate. How will business owners with limited liquidity, such as car dealers, restaurateurs, small manufacturers, etc., whose families for generations built a business now worth over that amount, cover the tax due without liquidating or selling their family business? If your personal net worth is in excess of $5 million ($10 million per married couple) please be sure to pay attention to the possible upcoming tax changes! The chances of changing the estate exclusion are real and of great significance. As a money management firm, we take pride in helping our clients build wealth. There will be a 40% federal tax on your net estate, plus the possibility of an estate or inheritance tax at the state level (18 states, including Washington D.C.). Clients should consider reducing their family wealth through strategic and thoughtful estate planning, which takes precedence over asset allocation. Please be responsible—time is short as there will most likely be a tax hike enacted in 2022.

This country needed a president who was a leader, that represented the silent majority who are in favor of strong social programs, but with fiscal discipline; and one with the courage and willpower to defend America’s ideals. Maybe President Biden can recover from these missteps. I sure hope so.

Harold G. Kotler, CFA
CEO, Chief Investment Officer


Indexes  are  not  subject  to  fees and  expenses  typically  associated  with  managed  accounts  or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness  or timeliness. Third-party data  providers make  no  warranties  or  representations  relating  to  the  accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg (,  FactSet  (,  ICE  (, FTSE Russell (, MSCI ( and Standard & Poor’s ( Performance results reflect the reinvestment of dividends and income and are expressed in U.S. dollars.  MSCI Index returns are presented net of withholding taxes.  This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Opinions expressed are subject to change. Past performance is not indicative of future results.


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