Thursday, March 5, 2009

Free market vote is in

A great column in Business Week captures the free market response to efforts of the past seven weeks to create a new New Deal. As Ben Steverman wrote:

At least on Wall Street, the honeymoon is over for President Barack Obama.

Polls still show the President has strong popularity among the general U.S. population, and Obama continues to command power in Congress. But among investors, fairly or unfairly, there is griping that the new Obama Administration is at least partly to blame for the recent slide in stocks. Since Nov. 4, Election Day, the broad Standard & Poor's 500-stock index is off about 25%, and since Jan. 20, when Obama took office, the "500" is down 15%.

It's never easy to determine exactly why the stock market moves in a particular direction. … But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.
One of the key lessons from Steverman’s interviews was that uncertainty increases risk, which discourages buying. However, what Steverman doesn’t say is that highly interventionist government policies by their nature increase uncertainty, due to the inevitable arbitrariness and risk of political capture.

One elected politician (with a four year term) or nine unelected judges with life tenure do not have the same self-correcting feedback loop of hundreds of companies competing in the marketplace every day, or millions of private investors in the stock market. That’s why centrally planned economies (even democratic socialists) will never be as effective as free markets in producing and allocating wealth.

On Wednesday, the president sought to reassure investors:
"What you're now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama said Tuesday.
In response, the Dow and other indices have plunged 3% today (down 4% at the close). Investors are not impressed: the president clearly doesn’t know what he’s talking about.

Beyond the near-term imperative of consumer confidence and liquidity, if the rules of the American economy are permanently changing, then we will have higher taxes, lower growth, and lower returns to investing in US equities. Prospects for a 2009 economic recovery are now gone. Investors are not being irrational to sit on the sidelines until this shakes out. As Steverman concluded
The problem for investors is the long-term outlook has never looked so fuzzy. With the economy deteriorating, the credit crisis continuing, and the Obama Administration still formulating a response, few feel confident enough about the future to buy stocks. It may be quite some time before investors find a change they can believe in.
I’ve paid a personal price for prematurely believing we were near a bottom. In addition to my foolish optimism on Bank of America, during last fall’s stock collapse I also attempted to buy Berkshire Hathaway after it fell: if Warren Buffet can’t find bargains in a down market, who can? However, BRK-B is down almost 40% since election day.

Our country is ruled by a caste of lawyers who are almost to a man (or woman) economically illiterate. The know how to write laws to redistribute wealth but don’t understand how that wealth is produced. They also write laws that make it easier for lawyers to extort money from productive members of society, and centralizing power to lawyer-politicians who use that power to stay in power.

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