Politics and Investing

We have been following markets for nearly 22 years from our special perspective — applying expertise in neutral public policy analysis, following economics, and seeking investment implications.

There has never been a time when decisions in Washington had greater importance for investors.

Putting Aside Politics

Many of our readers labeled our approach as GOP-oriented and as Bush apologists in our early years.  Now, some may think we are fans of Obama.

Neither conclusion is correct.  We try to analyze policy proposals, regardless of the political stances.  It is a challenge.

Opinion pieces are easy to write and get a lot of attention and blog traffic.  Those that attack any proposal are especially popular.  There is always a ready audience.

Current Errors

Many popular authorities — pundits, bloggers, economists — pounce upon any proposal with plenty of criticism.  Here are some examples.

Criticizing Obama for being too liberal.  Most of this is based upon budget proposals that are far from passage.  Investors should focus on the immediate economic effects.  As Obama noted in tonight's press conference, there was no expectation that the budget would be accepted as proposed.  It is a long-term agenda.  The time for debate will come.

Focusing on debt.  There is a political perspective that debt is bad and that anything increasing debt will lead to the demise of our nation.  This is a matter of political values rather than an immediate economic forecast.  The right question is whether the plans stimulate a return to the economic norm of sensible lending.  Our economy depends upon this.  Debt may increase in the interim.  This is normal counter-cyclical policy.

Claims that the plans are a "patchwork."   One wonders what these critics would see as a comprehensive plan.  Our own notion of a good plan is that it has many elements.  What many see as a patchwork, we see as flexibility.  It is good for government (or for businesses) to have multiple initiatives.  It provides flexibility, permitting policy makers to do more of what is working and less of what is not.

Investor Implications

It is important to focus on the near-term effects.  The most important questions for the economy involve stabilizing housing, providing normal lending, and stimulating jobs.

Mainstream economic analysis suggests that the plans in place will have an impact, but with a lag.  No one knows the exact impacts or the precise timing of the lag.  More importantly, no one knows when market recognition will take place.

There will be a challenge in reducing debt.  There will be more tweaking of the level of leverage.  No institution should have 30-1 leverage, but the lending system runs on a reasonable level of leverage.  The critics seem to advocate a WARP speed death spiral, oblivious to the economic effects.  This concept is central to understanding current public policy on the economy.

We see this as a time of great opportunity.  Part of the logic is that so few share this opinion.

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  • Patrick March 25, 2009  

    Stock gains have historically been much better under Democratic Presidents than Republican. This is even though most investors are Republicans. Could it be that Republican get too bearish with the change of party? But are then forced to buy when fundamentals get better?
    It is amazing how many people seem clouded in their analysis lately. You are correct about mixing long term policies with short term effects. I also think too many view policies with an economic and political impact through the lens of their political bias. They are unable to dispassionately assess the economic impact because they are afraid of the political impact.

  • Jeff Miller March 26, 2009  

    It is not just the investors, but most of the guru’s and pundits.
    Thanks for taking the time for another good comment. It is great to have some reader help and feedback.

  • Ben Woodward, CFA March 27, 2009  

    The market is a forward looking discounting mechanism. It is true that in the short run Mr. Market behaves more like a voting machine than a weighing machine. However anyone with investments knows that higher taxes on capital raises the required return and thus lowers investment prices. Additionally, capital flows to where it is treated best. Plus rhetoric that is clearly anti-business and populist lowers Mr. Market’s confidence and therefore also increases the required return. Debt no matter who takes it on, govt. business, or consumer, is a hard and fixed obligation, which generally lowers the long term growth rate (and assures future higher tax rates if the government borrows rather than the private sector), again crushing Mr. Market. It is no wonder that almost exactly when it became apparent who the next administration was going to be that we had the worst swoon in the markets since the Great Depression era. It could be that it Mr. Market looked forward and didn’t like what he saw. Plus relying on a Keynesian multiplier greater than 1 from a ‘stimulus’ from truly baffled and economically ignorant politicians is a bet that I and obviously most investors don’t believe in. “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot!” – Henry Morgenthau, Jr., FDR’s Treasury Secretary. The New Deal although popular failed and similar policies like it toady are likely to fail too.

  • muckdog March 27, 2009  

    I blame global warming for whatever is going on in the stock market.

  • Jeff Miller March 29, 2009  

    Ben – I am pointing to the mainstream economic interpretation, since I do not have my own macro model. Do you?
    The market decline coincides with many things, starting with the decision to allow Lehman to fail. The next step was Paulson’s backing away from the troubled assets program.
    I am very unhappy with the Obama Administration’s delay in restoring normal lending – -mostly by dealing with “toxic” assets.
    I do not think that a 5% bump on capital gains for rich folks is a big deal for the market. The constant media pounding might be.
    For the companies I advise, we are looking for opportunities.
    We shall see.
    I am sure that your opinion is widely shared, but it is exactly what I am warning against. If you insist on making the investment question a political one, you have a long four years ahead of you.
    FWIW —

  • Jeff Miller March 29, 2009  

    Muckdog — You are probably right, as usual. We are expecting snow tomorrow in Chicago and we had our lights off for the conservation hour tonight.
    Can I forecast I market rally on Monday from that?

  • muckdog March 29, 2009  

    Sounds just as logical as fibonacci retracements! LOL.

  • Forex news June 19, 2009  

    Thank you for some very useful info. I will be sure to read more here!

  • Online Forex Dude July 5, 2009  

    I’m no expert and you may be right, but I’m kind of tired of everyone saying all the spending is foolish. OK, if it is, then what’s the alternative? Would you have let all of the banks fail?

  • Jeff Miller July 5, 2009  

    Good question!

  • belldirect August 26, 2009  

    I think that the regulations and measures provided by the government to leverage the stock market should not be viewed as a political prejudice. It is good that the Fed is doing what it can to at least cushion investors and traders from the crisis that shook the market.Why not see it as a long tern economic solution which we can all benefit from? As for the budget issue, I believed that the government will not approved it if there is a tinged of bias in the distribution. Lastly, the credit market is facing a demanding time and it is a challenge to reduce debts. Though the credit market is strangled again solutions are being provided to alleviate the situation.
    Though the market has not recovered from the crisis, it is showing signs enough for all of us to celebrate.

  • mohamed November 9, 2009  

    well spending and debt maybe a good thing to help us out of this economic crisis, but it must be handled well otherwise spending could go out of control and we could end up paying for this debt for decades to come with higher taxes. Also wreckless spending could mean higher rates to pay for the government to borrow money if investors lose confidence in the governments money management and this could lead to a cycle of higher rates. Caution is warranted.