Thursday, November 20, 2008
- A Word On "Political Risk"
Do you think the federal government is done monkeying around with the financial industry? Me Neither. For weeks now, every day it’s a new set of rules with a new set of winners and losers. The odds of nationalization are actually higher than the odds of letting competition in the free market decide things. How about the auto industry… do you think you have a clear understanding of how the winners and losers will be decided in that market going forward? Unless you’re deeply embedded in the Democrat party in Washington, the answer is no.
But those industries aren’t considered ‘safe havens’. They’re considered a sector which you want to be holding during a period of growth. So how about the sectors that are widely considered “recession proof”. Do you feel confident that you understand what’s going to happen in the healthcare sector? Well we know government will be messing with that right? Or how about the most ‘recession proof’ bet utilities? New taxes on carbon have been promised and according to the president elect, they’ll bankrupt the coal industry and dramatically increase the cost of electricity so even they don’t look like a good buy. How about the energy sector? Surely that’s safe right? Oops …you forgot about the windfall profits tax.
In short, there is no reason to buy any stock in any company in any sector of the US because you don’t know what the rules will be come 2009. We know we’re abandoning the free market where all the rules are spelled out before hand. And until we know the new rules, no one will be buying anything. That is called ‘political risk’.
We’ve decided that some companies are ‘too big to fail’. We’ve tried to eliminate the risk of failure and instead we’ve taken on political risk. That’s why I think the thing to do now is for the administration to admit defeat, and let the banks, and insurers, and car companies all fail. Bankruptcy is a condition we understand. We have laws and rules for disposition of assets under bankruptcy law which everyone already knows. Sticking to those rules will allow us as investors to believe that we can pick the winners and losers again.
By embracing the ‘too big to fail’ idea we’ve made it certain that the rest of the economy will ‘fail’ in its stead. Political risk is destroying the equity market. That won’t change until we admit that ‘command and control’ economics doesn’t work, and let nature take it’s course. It’s tragic, and will be painful, but it will be better than the alternative because all we’re doing is delaying the inevitable. The cure has turned out to be worse than the disease. And since that’s so, we should remove the leaches and let the markets begin to heal themselves.