Financial Market Conditions at Mid-Year

As one of the many Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat supermajorities in the House and Senate with some concern.

More than the usual number of my fellow businesspeople and investors went over to that side, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change after eight years of George Bush as anyone else. But if they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.

Obama took them in with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for the Democrat base, not a program for governing.

This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than everyone expected.

Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered precious little real economic stimulus, but rather a shocking grab bag of packages to traditional Democrat constituencies, with not the merest nod to the rights or concerns of the minority.

We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners' property rights are provisional and expendable; that the ideological attachment of our rulers' to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the fullest possible extent they can get away with.

So far, so bad. But then something interesting happened -- we had a dramatic bounce in stock markets from March through early May. Some of this is probably discounting the possibility of a 1929-37 depression, correctly. Some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.

But some of the bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

This is a bull item in the market since March.

After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration's apparent readiness to overturn our carbon energy-based economy and its radical intentions toward the 15% of the economy that health care represents.

But the overarching sentiment problem comes from yet another reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this new view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress waste unimaginable sums of money on projects lacking any other point beside paying off their friends and allies.

In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends. The managers of other erstwhile basket-case economies, Russia, India, and Brazil, tut-tut their agreement and back calls for changes to the global reserve system.

At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, light in risk assets in general, and seeking for growth mainly in Chinese stocks.

The Contributions of AIG in Perspective, & Who Wrecked Them

I just spent an hour today going through American International Group's last twenty years of Annual Reports, finding out how much tax AIG has paid over the last 20 years, working out estimates of how much tax its employees have paid on their incomes and how much has been remitted to the Treasury on dividends paid by AIG to shareholders on previously-taxed income.

The numbers I come up with are $35 billion of income taxes paid until the company tumbled into loss for its 2008 fiscal year. Taxes on salaries and dividends through 2008 I estimate at another $20 billion, for a total tax rake-off of around $55 billion.

What I cannot work out as easily is how much tax has been paid by service providers, lessors and so many others who prospered when AIG prospered. It would also take study to quantify the other economic benefits conferred on the cities and towns in which AIG operates, and the contributions AIG made to all the good causes it has supported so generously down the years.

As black as the company is now painted by career-making politicians, including some who now advise AIG personnel to commit suicide out of shame, one must try to remember that there were many benefits of AIG's rise and rise and rise. Far from being a criminal enterprise or a ship of fools, AIG was one of the greatest American companies, right up until it was wrecked by the incompetents brought in after that great man of the people, Eliot Spitzer, made it his special project to destroy Hank Greenberg and the company he built.

The Question of Capital Flight

In better times, I was a money manager. My first job was analyzing Asia-Pacific stocks for one of the world's largest pension funds, and my first boss was a very smart, savvy Hongkong Chinese person. I had coffee with her recently and she says she is certain that this country is already experiencing capital flight. Capital flight is one critical step beyond "capital strike," which is how Larry Kudlow on CNBC characterizes it. If true, this is a big problem for a country with a current account deficit such as ours.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Some Reaction to the HIP

I ran the Household Initiative Plan by the strong free market advocates of the Ayn Rand "Atlas Shrugged" group on Linkedin, and got back strong opinions. One comment:

“The defect [of the HIP] is that it's just minor tinkering. Instead, let's repeal the community investment act, privatize or abolish the GSEs. Repeal the income tax, lay off all government employees . . . this plan is illogical since it seeks to artificially make real estate go back up again . . . "

Another:

"The defect [of the HIP] is that is a plan and a planned economy never works. You describe it as a plan to turn the housing market around. Around from what and in which direction? I don’t know if real estate has to come down [and] neither do you . . . the only way to know what should happen is to free the market and watch it work."

I answered as follows. First, there is no way that liberating 46 million accounts and trillions of dollars constitutes minor tinkering.

Second, I think my use of the word “plan” has caused more grief than the actual contents of the plan. Among strong free market believers it is a word that elicits negative reactions. I only chose the word plan in order to try to compete for attention among all the other plans that are out there -- Zingales, Hubbard/Mayer, Feldstein and all the rest. I could have called it a proposal, an idea, or following an ancient Fed official, a banana.

My plan, or banana if you object to the word plan, is non-interference, a level playing field, clearing away the regulatory debris, and letting the owners of capital decide how to apply their capital.

The "planned economy" is not part of my proposal. On the contrary the "planned economy" was introduced to this situation years ago when the current structures of IRAs, Keoghs, SEPs Simples and all the IRS apparatus that goes with them were created. By the way, it should be understood by one and all that this whole apparatus was a giant gift for investment companies, banks, financial planners and accountants.

Surely I am not the only one with money in IRAs, losing money in financial assets and thinking about the future, who might choose to buy a condo in Florida instead with the money if the restrictions were lifted. That would be my choice, freely made, well considered, possibly wrong, but I'm willing to take the risk on that if I am permitted and not ask for a bailout if I am wrong. If someone else chooses to stick with their Fidelity and Putnam funds, I would be the last to tell them they can't.

At least for now, the money in these accounts belongs to the people who own the accounts. (There are professors at the New School who are advising the administration to do something about that too.) Let the people make their own choices. I don't see how that can be objectionable.

If you take their money you will take their direction

President Obama took another shot at Wall Street today. "I saw an article today that indicated Wall Street bankers had given themselves $20 billion worth of bonuses. That is the height of irresponsibility. It is shameful."

We are uneasy about the anti-business tone being taken by the new administration and Congress. There's a ready market for this kind of populism, but after the bankers are burned alive on pyres of corporate jets and commodes, the economy catches no rise thereby.

American businesspeople are facing a world in which all their contracts and undertakings are examined line-by-line by government officials, second-guessed by PIRGs, NGOS, and the media (which is doing such a bang-up job managing its own affairs after all), and subjected to subpoena or prosecution by career-making politicians.

To advance themselves, they will not scruple to destroy you.

If you take their money, you will have to take their direction. Simple as that.