There are many risks in the stock market: most are understood by long term investors. But political risk is usually not discussed much. However, if you are one of the unfortunate people who invested in even the best of the coal companies in recent years, you know something of political risk. The huge regulatory burdens and EPA restrictions levied on coal companies in recent years devastated that industry, bankrupting even some of the strongest companies: taking stockholders, bondholders, and workers down with them.
You may think bonds are safe, but consider the GM bondholders who, through political manipulation of investment law, were put in second place behind GM union stakeholders when that company went bankrupt. Yet the same politicians did not act for the coal industry, and both the bond holders and the union members were left with no help from the very government that caused its downfall.
There is no question government has a huge impact on the markets. What I hope to point out in this blog is that the impact is usually negative, and for reasons rarely understood by the politicians themselves.
Politicians may mean well, and they want us to believe they can have a positive impact on our markets. Both parties are guilty, and this is what we may hear them say: “I want us to invest in you. I want us to invest in your future. That means jobs in infrastructure, in advanced manufacturing, innovation and technology, clean, renewable energy, and small business, because most of the new jobs will come from small business. We also have to make the economy fairer. That starts with raising the national minimum wage and also guarantee, finally, equal pay for women’s work.” Sounds good…..unless you actually consider how these promises are full of contradictions.
First, if we really had a free market, government does not “invest.” Investing requires capital. Only individuals and businesses have capital, and government does not have a single penny that it does not first confiscate from those who earned it.
When politicians talk about making the economy “fairer,” they mean they want to be able to pick the winners and losers. Of course, there has to be some kind of system by which winners and losers are determined — like what industries have more voters, which companies are donating to the party in power, or which lobbyists have been able to have the most input to our regulatory or tax laws.
In a true free market, the winners are those that are best able to allocate scarce resources in the most efficient way in order to meet the demands of the market. Those that innovate, who create goods and services that people want, are the ones who succeed. Those who are inefficient, wasteful, or who don’t recognize what the market wants, are the ones who fail. A free market, with limited government and regulation, is the environment where small business thrives.
Favored big business, on the other hand, loves big government and politicians. They can afford an army of lawyers and lobbyists to manipulate the system for their benefit. They can buy off politicians who in turn write special exemptions into the tax and regulatory code for them. Then the same politicians hypocritically rail against the exemptions they wrote, demanding an end to “loopholes.” This is crony capitalism.
Small businesses, which create nearly two-thirds of all new jobs in America, and which account for nearly half of all private GDP growth, find themselves crushed under the weight of government bureaucracy, including mandates and wage laws. Indeed, such laws, passed by politicians who may have meant well, force small business owners across the country to freeze or reduce hiring, cut hours, and shift workers to part-time in order to avoid their onerous provisions.
According to the 2016 Small Business and Priorities Survey, “unreasonable government regulations” pose the second biggest worry of small business owners in America. The first? Health care. Both cause uncertainty and rising costs as the result of our government and our politicians at work.
Of course we want our government to consider their role in our economy and trade. But flags should go up when politicians start to talk about meddling in free markets, even when their purpose may be to help. I believe the politicians don’t understand the contradictions to wealth creation and resource allocation they make within their own speeches, but investors need to be aware that political policies affecting a free market will eventually have a negative impact on any market investments, and maybe even their livelihood.
If you want to consider how at least a portion of your investments can be less susceptible to political and other market risks, I would love to show you some alternative investments totally outside our stock and bond markets.