Sunday, July 29, 2012

November's U.S. Elections and Why They Matter, or Don't Matter, to Stock Prices... Winston Churchill on the "Vice" of Capitalism and the "Virtue" of Socialism

On the difference between capitalism and socialism, Winston Churchill said it succinctly, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

The election is a few short months away, and it's a biggie. But there are many other "biggie" issues on the radar screen as well.

For example, Europe continues to struggle with the decision as to whether the euro zone and the euro currency will survive intact and if so, how. And whatever happens along those lines, exactly what the impact on Germany's, Greece's, Spain's, Italy's and the rest of the world's economies will be. On our side of the street, U.S. growth is weak and our debts, deficits and rates of unemployment remain unacceptably high, to say the least.

There are countless reasons to be concerned about the future outlook, for sure. But let's focus now on the upcoming U.S. elections and what the results will likely mean to the price of stocks.

So just how much will the election really matter to the future direction of share prices and the market generally? Well, I guess the best answer to that question is whether we're focused on the "short" or "long" term.

My own guess is that in the long run, the election results won't matter much at all to the market's height or direction. It's up.

In the short term, however, there may be some fireworks going off in late 2012 and early 2013. That's called market "volatility." Could be up or down, and probably both from time to time.

In any event, here's what one clear headed independent and unconventional thinker has to contribute to the discussion in A contrarian handicaps the election:

"A Mitt Romney win would be good for the stock market?

That certainly is the overwhelming consensus on Wall Street. And that should worry anyone with a contrarian instinct.

One adviser who possesses such instincts is Norman Fosback, who has been a close student of the stock market for five decades.

For three of those decades he was head of the Institute for Econometric Research, during which he authored a widely-followed investment textbook entitled Stock Market Logic and edited several investment advisory services.

Fosback currently publishes a service called Fosback’s Fund Forecaster, and in the latest issue, published earlier this week, he argues that, regardless of what you think the long-term economic effects will be of Romney’s policies in particular, and Republican proposals in general, their short-term effect will be to depress the economy and the stock market.

Indeed, Fosback worries that their depressing effect could be so grave as to send the U.S. economy into a Japan-like “deflation-induced slow-growth mode.”

Fosback reaches this sobering conclusion after analyzing the likely impact of the three major points of the Republican economic agenda — tax cuts, spending cuts, and replacing Fed chairman Ben Bernanke. His thoughts, in turn:
  • The proposed tax cuts will be bullish for after-tax stock returns, both in their own right and in contrast with what President Obama has stated he wants to do with tax rates. But, Fosback stresses, we shouldn’t make too much of this bullishness. For example, he points out, Romney’s proposed “tax cuts for businesses are largely illusory because they would, by definition, apply to statutory rates, and most publicly traded companies are already paying far lower out-of-pocket taxes... Moreover, the proposed lower statutory rates would almost inevitably also be accompanied by a crackdown on many corporate tax breaks and ‘loopholes,’ producing vastly less tax reduction on balance than superficially appears.”
  • Slashing Federal spending, given the current economic climate, will almost certainly amount to a “negative stimulus” — more than counteracting any positive impact of the tax cuts. If the spending cuts go through, Fosback argues, “[aggregate economic] demand will go down and corporate earnings will fall.” And that in turn will lead to “lower stock prices.”
  • Replacing Ben Bernanke with someone less inclined to bail out the banks and keep interest rates artificially low “will have more economy-depressing effects.” To be sure, Fosback concedes, Romney and his Republican colleagues are hoping that a Fed that is “more focused on private-market control will produce overwhelming long-run benefits.” The problem, however, “is that a lot of interim economic pain will probably have to be endured first. Less demand, less investment, and no bank bailouts if the plan inadvertently produces another financial crisis. It’s a high-risk gambit, and in the equity markets high risk is swiftly compensated by lower price/earnings multiples.”
Given the highly polarized environment in which we live these days, many will be inclined to dismiss Fosback’s arguments as nothing more than partisan attacks. But I should point out that, even though he does not reveal who he is likely to vote for in November, Fosback does not paint a particularly rosy economic scenario for a second Obama term either.

Fosback is concerned about the current record high level of corporate profits as a percentage of GDP. That percentage historically has been quite cyclical, which means that the path of least resistance when the percentage is high is for it to come back down. In fact, he argues “corporate earnings can’t really go up much more.”

All this adds up to above-average odds of a “fall” — regardless of who wins the Presidency in November.

In any case, regardless of our political leanings, we should remember that the job of a contrarian is to challenge those beliefs that we hold most dear — the very beliefs that, because of our loyalty to them, we are least likely to subject to critical scrutiny.

And, at a minimum, Fosback argues, the possibility of a Japan-style deflation being precipitated by the adoption of the Republican economic proposals “should give investors pause.”"

My Take


Stocks should continue their long term winning ways over time, regardless of the election results. We'll cover many of the reasons why stocks are the place to be in future writings. And which kinds of stocks, too.


We have a tough road ahead economically, regardless of who wins the election in November.

My view is that we won't be able to solve our many budgetary, welfare entitlement and economic growth issues for years to come.

They've been building since the 1930s and the public versus private sector debate won't end soon.

Thus, maybe it won't make a whole lot of difference who wins, as long as the national discussion continues and common sense prevails in the end.

My own view is that embracing individual freedoms, free markets and the blessings of liberty will bring about the most happiness and greatest prosperity all of our citizens. It will also provide We the People with the greatest national security.

Thus, government can't possibly be the answer, no matter how much "protection and security" many of our fellow Americans may mistakenly believe it provides. In the long run, we'll all come to learn this simple truth.

Finally, it's worth repeating Churchill's summation of all this:


Enough said.

Thanks. Bob.

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