WASHINGTON, June 12 (UPI) -- We're all investors today, at least through our retirement savings, so it's worth trying to discover what effect politics may have on the value of our investments, and on our ability to retire in comfort. Unfortunately, this is an exceptionally slippery subject.
Even major political changes, that appear likely to affect economic performance for years or even decades to come, are not necessarily reflected in the stock market. Ronald Reagan's election in 1980 promised lower taxes, faster economic growth and a tighter hold on inflation than the outgoing Carter administration, yet the stock market did not bottom out until August 1982, well after the first Reagan tax cut had been passed and inflation had started to drop. The escalation in the war in Vietnam in 1965, together with President Lyndon Johnson's decision to fund the war and his "Great Society" social program by means of deficit spending was clearly going to lead to higher taxation, inflation and poorer economic performance, yet the Dow Jones Index did not peak until mid 1966 and the S&P 500 Index not until early 1968.
Thus a deep understanding of the political process, and of likely political developments, doesn't necessarily help you run an investment portfolio. Warren Buffett, the legendary investor, was the son of Rep. Howard Buffett (R. Neb.) but his father was defeated for re-election in 1948, a victim of president Truman's popular farm subsidies, a year before Warren Buffett got into the investing business. Warren Buffett has always claimed his deep understanding of how a business works, and what a balance sheet means, is his principal key to investment success; there is no reason to disbelieve him.
Much more important in the United States than the great macroeconomic decisions are the small political eddies that can heavily affect individual stocks or sectors, either positively or negatively. For example, the insertion in the 1993 Budget of a provision prohibiting corporate tax-deductibility of executive salaries above $1 million per annum, together with the then-obscure success of then-obscure Senator Joseph Lieberman, D. Conn, in preventing the Financial Accounting Standards Board from expensing stock options, caused a massive switch to options in executive compensation, which initially resulted in a huge stock market boom, as corporate earnings levitated apparently effortlessly, and has since caused a massive crisis of confidence, as companies whose management had been goaded into insanity by the lure of shareholder gold came crashing back to earth.
Lawsuits -- the tobacco settlement, the attempt by disgruntled investors to shake down Wall Street -- also have far more effect on stock prices, and on the value of investor portfolios, than macro-politics or indeed macro-economics. Stocks did quite well during the moderate recession of 1990-92, but tobacco stocks in 1998-2000 were hugely adversely affected by the federal tobacco settlement, at a time when stocks in general were rising to all time highs.
Investment banks, in the current market, are buoyed by the continuing gap between short and medium term interest rates, which allows them to make consistent profits in their bond trading operations, simply because of the inventory they carry. This is disguising the effect of the $1.4 billion penalty settlement already agreed by the investment banks, as well as the increasing litigation threat (which will escalate rapidly if there is a further market downturn) from investors who lost money buying idiotic dot-coms.
In emerging markets, it's very clear that the range of policies that can be elected to power is far greater than in the U.S., or even in Western Europe; thus an adage of "sell on bad election results" generally makes sense in such countries. Even here, however, there can be anomalies. The Brazilian and Argentine stock markets were so badly beaten down in their respective crises in 2001-2 that investors have made nice profits in 2003 simply on the basis of a "dead cat bounce" off the bottom -- in both cases, the profits have been increased by the local currencies also showing strength against the dollar.
Even more extreme is the case of Venezuela, where in 2003 the crackdown by hard-left President Hugo Chavez on the opposition, and on the middle classes generally has seen the Caracas stock exchange rise to a record level within the past week. Venezuelan domestic investors, who have been prevented by Chavez from taking their money abroad, have discovered that if they buy the shares of PDVSA in Caracas, they can convert them to American Depositary Receipts and sell the ADRs in New York for dollars. No doubt this is a very short term situation, and certainly the economic and political outlook for Venezuela is grim indeed, but a profit is a profit.
Signature by a country of an extensive lending and reform program with the International Monetary Fund is generally negative for the country's stock market. For one thing, such programs are almost always sharply deflationary, while inflicting the least pain on the public sector that generally needs austerity most. For another, they even in some cases prevent the local government, which may well have an attractive domestic investor climate as one of its goals, from the pro-market reforms it may wish to pursue. In Thailand, for example, the stock market has done very much better since the advent of current prime minister Thaksin Shinawatra in 2001 than it did before, even though the international institutions are generally highly negative on Thaksin, believing him corrupt. Thaksin's policies are focused on development of the domestic Thai economy and domestic Thai businesses, since he believes the country's international position to be satisfactory; this is almost certainly appropriate, but is not approved of by the IMF. Malaysia too has seen its economy recovery smartly, better than its neighbors, since prime minister Mahathir Mohamad abandoned the "Washington consensus" model of globalization and pursued an autarkic policy.
In general, as I discovered from personal experience in Croatia, the most satisfactory political stance to develop the local stock market is one of center-right autarky, resisting globalization, which tends to allow the international giants excessive access to your economy, but at the same time cutting government spending and ensuring that the tax system is generally pro business and the welfare system not unduly burdensome. Whether or not this improves domestic living standards more than the globalist model can be argued, since it allows inefficiencies to remain in the domestic system, but it certainly ensures that a satisfactory proportion of the profit from economic expansion is retained by domestic business and domestic investors, and not siphoned off to some remote global corporate headquarters. Japan, and South Korea under the Grand National Party both followed this successful formula, to the enormous benefit of investors in their stock markets. Countries such as almost all those in Latin America, which have alternated between a socialist model and an IMF/globalist one have generally done badly for investors.
Today, emerging market countries that are following this model of free market autarky would appear to include Taiwan, Thailand (but worry about corruption) Malaysia (but worry about grandiose infrastructure projects), maybe Colombia and Turkey (both a little unclear, and Colombia is in a bad neighborhood.) Above all, look at India, where the Atal Vajpayee government since 1998 has liberalized trade enormously from its highly protectionist restrictions under Congress rule, without allowing foreign companies to dominate the Indian economic scene (in any case, foreign domination is much less of a worry in such a large country.) Maybe even Pakistan, where the policy is currently sensible, but building on an appallingly poor base.
In summary, domestically or in countries such as Britain where there is an established stable pro-market consensus, don't worry much about the "big picture" political color of the party in power and its policies, but look carefully at the "little picture" of small legislative acts and judicial actions that can heavily affect your wealth. In emerging markets, look for stable right of center nationalists, with a chilly relationship with the IMF and other international institutions. Avoid countries with obvious corruption, or severe social discontent, however.
As you can see, like everything else connected with politics, working out these investment implications is a very inexact science!
