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Friday, February 20, 2009

The Last Bull Capitulates

There's an old saying on Wall Street that a bear market has not bottomed out until the last bull capitulates. News flash. The last bull has capitulated. Me.

I'm a true believer in capitalism and markets. There is no better measure of what an item is worth than the price reached by a willing buyer and willing seller. No Ph.D. in economics has come up with a better system. Every economic and political system which tinkers with this simple formulation either outright fails (the Soviet Union, for example) or relegates its people to generations of un- and under-employment (France, for example). Command economies don't work, they never have, and they never will.

There also is no better way to create wealth for a nation than to permit people to participate in economic growth through stock ownership. The companies which create jobs and economic activity benefit from investment; investors benefit from the companies' growth; and everyone is better off, even those who do not own shares.

My professional life has been dedicated to investor protection, first in private law practice and now by running a law school securities law clinic which represents small investors. Investor protection walks hand in hand with free markets, which are not free when subjected to fraud. Investor protection is more than rules and regulations, but also policies and practices which promote investment markets.

I don't give investment advice, so don't take what I am about to say as a recommendation that you do anything other than keep reading. You probably would be better off flipping a coin than following what I do.

I have lost faith in this government. I was no fan of Bill Clinton, but I felt he shared a common set of economic values, including a belief in capitalism and markets. I have no such faith in Barack Obama.

For the first time in my adult life, I am convinced that we have a President who sees capitalism and markets as the enemy. There is no other explanation for the hyperbolic rhetoric Obama has used to create a sense of economic crisis far in excess of reality. We are in a recession, but as others have documented extensively, to compare the current economy to the Great Depression is damaging.

Obama seems to be wishing so hard for a depression, he might actually get it. Obama is well along in the process of creating a self-fulfilling prophecy in which he so talks down the economy, and so shakes markets, that people are paralyzed with fear allowing Obama to push his political agenda of creating a command economy. Count me among the fearful. It's hunker-down and cut-back time not because I've lost a job, but because of the decline in markets.

The economy and the markets are intertwined, which is something Obama doesn't seem to get. As people see their investment and retirement accounts drop, they adjust their economic activity to compensate. Multiply that effect by tens of millions of investors, and you can turn a recession into a depression.

Yet Obama has done nothing to ease the pressures on markets. In the trillion dollars of spending and "middle class" tax cuts, there is nothing for investors. Nothing. We will spend more on Harry Reid's magnetic railroad to nowhere than we will spend to reassure markets.

One simple step would have been to include in the stimulus bill an extension of the current capital gains tax rate, or better yet, a small cut as a signal to the investors that they have a friend in Washington. But Obama's zero-sum view of the economy -- where one person's gain must result in another person's loss -- does not allow for such pro-market measures.

From an investor protection perspective, Obama's stubborn adherence to this zero-sum economic philosophy has caused more harm to investors than all the Bernie Madoffs and Enrons combined. Hundreds of billions of dollars of investment fraud are dwarfed by trillions of dollars of investment losses from market declines, exacerbated by claims of "crisis" and "catastrophe" which flow from Obama's lips so easily. Combine this rhetoric with runaway government spending and give-aways to labor unions at the expense of businesses, and you have the makings for a real catastrophe.

Not all of this market decline is attributable to Obama's rhetoric and policies, but much of it is. Markets look forward, and what the markets see is a federal government out of control with a skipper who sees bringing markets to heel as an emotional and political necessity. The shame of this vicious market and economic downturn is that it didn't have to be this bad.

Worse still, we have a President who has a "tail wags dog" economic plan. Obama's economic plans contain almost nothing for the 93% percent of the population which is employed, paying its mortgages, and to a great extent, is invested in the markets. Obama doesn't understand -- or care -- that promoting and protecting the investment markets helps everyone, including those who have fallen on hard times, through job creation and increased economic activity.

So for me, it's time to take some money off the table until things settle down or we get a government which cares about markets, whichever comes first. I hope I'm selling at the bottom, because that will mean the markets and the country will have recovered from the worst economic policies since the Great Depression.


  1. One way that you can become wealthy is you can achieve it professionally.

    You can become a doctor or a lawyer or an architect or an accountant. You can become extremely good at what you do, be paid very well, and hold on to the money.

  2. I hear Atlas Shrugged is selling quite well these days.

  3. great post. Is this the same thing as saying the fat lady has sang?