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Did Politicians Kill 'Buy-And-Hold' Dreams?"

Tyler Durden's picture




 

While in the short-term the equity markets are falling, we are told again and again that if only we look just beyond the horizon, all will be unicorns and rainbows. The 'buy-and-hold'/invest-for-the-long-term mantra is what pays most of Wall Street's bills and keeps your wealth manager in his Hawaii vacation home. However, while the current jitteriness is ascribed (potentially wrongly as we noted yesterday) to the 'fiscal cliff', as Morgan Stanley notes, "A near-term fiscal cliff resolution won’t remove politics from the investing calculus, far from it. Developed-economy governments have significant negative net worth, which means that the public sector will ultimately impose a cost on the private sector. The political process will determine when and how the private sector bears the cost. This political uncertainty seems likely to remain a persistent and potentially critical factor for investors over the medium term. At a minimum, it will likely affect, detrimentally, the valuation of risky assets." Must read.

 

Via Morgan Stanley: The Very Political Economy,

Politics has become a more intrusive factor for investors. The prospect of heightened political uncertainty is one reason to think risk asset valuations will be structurally lower compared to the past 30 years.

 

Politics can always affect investors. However, political risk has generally been a second-order issue for investors in developed markets. More to the point, the major political trends in the two decades after 1980 were supportive for risk assets generally and equities specifically. There was a broad shift to lower taxes, reduced regulation – notably reduced finance-sector regulation – increased openness to trade, and less protection for labor. All this contributed to higher earnings and higher valuations for risk assets.

 

Several things have now changed. First, governments are broke. Exhibit 1 shows an estimate of governments’ net worth, as a percentage of current GDP. This is essentially a comparison of the discounted value of their income versus liabilities. There is no point quibbling about methodology: under any plausible methodology most western governments have negative net worth.

 

 

 

The significant negative net worth of government means there is no question that the public sector will have to impose a cost on the private sector. The only questions are when and how. The political process will have to answer those questions. Investors may hope the inevitable cost will be imposed in a way that minimizes economic or financial pain, but history suggests that politicians aim to minimize political pain.

 

The second change is the rise in income inequality. Rising inequality was very likely caused, at least in part, by some of the factors that supported equities: increased free trade, lower direct tax rates and labour market deregulation. The bull markets also increased inequality. If the richest households started with twice the average value of financial assets in 1980, then 20 years of 10% asset price growth would, all else equal, increase that ratio to 13 times by 2000.

 

 

It was acknowledged at the time that many of the reforms introduced after 1980 would initially provide disproportionate benefit to high incomes – but, in theory, benefits would trickle down. Exhibit 2 shows real income in the US, by income quintiles (20% buckets). The bottom three quintiles – the bottom 60% – have seen almost no income growth since 1980. (To be precise, real annual income growth in the bottom three quintiles has averaged 0.1%, 0.2% and 0.3%, respectively, since 1980.) Whatever trickled down, it wasn’t income.

 

 

 

It seems plausible that any attempt to reduce inequality could see backsliding on trends that assisted risk assets over the past 30 years. One example is the trend to lower effective tax rates on corporate income (Exhibit 3).

 

 

 

Rising inequality has gone hand-in-hand with rising political polarization. Exhibit 4 shows income inequality in the US (Gini coefficient) and a measure of polarization in the US Congress.

 

Ominously, but unsurprisingly, public austerity typically triggers social and political stress. Exhibit 5 shows the incidence of various political disturbances in Europe over the 80 years to 2009. The vertical scale is the number of incidents per year, per country; the progressively darker bars correspond to periods of greater austerity. The events are riots, demonstrations, general strikes and assassinations (the CHAOS bar sums the components).

 

 

It’s a cliché, but it’s true: investors hate uncertainty. The rise and rise in an index of policy uncertainty in Europe and the US has gone hand-in-hand with falling risk free rates (Exhibit 6).

 

 

The forward-looking point is that political uncertainty seems likely to remain a persistent and potentially critical factor for investors over the medium term. Structurally higher political risk reflects the structural economic problems that are likely to dominate the economic outlook for some time. This will very likely affect, detrimentally, the valuation of risky assets.

 

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Thu, 11/15/2012 - 11:22 | 2984056 GetZeeGold
GetZeeGold's picture

 

 

Hmmm......what should I buy and hold?

Thu, 11/15/2012 - 11:32 | 2984092 Enslavethechild...
EnslavethechildrenforBen's picture

Lead, guns, plenty of gun powder and defendable land

Thu, 11/15/2012 - 11:39 | 2984147 Atlasshruggedme
Atlasshruggedme's picture

Long on Montana. - Sorry Montana... Your going to grow.

Thu, 11/15/2012 - 15:03 | 2985041 Ident 7777 economy
Ident 7777 economy's picture

 

 

 

"Your going to grow"

 

What the hell does that even mean?


Oh - SILLY ME ... the poster must mean "YOU ARE going to grow."

 

Oh ...

 

Then why not write:  "YOU ARE going to grow." and skip trying to handle contractions?

 

 


Thu, 11/15/2012 - 11:45 | 2984177 zuuma
zuuma's picture

 

 

Buy:    Porn

 

Hold:  Whatever comes to mind.

 

This buy & hold system will assure a positive outcome each & every time.

Thu, 11/15/2012 - 14:19 | 2984830 madcows
madcows's picture

The old man looked down at his pants and asked "What happened?  You used to say good morning to me every day.  Now, you just watch me tie my shoes."

Thu, 11/15/2012 - 12:08 | 2984282 amanfromMars
amanfromMars's picture

Future IntelAIgent Systems would be a hot safe haven purchase, GetZeeGild

Thu, 11/15/2012 - 11:22 | 2984058 q99x2
q99x2's picture

Now you have to treat em like prostitutes and day trade em.

Thu, 11/15/2012 - 11:28 | 2984087 francis_sawyer
francis_sawyer's picture

You don't pay hookers for sex... You pay 'em to LEAVE after the sex is through...

Thu, 11/15/2012 - 11:51 | 2984205 helping_friendl...
helping_friendly_book's picture

To bad the Generals didn't figure that one out!

They could have put on their civys and done the fire and forget!

Their egos were much to big to be smart about it.

They are fucking Westpoint grads who did course work with the IDF? WTF?

I wonder if the Israelis are sending their hot girls to fuck congress too?

Thu, 11/15/2012 - 11:22 | 2984059 DaveyJones
DaveyJones's picture

That's not the only thing they killed

FDA has attributed 12 deaths to five hour energy shots

notice they're not called 24 hour 

Thu, 11/15/2012 - 11:25 | 2984073 duo
duo's picture

cuz if you're not dead in 5 hours, you need another one.

Thu, 11/15/2012 - 11:36 | 2984121 Quinvarius
Quinvarius's picture

Remember when sea salt chips made with olean were all the rage?  How many people died from that?  Sea salt is what they use in lethal injection to stop your heart.  Olean will dehydrate the crap out of you and put you on the shitter for the weekend.  Lethal combo.  No one ever speaks of it.  The product just disappeared.

Thu, 11/15/2012 - 12:11 | 2984290 adr
adr's picture

Kind of like the Arch Delux from McDonald's.

Of course that burger did wonders for constipation. Much better than drinking fiber or taking ex-lax.

Thu, 11/15/2012 - 13:51 | 2984706 ElvisDog
ElvisDog's picture

Oh come on, sea salt? Salt is NaCl, sodium chloride, and it's NaCl whether it comes from the sea or a salt marsh or wherever. For sea salt to be more toxic than any other salt, there would have to be something else in the sea water.

Thu, 11/15/2012 - 14:10 | 2984799 hidingfromhelis
hidingfromhelis's picture

Fukushima chips wouldn't be a big seller, I'm guessing.

Thu, 11/15/2012 - 11:25 | 2984074 odatruf
odatruf's picture

Tyler - I don't think buy and hold / long term thinking is what pays the Wall Street bills anymore.  How quaintly 1990s of you.

HFT, robots, algos and the few retail customers who get flipped in and out of positions in order to rack up transaction costs are what pay the bills.

 

Thu, 11/15/2012 - 11:29 | 2984085 DaveyJones
DaveyJones's picture

 Is " a very political economy" the PC title for a very corrupt economy? 

Thu, 11/15/2012 - 11:31 | 2984100 Enslavethechild...
EnslavethechildrenforBen's picture

Our economy left and traveled to a parellel universe.

We're left with the anti-economy

Thu, 11/15/2012 - 11:34 | 2984117 odatruf
odatruf's picture

Bizarronomy!

Thu, 11/15/2012 - 11:41 | 2984156 flattrader
flattrader's picture

The "bill" for the so-called Regan Revolution has come due.

>>>... More to the point, the major political trends in the two decades after 1980 were supportive for risk assets generally and equities specifically. There was a broad shift to lower taxes, reduced regulation – notably reduced finance-sector regulation – increased openness to trade, and less protection for labor. All this contributed to higher earnings and higher valuations for risk assets.<<<

>>>It was knowledged at the time that many of the reforms introduced after 1980 would initially provide disproportionate benefit to high incomes – but, in theory, benefits would trickle down. Exhibit 2 shows real income in the US, by income quintiles (20% buckets). The bottom three quintiles – the bottom 60% – have seen almost no income growth since 1980. (To be precise, real annual income growth in the bottom three quintiles has averaged 0.1%, 0.2% and 0.3%, respectively, since 1980.) Whatever trickled down, it wasn’t income.<<<

Yep, the truly wealthy have had it pretty good at the expense of everyone else for more than 30 years.

So, now the fuckers who wrote the rules to suit themselves and made all the money can fucking pay more than their "fair" share of the bill for a change.

Thu, 11/15/2012 - 11:46 | 2984183 Quinvarius
Quinvarius's picture

Good thing we have a 0% credit card to pay the bill with.

Thu, 11/15/2012 - 11:57 | 2984227 odatruf
odatruf's picture

That's correlation, not causation, flattrader.

The gain in wealth / income among the upper cohorts vastly outpaces the "saving" from sending less to the government.

You need to do more than simply assert that they gained their wealth at anyone else's expense via the tax code.

 

Thu, 11/15/2012 - 12:17 | 2984259 flattrader
flattrader's picture

So, you think it was all about the tax code?

Ridiculous.

You are missing the BIG PICTURE.

TRA 1986 was a "give away" to the truly wealthy, but only part of the Reagan Revolution "benefits" they enjoyed.

They also benefitted from less financial and environmental regulation giving us a less stable (and now criminal) financial system and a more polluted environment.

Many federal reulartory agencies got captured during this time period.

Thu, 11/15/2012 - 12:25 | 2984337 odatruf
odatruf's picture

Thanks for responding.

No, I don't think tax policy is much to blame for the growth in income / wealth inequality.  It seemed to me that you were saying you thought that.

I'd say there are global and cultural reasons that account for more of the concentration of wealth that is apart for any taxation or regulation. Still, I am all for putting banksters out of the privatize losses / socialize losses business if that is what you are getting at. And I am for undoing regulatory capture, although the only real way to do this is to disempower the captured entities.

But I want to be clear that government policy, even malevolent policy, isn't the main cause of inequality.

Thu, 11/15/2012 - 12:32 | 2984369 Manthong
Manthong's picture

“Did Politicians Kill 'Buy-And-Hold' Dreams?"

Duh.. Yeah..

What the politicians didn’t kill, the banks and financial elite have finished off with synthesization and HFT.

Thu, 11/15/2012 - 13:23 | 2984502 flattrader
flattrader's picture

>>>And I am for undoing regulatory capture, although the only real way to do this is to disempower the captured entities.<<<

You'll want an EPA that works the first time you drink poisioned water and an FDA that works the first time you ingest a tainted drug...not "disempowered" regulatory agencies which is damn close to what we have now.

No doubt you'll counter with the argument that you can "sue" for damages and the rule of law will protect you in court.  Don't be naieve.  Corps factor that cost in and know exactly how many customers they can kill before it affects the bottom line.

Should this happen to your child or your family no amount of money will compensate.

And in the case of a polluted environment with multiple pollutors/parties (some now defunct), just who is the "defendant" can be argued in court for years while you go broke waiting for justice.

I'm watching a case like that play out right now...as people continue to drop like flies due to contamination tha occured more than 40 years ago.  Old married couples dying of cancer and a new crop of kids under 21 who moved into an area nearby that was supposedly cleaned-up.

 

 

Thu, 11/15/2012 - 13:47 | 2984680 odatruf
odatruf's picture

flat - I understand your point and agree with you that sane, responsible regulations are going to be part of the world we live in. So, no I don't think the answer is that I can always sue. We need government and it can be a force for positive good in people's lives.

Yet still, regulatory capture has and will occur in the status quo, no matter whether team red or team blue controls the throttles.  It was and always will be thus that those who have resources will be calling the shots. My point is that the only way to avoid such capture is to disempower this group, meaning we need to have regulators do only those limited things only governments can do so as to not give them so much power as to make them easy targets for capture.  Of course the things only governments should do should be done well and effectively.

I worked in government myself for almost ten years. You may be assured I am not naive.

All that aside, you have yet to back up your assertion that tax and regulatory policy is the cause of wealth / income inequality. I just don't think it is, except at the margins. Most of the people who have accumulated wealth in the recent past are not banksters or big oil executives or anyone else who is getting over on the little guy. They just aren't. Sure, they may derive their income from selling something to consumers or providing a service, but that isn't what you are alluding to here.

Thu, 11/15/2012 - 15:53 | 2985277 flattrader
flattrader's picture

>>> Most of the people who have accumulated wealth in the recent past are not banksters or big oil executives or anyone else who is getting over on the little guy.<<<

I don't know what you mean by "recent" past and I think your definition of "wealth" is different from mine (I am refering to people who are truly wealthy-1% ers- not their functionaries.)

But, here is the top 1% from 1979 forward...and they are exactly the people you say they are not...people who derive their income from business and primarily in the FIRE sector.

>>>The biggest component of the increase in after-tax income for the top one percent is "business income" as opposed to income from labour or investments (though admittedly these things are hard to untangle).<<<

Big gains so much easier to attain without those pesky regulations and favorable tax rates.

http://www.economist.com/blogs/dailychart/2011/10/income-inequality-america

See  this as well.

http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-income-growth-a...

Reaches back further than 1979-80.

Note that is when the big upswing for the top 5% crowd begins--That's the Reagan Revolution.

Thu, 11/15/2012 - 16:14 | 2985386 flattrader
flattrader's picture

>>>All that aside, you have yet to back up your assertion that tax and regulatory policy is the cause of wealth / income inequality. I just don't think it is, except at the margins.<<<

Then offer another explanation as to why that income inequality chart diverges so dramatically immediately after 1979-80 for the 5% and even more dramatically for the 1% crowd.  If you think there was a catalyst other than a major overhaul of the tax code and the regulatory structure, then what was it?...and then explain away the S&L Crisis.  That's when the first set of chickens came home to roost.

I was with Treasury during this period and saw exactly what happened and how it went down...and got to clean up some of the mess.

Thu, 11/15/2012 - 11:59 | 2984234 Spastica Rex
Spastica Rex's picture

Off script, but right on.

The Gini coefficient should be a source of pride and comfort for the makers, however, because it shows that they're being rewarded more than the takers.

Thu, 11/15/2012 - 11:29 | 2984094 buzzsaw99
buzzsaw99's picture

Sucky. Anyone here could have written a more honest and comprehensive outlook.

Thu, 11/15/2012 - 11:32 | 2984105 firstdivision
firstdivision's picture

If you ever want anything that doesn't work right, or dead, give it to a politican to take care of.

 

In other news, this is a laughable reason that people need to learn that local/congressional politics trumps the presidential election http://www.cleveland.com/open/index.ssf/2012/11/ohio_house_committee_approves.html 

Thu, 11/15/2012 - 11:33 | 2984110 caimen garou
caimen garou's picture

rainbows and unicorns went out the window when hft's knocked down the door,hard assests you can hold!

Thu, 11/15/2012 - 11:36 | 2984133 luckylongshot
luckylongshot's picture

"You have a choice between the natural stability of gold and the
honesty and intelligence of the members of government. And with all
due respect for those gentlemen, I advise you, as long as the
capitalist system lasts, vote for gold."
George Bernard Shaw.

Thu, 11/15/2012 - 11:38 | 2984139 q99x2
q99x2's picture

I like the graph with chaos. At least you have something taking place. Otherwise it is like TV in the US. The whole US culture is sterilized. I can't take it. I want out of this desert. Make it go.

I know it is my excuse not to work. I have a paper to turn in in a few hours.

Thu, 11/15/2012 - 11:38 | 2984141 Madcow
Madcow's picture

The “debt-is-money” central-bank-driven economic system that we have in the West is fundamentally dependent upon periodic wipe-outs of the middle class (of people who borrow the money into existence in the first place). 

Growth, growth, growth, growth, growth, growth, TOTAL COLLAPSE.

 

Growth, growth, growth, growth, growth, growth, TOTAL COLLAPSE.

 

Again and again and again.

 

If bankers did not believe they would be able to collect assets during the (inevitable) deflationary wipe-out, they would never agree to extend credit during the growth (inflation) cycle.

 

So basically, we have a financial system that REQUIRES complete destruction of civilization once every 3 or 4 generations in order to exist. What is happening now should not be a surprise to anyone.

 

Thu, 11/15/2012 - 11:59 | 2984166 helping_friendl...
helping_friendly_book's picture

Buy and hold?

The only reason I hold is based on a fantasy some of the stocks, like GE, will someday be worth more than I paid.

No more. 

I put money in the Bank, Bank of China that is! A rmb denominated savings account, FDIC insured.

I watched the rmb go from 6.35 to 6.25 per USD.

When it goes to parity I will be laughing my ass off.

 

Thu, 11/15/2012 - 12:05 | 2984251 virgilcaine
virgilcaine's picture

Notice to Equity long and aapl bag holders.. best to get out now. 

 

vc

Thu, 11/15/2012 - 12:07 | 2984276 adr
adr's picture

Buy and Hold has been dead since 1999.

We are now in the buy and sell milliseconds later phase of global destruction. Buy and hold is dead for commodity contracts, stocks, real estate, and even consumer products. Nothing is meant to last and profits are to be made immediately or not at all.

Even corporations themselves aren't created for the long run. New companies are dreamed up to last a couple years, go public and then get bought out by major players at 50% premiums to their current price to help make connected insiders 50% richer overnight.

Sustainability is so 20th century.

IT'S MY PROFIT AND I WANT IT NOW!!!! is the rally cry for Wall Street in this day and age.

Thu, 11/15/2012 - 12:27 | 2984346 Urban Redneck
Urban Redneck's picture

PE is buy & hold in and HFT world

Thu, 11/15/2012 - 14:01 | 2984758 MFLTucson
MFLTucson's picture

Not fopr Buffett because if his stocks go down, they just bail him out.

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