The Independent Market Observer

3/12/14 – Free Market?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Mar 12, 2014 12:37:09 PM

and tagged Market Updates

Leave a comment

This will be a short post as I’m on my way to Commonwealth’s Chairman’s Retreat, an annual conference with an amazing lineup of speakers (and me), along with a fantastic location (this year, Las Vegas) and events. I look forward to it every year, and this one promises to be just as good as expected.

Browsing the papers this morning, I had one clear thought: do we really live in a free market? New Jersey has decided that Tesla cannot sell its cars there directly; it has to go through existing dealers. Talk about a government-protected business! This is a pretty blatant example, but it hit me right between the eyes (and prepped me for the next couple of points).

The second major hit on this theme was a proposal in Congress to revise the housing finance industry by winding down Fannie and Freddie, which were originally private companies but essentially nationalized in the financial crisis. The two agencies would be replaced with a system whereby the government provides a guarantee but takes a second loss position, leaving private investors to take the first losses.

Between a reluctance on the left to take government out of the mortgage business, a reluctance on the right to leave government in the mortgage business, and a panic by the hedge funds that bought Fannie and Freddie stock with the expectation that the companies would be refloated and may now see that investment disappear—the consensus seems to be that this will never pass. And that’s not even to mention the billions the nationalized Fannie and Freddie are now contributing to the Treasury, which would, of course, go away as they were wound down.

Third, the Obama administration’s proposal to define by executive order many workers who don’t currently receive overtime as overtime employees will certainly drive up wage costs for companies—and wage income for workers. Regardless of how you feel about this, there’s no denying that it’s another limitation of the operation of the free market in labor, and it will drive up wage costs and probably deter hiring.

Finally, the continued modification of the Affordable Care Act in an attempt to make it less damaging slows but does not stop the government’s further entry into the compensation decisions of companies. Again, good or bad, this is a decision on which companies and workers will now have less flexibility.

I see both the positive and negative sides, and the different perspectives, on all of these issues—and I’m explicitly not coming down on either side in this post. That said, it’s clear that there will be costs and that, if the structure of the economy changes markedly, the expected growth level will have to change as well. Normally, there is a balance of effects at any given time, so the total economic impact isn’t generally significant. I wonder if the accruing balance of these decisions will have more of a long-term negative effect than many of their proponents now expect.

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®