Will Bureaucrats Determine Your Investment Success?

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Equity market investors almost universally consider themselves capitalists in favor of free market economics.  Most are vehemently opposed to anything but minimal government regulation and interference.  As we head into the weekend, the three open questions most capturing investors’ attention are:  Will European governments and central bankers cobble together a further rescue plan for Greece?  Will Democrats and Republicans reach an agreement to permit the U.S. Government to continue borrowing to pay its bills?  Will the Federal Reserve or the administration concoct another form of stimulus to keep the struggling economic expansion alive?

Because an affirmative answer to each of these questions is likely to provide at least a short-term boost to equity prices, we hear very few strong voices in opposition.  All too many investors apparently embrace selective free market principles.  We wish to stay the hand of government except when it at least temporarily fills our wallets.

It’s not that difficult to understand many investors’ eagerness to welcome government rescues.  Most simply don’t understand the probable long-term consequences of trying to solve a debt crisis with more debt.  More cash in hand today is tangible; possible long-term debt consequences are nebulous.

It’s more difficult to excuse policy makers.  While it’s possible that some truly don’t understand the negative implications of what they are doing, it is far more likely that they are making deliberately self-serving decisions.  Saving their own bacon, whether reputational, financial or political, is more important than the welfare of existing creditors or future generations to whom they will bequeath the burgeoning debt loads.

It must be obvious to any perceptive investor that we are not dealing with free markets and a free economy.  When economic and investment success depends heavily upon the actions of bureaucrats, we are speculating, not investing.  There is nothing wrong with speculation, but it is critically important that those who cannot afford the attendant risks recognize the distinction.