Home > Economics, Finance, Investment Ideas, Keynesianism, Politics > Is Political Risk Really that High?

Is Political Risk Really that High?

Many after-the-fact analysts attribute the recent decline in stocks to heightened political risk and point to financial regulation, instability between North and South Korea, and most importantly, the crumbling Eurozone economy.  There is certainly merit to the contagion affect from Europe influencing asset prices on a global level; however, the risks to the U.S. are somewhat mitigated by the fact that Europe accounts for less than 2% of the U.S. GDP at most, and according to Goldman Sachs, possibly as little as tenths of one percentage point (Reuters).  As a consequence of the fear in Europe, the U.S. government’s ability to raise debt, as measured by the yield on Treasury notes, has gotten significantly cheaper.

But, this writeup isn’t about Europe.  It’s about the fact that people are greatly over-exaggerating the political risk in the U.S.  I spent a lot of this weekend jumping through portfolios of big-time hedge funds and investors on Stockpickr and was pleasantly surprised to see that large, top-performing hedge funds put a significant amount of cash to work over the past few weeks.  Not only were they buying stocks, but also, they were heavily investing in technological and innovative companies.  The type of companies that truly make our country standout on a global level and who produce the products that we offer of value to the rest of the world.  These investors were not “scared” of an attack from politicians on their wealth.  They were opportunistic and eager to step up and put their money behind our country’s most innovative and best companies.

The Political Faultline

Times are a bit tumultuous.  There is a significantly larger gap in ideology between the two parties, and in many respects it is difficult to reconcile these differences.  When it comes to issues like health care, the divide cuts at the heart of a divergent ideological belief in the role of government.  The rhetoric is rather lofty in battling between the dueling approaches; yet in reality, the “concern” led by the right and corporate America is largely just posturing.  Some would have you believe that there is a “war” against corporations.  Rand Paul went as far as labeling the criticism directed at BP as “un-American.”  That could not be farther from the truth.  Where there is a “war” is against negative externalities.   Growth is great, but when the costs of growth are wrought by society at great cost, the growth is/was not worth it.  What is really un-American is the unwillingness of some entities to consent to the sovereign authority of the government.  Our social contract relies on citizens consenting to be governed in exchange for a framework through which the opportunity for the many is maximized.  We need not lose site of this essential component of our Constitution.

Mark Thoma wrote an excellent piece about growth vs. stabilization policy.  As a self-acclaimed Minsky-ite, I am a firm believe that stabilization is the most important governmental role in encouraging growth.  The way things have played out, growth policies promote financialization, while stabilization policies truly afford the private sector to invest in innovation without worrying about macroeconomic risk.  As things unwound over the last couple of weeks, people were scared to invest in great companies at relatively cheap valuations due to macroeconomic concerns.  If we address our policies to stabilizing the economy and providing a solid foundation, without seeking exuberant growth, we afford ourselves the opportunity to reasonably and safely invest in truly socially beneficial ends.

Opportunity out of Political Change

For 8 years under the Bush Administration there was a science-phobia that pervaded policy decisions.  Coupled with the fallout from the dot.com crash, investors were wary of putting their money to work in science.  Moreover, the low interest rate policy of the Fed made investments in real estate and finance far more attractive than innovation.  All that changed with the transition to a new Administration.  The Obama Administration has made it clear that they want to generate and encourage more investment in innovation.  Whereas in the past, alternative energy was shunned as unnecessary, now the U.S. is far more dedicated to becoming a global leader in the emerging field.  Stem cell research is now free to advance.  The FDA now looks favorably upon treatments such as Dendreon’s (DNDN) which offer cutting edge opportunity in actually treating cancer.

Clearly, the Obama Administration has no secret desire to disable and bankrupt corporations in America.  There are merely different priorities in promoting growth than with past Administrations and in different points in time.  Right now, stabilizing the economy allows investors to take that leap of faith and risk capital while pursuing the rewards of innovation.  I believe this goes a long way in explaining the relative strength of the Nasdaq when compared to the Dow and S&P.  The leaders of our economy and therefore our stock market are no longer the financial stocks, but rather the innovators of the world.  So long as this trend continues, there will be increasingly more reasons for optimism in our country’s ability to bounce-back from the depths of the financial crisis and over time, considerably more opportunity throughout our country.

We are no longer the manufacturing powerhouse that grew robustly and aggressively throughout the 1900s.  Our product to the world is innovation and without investment, we will have increasingly little to sell on a global level.  We need to continue pushing the limits of what is known by man in order to not only bounce back from the woes of 2007-2009, but also to prosper from 2010 on.

  1. May 26, 2010 at 4:41 pm

    weakened on Thursday as USD strengthened, as well as reports that political risk may cloud the nation economic outlook. Political Science Textbooks

  1. May 28, 2010 at 1:03 pm
  2. June 7, 2010 at 12:26 pm

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