Investment Advice for the Rule of Awe

I am in awe of Obama. He has rocketed onto the national and international scene without a major error. He seems to be everywhere, and doing every thing he can to handle the worst crisis in generations. His actions appear to be unopposed in most areas.

But we need to exercise some care that we do not allow ourselves, in our awe of the man, to forget that we have security and stability because of the "Rule of Law" and there is no place for the "Rule of Awe"

Who would have thunk it? Here we are in a nation in which the "Rule of Law" is enshrined in constitutions at the federal and state level, and in various charters in the lower levels of government. But at the same time, we find ourselves with a federal government acting to redistribute billions of dollars without act of Congress, or judicial review.

Investment-wise this situation suggests that you do the following:

1. Reduce investments in corporate and Treasury bonds, since the legal protections for these assets are being reduced.
2. Reduce investments to US companies whose assets are in the United States, if they have significant Retirement and Union obligations
3. Increase investments in those countries where the Rule of Law still prevails (Canada, Australia, Japan, Germany, Switzerland, Great Britain)
4. Do not depend on investments whose value is determined by "dollars" but by the assets they have claim to.

The first act in this drama, which cannot end well, came when the government, terrified by the carnage of Lehman Brothers, decided that some companies were "Too big to fail". Using their fear, they have participated in the give-away of hundreds of billions of dollars. They are ignoring the fact that these failures have occurred as a result of the ill-conceived programs of the same people that now participate in this huge transfer of wealth.

Finding themselves unopposed, they have now gone one step further,indulging in a "taking" of unprecedented magnitude. We have long had an understanding in government that private property belonged to it's owners, and that government could not take private property for private use. The rules of "condemnation" provided for taking, appropriately compensated, for public use.

But the actions of the government with respect to the automobile companies have gone one step too far. The rights of the bond holders of Chrysler were trampled, giving value (what there is) to the government and to the workers, and eliminating both shareholders and bondholders rights.

The Obama/Palosi Administration is now attempting to expand their actions into the restructuring of General Motors (GM), but have so far failed. The General Motors bondholders, a much more diversified and feisty lot, refuse to accept a much reduced value, while the workers and the government received much of the value. This drama is not yet done.

If we find ourselves in a world in which a federal government can re-distribute private wealth to special interests, we will soon find ourselves in a situation in which federal government will re-distribute private wealth from those who oppose it to those who support it, and the Rule of Law will be gone. We will soon find that the cure is much worse than the disease.

Disclosure: Long Ford, Long GMAC bonds

Comments

[Neil459:]

"But Obama speaks so much better than Bush! It can't be that bad." says all of the unemployed auto workers, traders, and finance geeks.

May 28 08:28 AM

[msgtb:]

We have no rule of law, the SEC is letting GS and others have a free rein over the stock markets. There is no sheriff in this town. The hype and deception will eventually come out and it is a shame for someone who talks transparency but helps the bankers richer on their mistakes. The big banks are insolvent and should have been allowed to fail. The forward looking requirement for banks and financial institutions is somewhere around 50% of what it was in 2007. The banks must fail for us to get out of this quagmire.

God bless us we need it.

Dave

May 28 05:55 PM

[Old Trader:]

While in general agreement with the article, I'm not so certain that I'd wish to open, or add to any positions in either the UK or Japan, given that the UK seems to be in even worse shape than the US (economically speaking) and Japan is the perenial "weak sister" of Asia. There's no shortage of places to invest, when one looks in a global context.

Regarding the "rule of awe/rule of law"; changing rules on the fly is what has kept me out of Russian stocks. In all likelihood, my "quirk" probably cost me money, over a longer term, but in that sort of environment, the political risk is just too great for my taste.

May 28 06:43 PM