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The Power of Capitalism

By Bo Beckman, Senior Portfolio Manager, Oxford Private Client Group

Basic economics has taught us that price is a function of supply and demand. If supply is constant, for example, and demand drops, so should price. Conversely, if supply remains constant but demand increases, shouldn’t the price   &nbs... increase, as well? So what happened in 2008 economically?
We have been told that demand dropped dramatically (explained as being revealed in the billions of dollars of redemptions from hedge funds) and with a constant supply, prices therefore dropped. In other words, there were many more sellers than buyers.
Hmmm. I agree with the basic principles of economics and have been witness to the graphs pertaining to supply and demand, but when was the last time you saw a supply and demand curve for the stock market?
If you think about it, how is it that a multiple trillion dollar market that affects the livelihood of so many and so much isn’t as common as things like the strength of the dollar or interest rates?
Simple—it would make it too basic. If the markets were so basic there would be little need for all of the professionals who are retained for the purpose of guidance in such a complex market. The market isn’t complex; it is basic. 
The information we receive from the industry to assist us in understanding why something is occurring (and in an effort to preserve their interest), the investment industry puts out this information, this minutia that makes it seem and feel complex.
The simple fact is, at any given time the market can only do one of five things—go up a lot, down a lot, up a little, down a little or go sideways. That’s it. And there are only three primary asset classes associated with our industry—stocks, bonds and cash—and only 10 sectors that comprise the market and only a handful of developed countries.
The fact that there are thousands of companies and thousands of firms     attempting to market the stocks of these companies is what creates the complexity, the confusion. 
If one actually stops and thinks about it, the bear of 2008 should not have been that big of a surprise—there were plenty of warning signs —but most investors simply took for granted that the market would continue to rise just as it had for the past five years.
Efficient markets?
The efficient market theory suggests that all known information is discounted in the market, therefore reflecting accurate pricing. I agree with this assessment but I have to wonder exactly how one would define “known.”
We were told in 2006 that the Chinese were going to start consuming energy (oil) at a rate faster than we could produce it with our outdated refineries. As such, the price of oil shot from around the $50 range to over $140 a barrel. Then, overnight, the prices started to drop and tanked back to under $40.
I do not recall hearing or reading about the Chinese announcing that they were wrong and they actually were not going to consume as much as they had anticipated. Nor did I hear that we had built more refineries overnight. If the reason it went up was to bring the economy of energy back into balance and price it more appropriately based upon this known information, why did it drop with no explanation? (So maybe it is more about who knows than what is known.)
I have often said that just because something exists doesn’t make it right and, in fact, it doesn’t even make it real. Capitalism has shown its depth of power and its unwavering commitment to its definition. That’s what brought down the big financial institutions last year—Bear Stearns, Merrill Lynch, Shearson Lehman, Fannie Mae, and Freddie Mac. All were icons in the industry that were suddenly shattered to dust.
The same power capitalism provided our country to grow from its infancy to a world power is the same force that could cripple it if not respected.
By definition, there will be periods of slow growth and bear markets. This is natural. When certain aspects accelerate in growth beyond the aggregate in multiples, there will be a reversion to the mean.
This is all our market has done. As such, I would not be losing faith in capitalism, rather I would have a heightened awareness that it is working and it did what it was suppose to do, which was to remove those who attempted to manipulate it or take advantage of it.
Bo Beckman is the senior portfolio manager for the Oxford Private Client Group in Minneapolis. His portfolio has outperformed the S&P 500 for seven consecutive years. To learn more about Mr. Beckman and the Oxford Private Client Group, please visit www.oxfordpcg.comor email him at
Contact Eric Erickson Directo at 877-350-3863 or eric.erickson@theoxfor...