Ignorance and Want: Forever Present
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Adam Smith is often acknowledged as the father of modern economics, and perhaps as often as the first champion of Free Market Capitalism.   What many don’t realize is that Smith was not an economist (the study did not even exist before his Wealth of Nations was published in 1776), but rather, a moral philosopher. 

This is important because Smith didn’t argue for freedom of the individual and in favor of the righteousness of mutually beneficial transactions unimpeded by the Sovereign (or, “the State”) because he thought that would be the best thing for business development (they didn’t really have that concept back then, either).   No, Smith proposed his system of equitable exchange between free men as a moral thesis — a necessary  evolution in late-Enlightenment thinking — that would make for a more equitable and civilized society.   Truly, Smith was far more about “The Golden Rule” here, than he was about “the gold.”

I posit that this misunderstanding of capitalism — especially by those who believe in the guiding hand of the Monarch (now, merely “the State“) over the Invisible Hand of the market — continues today.   Moreover, I’d posit further that the misunderstanding is one of basic definitions.   

Monarchists, Feudalists, Fascists, Socialists, and other government-first adherents tend to believe that the key to capitalism is physical capital associated with wealth — cash, land, equipment, etc.    In fact these are mere wasting assets, the by-product of capitalism, rather than its key ingredients.  They are nothing without the spark of human  ideation — the intellectual capital that drives all progress and increased standards of living.

For there is no arguing that innovation drives human progress, and it’s by-product in a free society is wealth.  It is no coincidence that those countries that respect and even seek to attract intellectual capital are among the wealthiest in the world.  

To provide an example, it’s no coincidence that health care has become one of our greatest economic pillars.   We are among the very few nations left that will invest directly in health care innovation, and, as a result, we are providing innovation for most of the world.   That creates an enormous market for U.S. health care entrepreneurs and venture capital investors, because they are in essence, innovating for a global market with very little competition outside our own borders. 

Sometimes I wish someone could sit down with the Congressional Delegation of  California — with their state’s enormous reputation for cutting edge innovation — and explain this paradigm to them, veeeerrrry slowly.  Perhaps then they would not be so quick to take a hatchet to the golden goose’s valuable neck.

Ah well.

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I wonder also that if our friends who favor a heavier hand of government could finally understand that it is people acting in freedom that make for a vibrant and successful  economy, and therefore, people are our most precious asset, would they continue to be such proponents for Malthusian population control? 

Would they, who purport to stand for the “little people,”  be so non-chalant about layering on increased taxes and regulations on the  idea-laden, but cash-light small business community?  

I am willing to give them the benefit of the doubt.  I am willing to believe it’s all just a matter of fundamental misunderstanding, and they “know not what they do.”

Let’s take on the responsibility then.  This holiday season, let’s do something truly for our fellow man.

Let’s pledge together to be the instrument of education  in our communities and our states.   

Only active participation can help turn a tide of creeping government that threatens to separate the country irreparably from its roots in individual freedom.   Let us rather return to those roots, by blowing the horn of innovation, progress, and freedom for all free men and women — and those seeking to be free.

Slante.

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There are many reasons that we must prepare our portfolios for more stormy weather, Jacksonians, and the increasingly dangerous interplay of our Federal government in the formerly “private” sector, whether it be for alleged “stimulus” or “rescue,” is one of the most foreboding.

Case in point — there has been a lot of back and forth on the iBC blogs recently regarding the Chrysler re-organization plan, and the Federal Government’s role — reaching all the way to the White House — in “negotiating” the terms of the deal.    For sure the Republicans opened the door to this heretofore unprecedented interference with the perfidy of Lex Luthor (remember him?) and his banking pals, but the Obama Administration has really gotten into the swing of things, pirouetting from control of the financial institutions (ie, “the TARP losers”) to attempting to rig the already down on it’s heels U.S. auto industry.   

 In the latest news we hear that Obama’s people are attempting to “cram down” senior Chrysler bond holders in a less than typical fashion — by inserting unsecured creditors– specifically the UAW labor union — in front of senior bond holders.   There’s a very heartfelt — and angry — attack on this land grab found in this article, written by  “Evil Hedge Fund Manager (TM)” Clifford Asness of  ($20 bn) AQR Capital Management, who is not a party to these proceedings, but has a pretty good idea of where such machinations will end, and so has stepped forward in print.   Here’s a cogent excerpt from the piece (highlights mine):

Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Asness goes on to mention how damaging such action can be to the fabric our capitalist system, and not just specifically to the non-TARP lenders who are holding out against the Obama Plan.   If the “government” starts taking sides in otherwise quotidian corporate restructurings, what trust will the private sector — not just hedge funds, but any large investor pools — have in any government or union associated businesses going forward?   

And how will that affect the pricing of their securities?   

From the standpoint of M&A valuation, unions are already anathema to private capital and tie a huge millstone around the neck of even the best companies who are saddled with organized labor.    This kind of side-picking will only drive those businesses’ long term equity values — and subsequent ability to grow — down even more.   

For a test — just ask yourself: would you buy a car built by a company largely owned by the Federal government and the UAW?   Even if you were sympathetic to the Obama Administration’s aims?  

 In the 1930’s this sort of corporate-government collusion led to fascism in a number of the “enlightened” European countries.   I’m not saying we are going down that path, only that we are looking at another major strike to the economy if we allow the government to continue to treat the sources of private capital as second class citizens, their legal standing be damned.  

Because the first tenet of capitalism is “Capital is Mobile” my friends, and it will fly to other pockets of investment where the risk-return parameters are more in balance if it feels threatened on these shores.      The President may discover this principle too late, much to his chagrin, and our own.

In the meantime, Jacksonians, as small investors,  all we can do is listen to Fly’s Goat’s singing admonition, and “be prepared*:”

 [youtube:http://www.youtube.com/watch?v=-nJOY0P84v4 450 300]

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*(TBT, GLD, SLV, SLW, PAAS, EGO, RGLD, NRP, etc., etc., etc. )

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