Global Politics Update

While the media focuses on the US 2008 presidential election, many forget the importance of politics on global stock returns. Today, an update and analysis on global politics.

Story Notes:

  • Investors need an accurate view of politics—not just US politics—to be successful
  • Despite a few significant changes, the regulatory environment remains benign among most of the largest economies in the world

Leaving well enough alone is something humans have never been good at. Hence, even the most free of free market economies still find their governments meddling with trade laws, taxes, and all sorts of other bureaucratic goodies. Government intervention in free enterprise (at least, in the developed world) is most often a bad thing. Why?

  1. Nowhere (to our knowledge) on a mass economic scale has one elite entity been better at determining the allocation of resources over a market economy regulated by freedom of self-interested choice and the laws of supply and demand. At best, wealth redistributions, earnings confiscations, and other violations against freedom are a net wash to an economy. Most new laws create heinous unintended consequences and far more pain than gain.
  2. Developed countries already have too many laws and bureaucratic structures—adding more red tape to the heap is seldom a net positive.

So when it comes to pure economics (note that we're not talking about social policy or ideology), MarketMinder doesn't much like government intervention. But the reality is politicians are among the very few groups with enough concentrated power to affect the direction of global markets significantly. Therefore, we must take note.

Many investors tend to focus on the politics of their domicile country only—a big mistake when we consider the US represents less than 50% of the total market capitalization of the world. What's more, the sheer interconnectedness of today's global economy makes global awareness imperative. Below is a brief update on recent political activity.

Let's start with the good old US of A. It's still far too early to handicap the 2008 US presidential race, but the big primaries in February are drawing closer. The presidential and Congressional races will be an important topic for 2008—but stocks probably won't start discounting a result until well into the year. But there are other issues of note besides new presidents:

Social Security Compromise
By Martin Feldstein, The Wall Street Journal (*registration required)

The article suggests Congress may be getting closer to enacting a form of universal retirement account to supplement Social Security. That's fine and good, but in our view there's very little chance of big legislation passing in the US anytime soon. See our past commentary, "Veto Power" 10/5/07 for more.

Also, if you count the Supreme Court as part of the political structure (as we do), a key decision looms:

U.S. Supreme Court Case May Be `Securities Law's Roe v. Wade'
By Greg Stohr, Bloomberg

Supreme Court decisions can have profound implications for markets. Recall the deleterious effect of the recent Kelo decision, where the high court granted municipalities and the feds eminent domain to seize private property. This surely is something to keep an eye on.

Elsewhere, the UK's prime minister, Gordon Brown, has proven to be a bit more free market-oriented than anticipated. But news that Brown would not seek a new election (and therefore, a stronger mandate) this November essentially means the status quo will rule in the UK for some months to come.

Brown: No Election in November
By Liam Paterson, Scotsman.com

In the east, Japan saw some turbulence over the summer as Shinzo Abe stepped down as Prime Minister, making way for the notoriously sedate Yasuo Fukuda. True to form, Fukuda's ambitions seem meager, making few major changes and echoing the official party line of his Liberal Democratic Party thus far.

Fukuda Is More Pragmatic Than Former PM
By Oxford Analytica staff via Forbes

France's new president Sarkozy has been an orgulous and outspoken proponent of free commerce since taking office this year:

Sarkozy Heads to Russia for 'Frank' Talks with Putin
By Staff, IC Publications

But while the tone of French rhetoric has certainly changed, we remain skeptical whether truly significant reforms will be ratified. Big talk of reform is a much different beast than actually making it happen. (Just ask Germany's Angela Merkel or past Japanese Prime Minister Koizumi.)

Out in Australia, Prime Minister John Howard is reeling. When election time comes, he's very likely to be ousted.

Howard Hedges as Poll Points to Defeat
By Staff, The AFP

Other major regions have also been relatively quiet. Merkel is virtually MIA in Germany, and the constant reshuffling of Italy's government is lately rather tranquil.

Emerging markets, as always, have been a bit more turbulent this year. But unless the issue is truly gigantic, it's often not worth paying as much attention to emerging markets politics because they are too small to impact global stocks significantly. For instance, the ruckus surrounding the legality of Musharraf's election in Pakistan is negligible to stocks.

Musharraf's Victory Leaves Pakistan in Political Limbo
By Associated Press via The Wall Street Journal

That said, we always cock an ear toward the likes of China and its quasi-capitalist beginnings, Kim Jong Il in North Korea, Chavez's socialist tyranny in Venezuela, and of course the ongoing feud with Iran and its nuclear intentions, among others. One positive development has been the general, but slow, acceptance of the Central American Free Trade Agreement:

Costa Rica Leader: Trade Pact Passes
Marianela Jimenez, the Associated Press

Clearly there's a lot to keep an eye on. But in sum it's a benign global political regulatory environment where global economies are surging … a great time to be globally invested in stocks.

Editor's note: MarketMinder has written numerous commentaries and columns on specific political issues. Please see our archived commentary section for more.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.