A Free Market No More

With the nationalization of the American financial sector complete, and the federal government set to become the largest stock trader in history with its control of the banking industry, we more mundane types must figure out how to approach the new investing landscape. The difficulties are legion and the ever shifting sands of federalist intervention will make for an interesting and highly risky learning curve as we test the newly minted limits placed in the markets by the now socialist run federal reserve.

Where We Stand

Over the course of several months the markets ate billions in investor capital. From losses in 401k’s to investment brokers, hedge funds, private equity groups and individual traders have all taken a hit just from the action of what should have been no more than a major market correction. This would have been problematic on its own as the markets went forward with the at risk capital reduced by the usual market fluctuations. Billions of dollars had already been eaten by the correction, but this was to be expected. The markets would have eventually found equilibrium and the remaining capital would have fueled the next leg up.

Enter the new, completely re-vamped federal reserve. Complete with shiny new economic socialism handbook and a taxpayer powered checkbook. Suddenly, it is no longer in vogue to allow a free market to correct itself through the time tested method of eating the weak companies and spitting out the efficient, strong companies. No, the usual correction method would no longer do. Uncle Sugar could not allow the depth of its complicity in the sub-prime meltdown to become public in an election year. So rather than a few congress critters hitting the unemployment line, they decided to wipe out tens of billion of dollars in investment capital by federalizing the financial sector and confiscating the remaining shareholder value. With each seizure, the shareholders (traders, investors, mutual funds) were wiped out completely. Rather than allow the companies a chance to merge, or recapitalize and continue, leaving investors some value and the chance at recouping even more, the fed cancelled capitalist opportunity and replaced it with staggering losses to everyone invested in the common stock of the companies.

Could they all have recovered over time and regained some or all of the investment capital? No. But the market would have seen enough survive and return to profitability to eventually at least mitigate the losses and leave some capital to grow with. By removing the opportunity to work their way out of this mess, the companies and the risk capital of many have been taken away by socialist fiat. To top off its appetite for your retirement portfolio, the fed has even given you, your children and your children’s children the bill for it’s meal.

You Can Not Do That Now, Comrade

With the shorting ban extended on the financial sector and the wiping out of tens of billions of private investment capital by the federal reserve, the question begs to be asked. What’s next?

Therein lies the quandary any investor or trader faces as we go forward. Will the shorting ban be lifted? In my opinion, maybe. But I wonder why the fed would lift it now that it will be the fed being shorted, in many cases. As the 800 pound gorilla in financial equities, it is not in the feds interest to have any curbs on its portfolio.

When the market for financial securities recovers and the fed see’s its holdings rise in value, what reason would it have to allow that rise to be limited to true value? Creating yet another bubble would be beneficial to the federal coffers and who is their to tell them no? Congress no longer even pays lip service to it’s constituency, we just got $700 billion worth of proof of their disdain for the American public. The executive branch cheered it on, congress has now joined in as a willing accomplice and the judicial branch has thus far given its tacit approval all of the way to the Supreme Court by it’s failure to cry foul at the unlawful seizure of American citizens property. The shareholders own the companies, the assets of the companies are collateral for the capital exchanged for each share of the company. That makes those companies assets shareholder property in the event of a failure of the company. By nationalizing those companies the federal reserve has confiscated the property of the shareholders without benefit of due process.

Where Does It End

As time passes and the current financial mess gets straightened out, there will surely be more casualties on the correction front. The difficulties that other sectors face are mounting with each passing day. The airline industry has huge problems, the automotive industry is on taxpayer life support already, to the tune of $50 billion and rising. Trucking and distribution are on hard times due to energy cost’s. Construction has all but stopped. Telecom and Tech sectors both face major hurdles in growth. Healthcare is just beginning to feel the pinch from the retiring baby boomers, a segment that grows daily and will continue to for some years to come.

So which sector do investors and traders move their capital to now? In the face of a nationalist takeover of troubled sectors, what is the route we should take?

The automotive sector, perhaps the weakest after financial, may well be next on the federal hit list. The options for traders and investors here are far fewer than those that were available in financial. Guessing wrong on whom the feds leave standing out of the few industry members may well be an unpalatable risk to many. It is quite sobering to realize that one can go to bed owning a part of a hundred billion dollar company with your life’s saving’s and wake up with a note from Paulson that reads” Gotcha!”.

There have already been congressional rumblings about nationalizing the oil companies, so that venue is already on shaky ground. One more profit report that the congress doesn’t like and, bam!

The airline industry is so dependent on low fuel costs and high rates of expendable consumer cash that any further increase in fuel costs or decrease in consumer spending will leave aircraft idled the world over.

Healthcare is the one area where growth is certain and economic downturns have the least effect. Healthcare is also the one area most talked about as being socialized, and with the new, improved version of democracy we see in the government, this industry is on quicksand.

A Troubling Outlook

I know that I am painting a somewhat bleak picture here, ordinarily I lean toward a brighter future and increasing opportunity for economic events. I have never feared a correction, they come and they go. However, I do not see this downturn as a correction any longer. The massive intervention of not only the American government, but in Europe as well has changed the investment risk / reward model greatly. By attempting to quell uncertainty in a single economic sector, the rules have been changed forever for all sectors. In a global market the interlocking nature of sector with sector coupled with no rulebook for the new interventionist model makes for even greater uncertainty. The apparent willingness of congress to bankrupt our grandchildren for the sake of a single election cycle is not only ludicrous, but the lack of protection for the huge amounts of taxpayer capital lends even greater uncertainty to the situation.

I would be interested to hear what the Supreme Court thinks about this new found nationalist power that the Legislative and Executive branches wield. The silence from the judicial branch is deafening. And we ordinarily can’t shut them up.

Troubling, at least to me.

God Bless and Good Luck