Thursday, July 23, 2009

Stocks Are Going to Keep Going Up

Even Obama can't keep the stock market down. In fact, his declining political fortunes may be giving the Dow Jones a needed boost.

Can stocks go up while the economy lies at anchor? Yes, businesses can be profitable even if there is considerable unemployment and a sluggish economy. For one thing, the rest of the world is not following the Obama plan, so that, except for the US, the rest of the world has an excellent chance of recovering quickly from the current economic crisis. Our companies can sell to them (assuming our companies don't use coal-powered electricity and have few, if any, employees).

Labor, with a little help from its Congressional allies, in the US seems determined to price itself out of the market and will remain in excess supply (unemployment) indefinitely. But, that doesn't mean that life doesn't go on outside of the US and that employment opportunities won't be available elsewhere. They will be.

The world is going one way; the US is going the other way. The world will recover and avoid the stagnation that America seems to rushing towards. Businesses that take advantage of the freer markets and more efficient labor markets that exist outside the US will prosper. Many of these businesses are American public companies.

In the 1930s, the US found itself adopting economic policies that prolonged the depression. While the US remained mired in the depression until 1941 (from 1931 to 1941, unemployment in the US never got below 14 percent), the rest of the world (with the exception of France) had a boom. Only the US and France had a decade of misery in the 1930s. The US is now following the same path if followed in the 30s, a path of economic stagnation. It is not as bad as the 30s yet, but Obama may be finding ways to get us there. If you bought stocks in the summer of 1932 and sold them in 1941, you made better than 8 percent per year returns, even though the economy was a disaster. That's probably a blueprint for our future under the Obama regime.

So, don't be surprised if economic stagnation in the US takes place side by side with a healthy stock market. Businesses adjust. If US policy is to make employees toxic, that doesn't mean that businesses can't figure out how to make substitutes through outsourcing, through use of temporary employees or contract employees, or through the creation of subsidiaries outside the US not subject to our increasingly nonsensical economic policies.

Markets have a way of working even though governments are stupid. American public companies will make adjustments, avoid high levels of employment, and adjust to the new realities. And they will thrive. The average American will have a tough time, but stocks need not.

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