The Politics of Economic Destruction

About 3 weeks ago, I wrote about Senator Christopher Dodd’s proposals for increased regulation of venture capital and angel investing and why these are very bad and damaging ideas. WSJ (4/22) makes several points about this proposed legislation:

Amazon, Yahoo, Google and Facebook all benefited from angel investors, who typically target companies under five years old…such firms are less than 1% of all companies yet generate about 10% of new jobs. Between 1980 and 2005, companies less than five years old accounted for all net job growth in the U.S. In 2008, angels invested some $19 billion in more than 55,000 companies.

Mr. Dodd’s bill would change all this for the worse. Most preposterously, it would require that start-ups seeking angel investments file with the Securities and Exchange Commission and endure a 120-day review. Rare is the new company that doesn’t need immediate access to the capital it raises, and a four-month delay is the kind of rule popular in banana republics that create few new businesses.

There’s a lot wrong with Dodd’s ideas on VC and angel investing; see my earlier post and the WSJ article for more details. There’s plenty more to be concerned about in the current approaches to financial regulation being devised on Capitol Hill.

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Random Thoughts on the Latest Government/Media Charade

The clueless Bloomberg reporterette interviewing Goldman Sachs chairman Lloyd Blankfein was like one of those MSM reporters who do man-on-the-street interviews in totalitarian countries: “So, Mr. Garcia, what do you think of President Castro’s new program?” Of course Blankfein gave vague answers and was careful to cite approvingly the great knowledge and wisdom of his Congressional masters. What did anyone expect him to say?

Meanwhile, Senator Levin thinks that a firm such as Goldman that is engaged in the business of making markets is doing something immoral because it is “betting against its customers”. This makes Senator Levin a fool or a demagogue or both. Maybe he will now try to ban all trade, since the fact that each party to a voluntary transaction thinks it is getting the better part of the deal must mean someone is getting ripped off.

As someone else said around here, the country is in the very best of hands.

Mr. Calderon, Tear Down this Wall

The president of Mexico, Felipe Calderon, does not like the immigration law recently enacted in Arizona. He thinks it “doesn’t adequately guarantee respect for people’s fundamental rights.” Whether there exists a right to enter and remain in a foreign country without permission is certainly a proposition open to debate, and not often said to exist in other circumstances.

The US border has long served as a safety valve for Mexico. When there are no jobs available there, unemployed Mexicans have often come north for better prospects. Not only does this situation permit Mexicans to make their living here and support the families they left behind, but it also takes pressure off the Mexican establishment. From the point of view of the Mexican authorities, the poor and unemployed are better off working in the US than staying home causing trouble. The prospect of violence and insurrection is a real one. A porous border protects Mexico from some of the effects of its statist policies. The remittances from abroad, even with the US in recession, are still second only to oil as a legal source of foreign income.

The US has an official policy of excluding illegal immigrants from Mexico, a business policy of employing them cheaply, and a political policy of appealing to whatever side of the question brings in votes and money. What we have not done is address the Mexican government’s policies. The current Mexican policy is to encourage illegal emigration to the US in sufficient numbers to compensate for the lack of economic opportunity within Mexico’s borders. Mexico makes little or no effort to restrict the northward flow, and has no incentive to do so.

Leaving Mexico out of this discussion makes it completely useless to deal with the subject at all. Any immigration reform in the US that is not acceptable to Mexico will be subverted.

Physical barriers can make it more difficult to cross into the US, but no barrier is impenetrable. Past efforts have affected the immigration flow only marginally. Now people cross the desert in Arizona instead of California. It is more dangerous and expensive now, which makes the smuggling gangs more important and prosperous. Short of erecting a Soviet-style border defense, with barbed wire, minefields, and machine gun posts, this is an approach that has not worked and will not work.

The single largest factor that reduced illegal immigration from Mexico was the US recession. We should take a hint from that. Think of the border as a semi-permeable membrane. If the border is impermeable to investment, but permeable to people, people will flow across toward where there is investment (and jobs) until an equilibrium point is reached. To reduce this osmotic pressure, and reach an equilibrium point involving less movement across the border, it is necessary to increase investment in Mexico.

Under the Mexican constitution (Article 27), all mineral rights belong to the government. Oil is extracted and processed by a state monopoly, Pemex. With the state desperate for money, Pemex has deferred maintenance and exploration, and is considered to be in a run-off mode as existing petroleum reserves are used up and newer extraction techniques are ignored. Nevertheless, Mexico has for many years issued licenses to foreign mining companies, and is the world’s second largest producer of silver. Under the same article, foreigners cannot own land within 100 km of a border or 50 km of the sea. Various restrictions also apply to foreign ownership in communications, transportation, and financial services.

The Mexican state uses its power over the economy to reward political allies, punish enemies, and extract benefits for the politicians themselves. Nothing about this should seem unfamiliar to residents of any large American city, but the scope given by Mexican law for self-serving politicians is something even big city mayors could only dream of.

We are going to have to accommodate a certain large number of Mexicans coming to the US. The circumstances of their coming and remaining should be debated, but so should the conditions that drive them. We should not let it happen without getting economic concessions from Mexico.

Update: Fausta has much more about the Mexican government’s cynical policy on immigration.

Overlooked

The latest flap concerning Muslim extremists getting bent out of shape over a South Park episode, and how the network censored images of the prophet, is a case of history repeating itself.

A previous ep from 2006 supposedly depicted Mohammad, until the network excised all images of that particular worthy. They even went so far as to bleep out every utterance of his name. All done in the fear that, unless appeased, intolerant practitioners of the Religion of Peace would indulge in an orgy of bloodshed and fire.

I wrote Comedy Central at the time, taking them to task for their shameless act of cowardice. I received a well spoken, thoughtfully composed reply that explained the concerns of the network.

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Market Timing

In the past I, like many general investors, shied away from the concept of market timing. It was viewed as too difficult, and many investors left the markets when stocks went down and then missed the rally on the way up, essentially “buying high and selling low”. Instead, investors were advised to “stay the course” and keep investing, assuming that, over time, the rising markets would reward continuous faith with high returns.

An article in Sunday’s Chicago Tribune showed in a crystal clear fashion that, in fact, market timing is the ONLY issue for stocks, at least nowadays. This article shows stock performance for the top 50 stocks by market capitalization based in the Chicago region.

EVERY SINGLE STOCK is showing positive performance over the last 12 months! What are the odds of that, assuming that the stock market has its ebbs and flows? Very remote. The ONLY issue in the market over the last few years has been timing; everyone lost in late 2008 when the market cratered, and everyone who bought in at the trough made a lot of money. Likely to see this same article in late 2008 virtually 100% of the top 50 firms would be in negative territory over the prior year.

While I can’t say for certain what is driving stock performance UP (now) or DOWN (2008), I can say that virtually the entire market is extremely correlated with this phenomenon, as indicated by the top 50 stocks all being in positive territory.

Recent articles I have seen point to returns as being closely tied to the P/E level; when you buy into a “cheap” P/E market, you do well; when you buy into an “expensive” P/E market, you do poorly. While no one can say for certain what cheap or expensive really means, that broad theory is one that might be crucial to stock investing post 2000. In modern history (the last 30 years) there hasn’t been a long period where stocks traded in such a narrow range (around the Dow 10,000 level); but we need to decide how to weight the last few decades against the entire history of the stock market.

While I am not a professional stock adviser, the fact that 50 out of 50 of the top Chicago stocks (by market capitalization) are all up has to be a signal of some sort.

Cross posted at LITGM and Trust Funds for Kids