Brock Lorber

More About: Economy - Economics USA

US Financial Market Tsunami

As the US government prepares to become the Mother of All Institutional Investors (MOAII), stock picking is going to become very, very simple. Investors and traders alike will now all switch to momentum trades, as in, putting their money where the MOAII is going.

Buy-and-hold”? Forget it. When the MOAII throws its (your) weight at a company you'll buy (again) and that company will grow, grow, grow with the full faith and credit of the US government behind it, until, that is, the anti-trust division decides to step in. Then, your tax dollars will be used to sue your tax dollars and your investment. Sounds fun, eh?

Fundamentals?” Really? Only two fundamentals matter from here on out. The size of the MOAII's stake and political contributions. From here on out you'll get your fundamentals from

Technicals?” Woe be the trader who is slower than the MOAII. Can you even imagine the pain of a short squeeze led by the US Treasury? Betting “Don't Pass” while shooting in a Russian bootleg dice game will be enjoyable, by comparison.

Any investor, trader, or company that doesn't understand the full magnitude of the US government's new-found ability to take positions in favored companies is asleep at the wheel. This is a game-changer that will take forever to be undone.

For example, consider “healthy” financial services firm XYZ. The federal government's newest employee, who runs MOAII, has decided to make XYZ “healthier” by investing your money in XYZ common stock. At that very moment, XYZ's market capitalization ceases to be determined by the market.

While you or I (or a normal institutional investor) may look at XYZ's books as well as the financial services sector and formulate a fair market value for the stock, say some price to earnings ratio, the MOAII has no such considerations. If P/E was a consideration, the MOAII wouldn't have taken an XYZ position in the first place.

The MOAII's only consideration is that the price per share of XYZ never falls and, in fact, increases. If XYZ shares fall, we lose part of our “investment”. If XYZ shares fall, the MOAII looks bad. If XYZ shares fall, XYZ can't issue more shares at the “healthy” price therefore XYZ is “less healthy” than they were before the MOAII took a position. The MOAII will re-mortgage the entire country to prevent the stock price from falling.

Now, consider competing financial services firm ABC. To the extent that the MOAII maintains or increases the share price of XYZ, it also proportionally maintains or increases the average P/E of the financial services sector. To balance the P/E, other institutions must slash the price of ABC and other, non MOAII-favored financial services stocks. Put another way, the peg the MOAII puts in XYZ's stock hurts every other company in the sector if/when the entire market moves lower.

Other considerations:

- What does an XYZ share holder meeting look like?

- If auto makers LMNO and DEF (politically-connected) both need loans for manufacturing expansion, which company gets the credit? What does that do to XYZ's equity stake in LMNO (to the extent that fundamentals still matter)?

- What happens if market participants kill an XYZ-handled IPO out of the blocks?

- And on, and on, and on.

This is a game-changer that, I believe, kills US stock markets for a long time. Even if these quickly-listed considerations were examined and stopped this madness now, the mere fact that this step was contemplated (and the entire bailout culture that has sprung up in the last few months) poisons the value of market information. This is the embodiment of the socialist calculation problem.

All fundamental and technical information transmitted by the market has become conditional on uneconomic politics. It will be a generation or more before these conditional factors can be discounted. Meanwhile, New York will be exsanguinated as capital flows to unimpeded markets.

Dollar expatriots are looking pretty prescient about now.

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