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Take The Politics Out Of Investment
By: Martin Tillier
Economics and politics are seemingly inextricably intertwined. Whether you like it or not, Government plays a huge role in the fortunes of the modern economy and even those of individual companies. Our own political beliefs are a part of who we are, so it takes a conscious effort to detach any decision we make from them, but if you are to be successful as an investor, it is important that you at least try. It is not that you should be without morals or principles, rather it is important to recognize when your view of economic events and policy are colored by partisanship.
The revelation this past weekend that Larry Summers has removed himself from consideration for the post of Chairman of the Federal Reserve has been greeted positively by markets. When both candidates were being discussed the consensus was that Summers would be more “hawkish” than the other prominent candidate, Janet Yellen. It may well be that the market is reacting out of relief. The prospect of the Central Bank ceasing to create billions of dollars each month or speeding up the end of that policy had caused some jitters. I believe, however that relief of a different kind is also contributing to the positive reaction.
Both Summers and Yellen have Democratic Party affiliations, but the market’s perception of each candidate is markedly different. Yellen is perceived by many as more of a technocrat due to her current position as vice chair of the Federal Reserve Board of Governors. Summers, on the other hand, is seen as much more political due to his involvement in both the Clinton and Obama administrations.
Larry Summers’ stated reason for withdrawing is that his confirmation by Congress was unlikely, or at least that the process of that confirmation would be a messy distraction. He is probably right. Of course, there is no guarantee that confirmation hearings for Ms. Yellen will be anything less of a circus, but the perception of her as a bureaucrat rather than a politician makes that less likely. Who was the best candidate is now irrelevant; the market is just relieved that there is more clarity as to the likely successor to Ben Bernanke and that that candidate is not directly connected to the Obama administration. It is one of life’s great ironies that financial markets, which depend on differing opinions for their very existence, dislike disagreement.
It is possible that by the time an appointment is made, one or more alternative candidates to Janet Yellen will have emerged, but for now she is the odds on favorite to be appointed. While the prospect of a new Fed Chair who will not rock the boat, and who will likely continue easy monetary policy, has caused a positive reaction by traders, the increased degree of clarity has also helped.
In this day and age consensus on economic matters seems a remote possibility as everything is seen through a lens of partisanship. The absurdity of judging the policies and performance of a Fed Chair from a partisan perspective is amply demonstrated by the career of the outgoing appointee. When Ben Bernanke was appointed by George W Bush in 2006 he faced enormous criticism from the left of the Democratic Party. His history with Goldman Sachs and his affiliation with the Republican Party made that inevitable. Criticism of Mr. Bernanke now, however, is more likely to come from the right, angry at expansionist policies. They believe that easy monetary policy is debasing the US Dollar, growing the influence of government and playing fast and loose with the prospect of inflation.
This criticism from both sides of the political divide at different times is what convinces me that Ben Bernanke has done a good job during his tenure. From the point of view of monetary or economic policy, being attacked by the far left and the far right probably indicates that you are doing what you consider to be best for the economy, not acting out of a partisan adherence to dogma.
Only history will tell us whether Yellen will turn out to be a good choice should she end up as Chair of the Fed board, but she is almost certain to be greeted by criticism from the right before she has done anything. As the economy continues to improve and current policy is reined in, and certainly if she is re-appointed by any future Republican President, she may face criticism from the left. In the event that comes, I will feel more confident of her ability in the role.
Economic decisions are inherently political. If we are to make good ones concerning our own investments, however, we should wherever possible look at what influences them and err on the side of the apolitical. Political bias is a bad basis on which to invest. Just because a Democrat or Republican is appointed to a position of economic influence is no reason to sell everything and go to cash. Sometimes, decisions made by those of a different political stripe are the right ones and failing to recognize that could cost you dearly.