The Death of Market Fundamentalism

commentary from this week’s “Sectors and Styles Strategy Report”*:

The US Congress was never been known for getting things done speedily. And for many years, under Republican rule, neither was it known for aggressive supervisory action. However, a decidedly more activist tone and tempo have emerged from the Democrats in charge. And the ramifications are likely to be quite significant.

The opening battleground centers on the speed and aggressiveness of the congressional Democrats (Senate and House) versus Wall Street, the futures industry, and the energy industry. Activist Democrats are on the move calling before congressional committees a steady stream of experts to testify on oil price speculation. Pressure has been brought to bear on regulatory bodies such as the CFTC. And laws are being submitted to pressure groups such as the energy companies to start drilling on the nearly 4,900 leases already granted of which less than 1,900 are in production (“Use It or Lose It”).

And it isn’t just the volume of action taken, but also the speed and a certain sense of media savvy that seems to be a part of the activist Democrats agenda. With Internet distribution of their message via organizations such as Move On and People for the American Way as well as mainstream media channels such as the “Countdown” program on MSNBC, mobilization of public opinion is moving with greater speed and power than ever before. And in the process the agenda for discussion is being set.

Republicans, in the meantime, reduced to a limited number of talk radio advocates operate in reactionary mode. The consequences of a decade of squandered opportunity.

Investment Strategy Implications

The investment implications of political matters fall into two categories: regulatory and legislative change, and public opinion. Both are being impacted by the activist Democrats. As noted above, the initial battleground centers on the price of oil. If the price of oil declines, the activist Democrats will feel emboldened as their first foray into a new era of power (speed, knowledge, informed spokespersons, and media savvy) will likely emerge. One near certain outcome will be a more aggressive regulatory regime. For free market fundamentalists, this will produce a fate worse than death.

The multi-decade era of market fundamentalism** is on the verge of ending. A more activist government appears almost certain to emerge. Bye bye laissez-faire, hello Mr. Regulator. After many years of detached government management, the pendulum appears to have swung. However, this may not be all that bad, as the detached government management style of the Bush Administration has produced poor administrative execution (e.g. Katrina) and more extreme developments in the markets (e.g. subprime). Of course, such a regulatory shift may be taken to an extreme. But that is not likely to occur for several years as political corruption takes time.

That said, it does seem probable that the death of market fundamentalism has arrived.

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**A belief that markets are best suited to handle the trading and value of assets with as little regulatory intervention as possible.