Politics and equities

This is a response to this post

I am generally a person with left wing political views. I think it is much more likely for the government to cooperate with the OECD first to crackdown on tax evaders who have money offshore.

Despite my political views, I do not have much optimism in Obama I do expect the markets to go down further and the Bernanke/Obama "reflation" agenda to "fail" (as in not spark new consumer lending or cause stagflation.) I still believe in deflation though, and as the discount rate for long term illiquid assets (stocks are relatively illiquid) rises resulting in investors asking for an increased risk premium for holding onto equities and not pricing in economic growth which would drive down the price of equities, people will liquidate and switch to more liquid assets. They will give up on trying timing the market and profit on a recovery (it probably would not happen anyway) because their discount rates have gone up so they want to protect themselves from nominal short-term losses in assets such as equities. The result is that most people who do not have a long time horizon would not hold on to equities.

So what does this mean? Generally people who hold stocks have more conservative political views and tend to vote Republican. If one lets the process go on untouched, it would result in a shift in a preference for more left-wing policies and a preference for labor over capital since less voting people own stock. But if the government tries to intervene in this natural process (a referrence to the proposal of confiscating IRAs and 401(k)s), they would lose some potential supporters as these people would feel that the government harmed them by confiscating their assets. Thus, it is simply better for the government (if it seeks to generate people with more left-wing views) to let the Darwinian flush in the equity markets to go on unabated and let them relinquish their equities naturally although that would be a painful process for many.

Most people are incompetent at managing their own money and they do realize that now. This incompetence can be explained by the information asymmetries that professional traders have over retail investors, and as explained above, they have higher discount rates during times of crisis which leads them to make bad long-term decisions. I think there will be little resistance to more government involvement in a democratic population now. The people voted for Bush in the last election because the asset bubble in housing and stocks made plenty of people happy despite the economic fundamentals which also explain the tolerance for policies that favor capital over labor.