The New Welfare Queens

I keep ticking off the industries Obama and his cohorts in Congress want to control, and it makes me wonder where it's safe to invest. An arbitrary government action can cut the value of an investment in half in a matter of minutes, and such actions are happening with increasing frequency. Witness the affect of recent government actions on the stocks of health care, energy, financial, and auto companies.

Will the government crush the profitability of health care companies or put the insurance companies out of business altogether? Likely to the former, and very possibly to the latter. Will they bankrupt utilities that generate most of their power with coal? Quite possibly. In fact, Obama promised to do so during a campaign interview. Which banks and financial services companies will they bail out and which will they kill? Who knows? So how does one invest in this environment?

Congress recently voted for a measure to impose a 90% income tax on AIG executives to recapture their bonuses. Many cheered. I did not. Not because I am a fan of AIG. I am not. But this is a very dangerous and disturbing precedent. If the government can impose a 90% tax on an arbitrary set of individuals, it can and given time, will, be used as a weapon against many other disliked individuals, companies, or industries.

This action was quickly followed by murmurs that the government might impose pay caps on people throughout the financial industry. If that happens, let's guess where the U.S. financial industry ends up. In the toilet? Yes, but that wasn't my actual answer. Hint: it will not be on Wall Street, or any other street in the U.S. That may suit many people just fine given the amount of anger towards the culpable individuals in the financial industry, but the real world effect of this outcome would not be positive for anyone in the U.S. But that is where we may be headed.

Admittedly, parts of the economy are a mess. Venerable financial companies have failed due in large part to their own mismanagement of risk. U.S. auto companies are a disaster. But I would argue that this calls for a rapid bankruptcy process for the insolvent companies, followed quickly by reemploying the good assets in new corporate entities, not for propping them up like so many marionettes on government controlled strings, and turned into today's version of Ronald Reagan's “welfare queens”. Meet the welfare queens of 2009 -- AIG, Fannie Mae, and Freddie Mac.

Over the weekend, Obama fired the CEO of General Motors, Rick Wagoner. Let that sink in for a moment. The President of the United States fired the CEO of a private U.S. based company! Well, you might say, GM is a mess and Rick Wagoner is obviously to blame. Perhaps. But I do find it curious that the GM board has been very supportive of Mr. Wagoner. I would imagine that they must know something about what's going on there, and since when has the government been able to fire private individuals from their place of employment. Answer: since never. This is unprecedented.

In Gerald Seib's excellent commentary in today's WSJ, he talks about the political considerations of the government's actions regarding the auto companies. He notes that the government cannot be seen as becoming too deeply involved in running private companies, while they must also be seen as protecting taxpayer dollars. However, states Mr. Seib, 'in his announcement, Obama said his aides will be “working closely” with GM to devise a business plan, one involving making many more environmentally friendly cars.”' Holy cow! Did you read that? Obama says he doesn't want to be too involved in running a private business. Should we believe this statement? I think not. With barely the chance to exhale, he tells us that his aides will be working with GM to devise a plan to make more environmentally friendly cars.
The message? The government will not run GM on a day-to-day basis, but they want to arrogantly impose the overall business strategy on GM to further their environmental aims. Who cares if GM makes money? We can just give it more billions, if necessary. We figured out a great new source of money to hand out. It's called a printing press!

So who's left that's not under the government's increasingly large thumb? Not the agriculture industry. They've been a welfare queen for years, under both Republican and Democrat administrations. Not the real estate industry. They've been a welfare queen for years, too, with incredibly generous tax breaks for homeowners (that in part helped caused this catastrophe we now find ourselves in). To add whipped cream on top of the pie, the government has now instituted programs to give homeowners money to help with their mortgage payments, and is bankrupting the country to try to drive mortgage rates down low enough to avoid the inevitable further drop in real estate prices.

I find its always good to save the best for last. The biggest industry of all, unionized government workers at all levels of government keeps on growing and growing and growing – America's growth industry in 2009 and beyond. And we keep on paying and paying and paying and borrowing and borrowing and borrowing to keep it all propped up.

So where can we invest without excessive government interference and uncertainty? Several areas come to mind. Technology has been and probably will continue to be relatively untouched. U.S. manufacturing companies who support the global infrastructure build out, such as Caterpiller, Deere, and many others are probably safe from interference. Retailers are probably safe, as well. Of course, this is not necessarily an endorsement to invest in these companies at the current time for other reasons, but one should be able to invest in them on business fundamentals rather than trying to predict unpredictable government fiat.

I think I need a shower...or maybe just a government job.