Marc Faber: Obama’s not going to be good for the market

I was reading Barron’s 2008 Midyear 2008 Roundtable just yesterday when a comment by Marc Faber struck me. He said that Obama is “not going to be good for the market.” He expects Barack Obama to win in November and for the investment markets to suffer as a result. Although I support Obama, I have to agree with Faber.

In particular, it is the end of Bush’s capital gains and dividend giveaways that are going to do in the market. Last month, I attended an investment luncheon with Greg Valliere as keynote speaker. The theme was politics and its impact on investments. This is what I wrote:

Valliere said that even John McCain will not be able to withstand an invigorated Democratic congress. Bush’s tax cuts are set to expire in 2010. This means that unless some legislation is proposed, voted for by congress, signed by the new President and enacted, all of those tax cuts will expire. This gives the Democrats in general, and Charlie Rangel in particular, a lot of leverage.

First, the Top Rate on ordinary income is definitely going higher. 35% may go to it’s pre-Bush level of 39.6% McCain may have to accept a compromise at 37-38%.

Second, capital gains is a big story. If Obama wins, they are going from the current 15% to the mid-20s. And then you’ve got Dividends, which were taxed at the rate of ordinary income before the Bush tax cut and are now taxed at 15%. That’s a huge difference. Valliere does not see the rate shooting up to 39.6% but it will go up substantially as well.

Interestingly, a subject where Valliere was clear was on these tax changes being retroactive. Even if the new President gets legislation through congress quickly, we’re talking June before a comprehensive new tax bill is signed, sealed and delivered. But, this bill may well be retroactive to January 1, 2009 if it is Barack Obama as President. Retroactive bills have been done before, so this is not a novel idea. Any way you look at it 15% is history
Election means big government and higher taxes

As I see it, people are going to wake up after the election in November and realize their taxes are going to go back to the pre-Bush rate. Then, they are going to call their broker and sell to lock in gains at 2008’s capital gains rate. That is very bad for stocks. There are a number of other ways the investing climate will be difficult in a post-bubble world — regulation and big government chief among them. I suggest you read the rest of my previous blog entry to see these themes fleshed out in detail.

But, I would like to add as a conclusion this: I am not adverse to suffering through a period in which the investing climate is poor if it means fixing the parts of our capitalist society that are fundamentally broken today. The U.S. has morphed into a “winner-take-all” consumerised, debt and credit driven society controlled by an overpaid crony capitalist private sector. All the while there is no oversight, either from regulators or the vacuous corporate mainstream media. I cannot condemn this state of affairs in more harsh terms.

Certainly I look forward to more investment gains to come in the future. However, our goal over the near term has to be reducing debt, increasing savings and investing in our human and physical infrastructure. Moreover, increased regulatory and media scrutiny could only serve to level a very unbalanced playing field and would quicken this process.

Safety and security must also move center stage. The social safety net in the world’s richest country is looking very frayed indeed. I am deeply sceptical of state-funded health care, having lived and worked in a number of countries where health care is provided mainly by the state. However, I ask you this: what is the point of being a wealthy society if the most basic of needs in health, education and economic security go unmet? A ‘state-assisted’ healthcare system may be the only way forward.

It saddens me to support big government and re-regulation. My preference is for a free market world unfettered by government intrusion. But the pendulum has swung to far the other way. Americans live in fear, not of terrorism, but of missing out on the basic needs of education, healthcare and jobs. Government must correct this state of affairs.

This corrective process will not very good for asset valuations. But, so it must be in a world extremely out of balance.

  1. Anonymous says

    Explain to me how you can support Obama and still support free markets? Heck, explain to me how you can support McCain and be for free markets……

    Ron Paul for president

  2. Edward Harrison says

    Anonymous, I like Ron Paul a lot. However, he is no longer running for President. What’s more is free markets are not the only issue for the presidency. There issues like social safety net, education, the supreme court composition and on and on.

    As much as I would prefer the free markets to socialism, the truth is that market solutions do not always produce the best outcome.

    Why have government at all if one believes the free markets will solve all problem? In my view, it is because free markets can be rigged and manipulated. Moreover, free markets don’t always lead to a ‘fair’ outcome. A free market can easily produce monopoly.

    The role of government is to regulate the operation of those markets. Zero regulation is sub-optimal just as complete government regulation is.

    The ideal balance lies somewhere in between.

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