Bulls make money, bears make money, and PIIGS get slaughtered
The November 9th GOP debate at Oakland University featured several “guest” moderators from sponsor CNBC to present questions to the candidates. Best known as the host of TV show Mad Money, Jim Cramer went first and provided commentary in his usual animated form.
His first question related to the Italian debt crisis. Just weeks after coverage of Greece’s debt default scare hit its peak, Italian debt yields soared given increased likelihood of their own default. The candidates collectively settled on the opinion that Italy must ultimately be responsible for Italy, and if anyone were to bail it out it must be Europe. Mr. Cramer responded that Italy is “too big to fail” and that an Italian debt default would have dire consequences for Europe as well as the US, but the candidates were firm in their opposition to a bailout.
Several European nations besides Italy and Greece face significant financial trouble. Together, the ones in the worst shape are known as PIIGS and comprise Portugal, Ireland, Italy, Greece, and Spain. Obviously, their lack of financial discipline has led them to a scenario in which their ability to borrow has been curtailed due to high interest rates, and attempts at austerity measures has met fierce resistance. A common phrase heard on Jim Cramer’s show is that “bulls make money, bears make money, and hogs (or pigs, or PIIGS), get slaughtered.” That means that an investor can make money by being long or short a stock, but being greedy could mean losing all of it by not cashing out at the appropriate time. It illustrates what happens to countries that do not display consistent financial discipline (and would have made a great line in the debate).
The debate’s second topic concerned the US stock market, which happened to fall significantly that day. Touting his position on the front lines of the stock market, Mr. Cramer asked what could be done to restore confidence in the market, and framed it in the light of people losing value in their 401(k) plans every time the market goes down. The candidates said that ultimately it be left to play out on its own, and government involvement in an attempt to prop it up would only lead to another bubble forming.
Ultimately, the answer is that no politician or government entity can control the stock market. Given its nature, it will always fluctuate, and the only viable way to control it is to do so by facilitating an environment that promotes stability over the long-run. Here are three keys to doing so:
Education: Investors must accept that equity investments will be more volatile than bonds or money-market securities, and a long-term investment horizon is absolutely necessary. They must also know this before entering the market. If a significant decline in value is a crippling problem and cannot be ridden out without undue stress, they simply shouldn’t have been in stocks in the first place, and should have chosen less risky investments.
Energy prices: Much of the volatility in the market originates from the movement of oil prices and attempts to bet on (or hedge against) future volatility. By pursuing a comprehensive energy policy, including both increased domestic oil and gas production as well as investment in alternatives such as nuclear and solar (and perhaps hydrogen), the risk of adverse economic impact brought on by energy prices will be reduced, speculation will subside, and the market will smoothen out overall.
Taxes, debt, and regulation: These are often noted separately, but are all intertwined. Given the US’s own debt problems, spending must eventually come down, or tax revenues must go up (whether via a rate increase, or preferably, by reforming the system to close loopholes and spur economic growth). Given the uncertainty with regard to tax rates, spending levels, and the regulatory burden, businesses will not hire until their level of confidence rises. Once serious solutions to these issues are presented, the broader market will react positively.