When I set out to publish a Blog about wealth management, I never intended it to be explicitly political in nature. I soon realized that was both naive and highly unworkable. Strip away all the rhetoric, and politics is fundamentally a contest to determine income redistribution. There most be some political dimension that tinges upon every investment decision.

So today we will talk about market distortions caused by rationing. Whether it is in health care, agribusiness, or rent control the result is always the same. In the absence of an open, public, clearing mechanism to set prices, a subterranean, shadow market will emerge. The pejorative term of art is black market. Economists would call it a free market.

The market under discussion today is the first amendment right to free speech, and the rationing mechanism is known euphemistically as campaign finance reform. Since the next President will make critical decisions on the economy, this topic falls well within the purview of wealth management.

Some background…

Free speech is an ideal enshrined in the bill of rights. But in our pricey media markets it is very expensive to produce, which is why the presidential candidates must raise campaign funds in the multiple hundreds of millions of dollars.

Just one of the market distortions resulting is that candidates for public office will go to great lengths to remain within the letter of the law, while subverting the intent of the law. The goal of this gambit is to have funds transfer to the candidate in such a manner that they do not have the outward appearance of outright gifts, but rather are embedded and muddied in the stream of commerce.

Herewith are some timely scenarios worth pondering…

The Clinton Scenario

Mrs. Clinton is on record for producing some spectacular returns in the Cattle Futures Market some years back. As I have no firsthand knowledge of how this actually materialized, my musings are simply intellectual exercises. Something along the line of….”If I really did it…”

Here are the options I came up with.

1. She is a demonstrably smart woman. Wellesley and Yale Law School. She could have focused all of her considerable talents on the arcana and intricacies of bovine production and consumption patterns, and handily outwitted nearly all the other market participants.
2. She is clairvoyant. Hey…it worked for Edgar Cayce. Why not?
3. As I said, I haven’t a clue as to how she did it, so instead I came up with a plan for how it theoretically could have been done. Anyone bereft of the skills and gifts of the A/B options, would simply require the assistance of the counter-party to each of the trades in order to post such a winning percentage.

And in order for the counter-party to willingly take the losing side of almost every trade, there would have to be a very strong desire on their part to lose money to fund the investor’s gains. Almost as if they wanted to gift the putative trader with a large sum of money, but with the understanding that such a gift would be either politically unacceptable or blatantly illegal.

The mechanism is simple enough. In the futures market you can go long (bullish) or short (bearish) on future pricing of any commodity. Like flipping a coin, you call heads or tails; and you win or lose on each coin toss.

If you found a willing partner who would let you place your bet on the coin toss after each flip, you will win every time. Hindsight is 100% accurate. Not very sporting, but highly profitable. Applied to the futures markets, if a series of trades went down in either direction, and the names of each party were somehow placed on the winning and losing tickets after the trade, the result would be the same.

But then, I wasn’t there to see this drama play out. So who knows? Like writing a mystery, it’s fun sometimes to just plot out a fictional narrative.

The Obama Scenario

Mr. Obama is much in the news these days, and his Chicago home purchase is getting a great deal of scrutiny. The facts are not much in dispute. Simultaneous with the Obama family’s purchase of their home, a certain Chicago real estate developer developed the overwhelming urge to purchase the vacant lot immediately adjacent.

Makes sense. You’ve heard it many times. Land is a good investment….after all, they’re not making any more of it! And you have to wonder….if the total purchase price, the house and the neighboring lot deals closing together, produces a price acceptable to the seller where is the harm?

It comes down to this. If the house sold for far less than fair market value, and if the vacant lot sold for far in excess of its fair market value, one could make the point that the amount overpaid for the land is a corresponding and balancing hidden gift to the party that underpaid for the house.

In both these examples, You’d probably have to agree that even if the rules were, uh… bent, it still falls comfortably within the definition of a victimless crime.

Well, that is, unless you count the shortfall to the IRS, who would likely be entitled to a gift tax on the hidden transfer. Anytime someone desperately wants to give money away, and someone else willingly agrees to accept it, no paper law or rule or regulation will likely prevent it.

Which brings us back to rationing. The unintended consequence of campaign finance reform was to drive underground human interactions and behaviors that will forever be with us. The rich and powerful will always find a way to fund, sponsor and support those they find sympathetic and useful to their ambitions.

And McCain?

In the ecumenical spirit of bipartisanship, I should point out the incipient scandal that will no doubt be unleashed on John McCain by his eventual opponent in the general elections.

I refer, of course, to the five years that McCain spent at the Hanoi Hilton….without paying as much as a dime…. for his extended stay.

Where’s the outrage?

Posted: 03|10|08 at 6:19 am. Filed under: politics.
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