Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Here’s Why Market Deregulation Will Be Bad For Stocks

Stock-Markets / Market Regulation Jun 14, 2017 - 04:13 AM GMT

By: John_Mauldin

Stock-Markets

BY PATRICK WATSON : Deregulation was one of President Trump’s top campaign promises. Expectations for it helped spark a post-election stock rally that boosted highly regulated sectors like banking and biotech.

I’ve thought all along people expected too much. Presidents don’t get a magic wand on Inauguration Day, and they can’t bring on major change just by talking about it.

Now, formerly bullish investors and business leaders are starting to curb their enthusiasm.


Tax reform is already getting pushed back to 2018 and possibly later. And the Obamacare replacement plan—as well as the tax cuts that are part of it—is going nowhere fast. At least one GOP senator says a deal is unlikely this year.

If those are off the table, can we at least count on regulatory relief?

To some degree, yes... but we may have already seen most of it. If your investment strategy counts on deregulation to boost stock prices, you might want to reconsider.

Trump’s Wordplay

Deregulation was high on the priority list in January. Congress passed legislation reversing some of the Obama administration’s last-minute initiatives. President Trump signed an executive order telling agencies to rescind two regulations for each new one.

Except, that’s not what it said.

The actual order, which you can read right here, says agencies must identify two regulations for repeal for each new one they issue.

Identifying a regulation to repeal is not the same as actually repealing it. Many in the media and on Wall Street missed that part.

The reason Trump’s EO was so meekly worded is because even the president can’t wipe out most regulations by the stroke of a pen. There’s a legal process for both making and repealing them.

Agencies have to gather information, study costs and benefits, allow public comment, etc.

This takes time—and with good reason.

Some regulations may be bad for business, but constantly and arbitrarily changing regulations would be even worse. Stability is one reason the United States is the world’s largest economy.

It’s possible, if not likely, that this EO will ultimately get rid of some regulations. But it won’t happen until somebody sets the process in motion and stays with it to the end.

And that won’t happen until “somebody” is there to do it.

Missing Managers

Presidents appoint the top leadership in most government agencies, with the Senate’s advice and consent.

We hear about the cabinet secretaries and see them on TV, but the real work of running the agencies happens just below. The assistant secretaries, undersecretaries, etc., are critical to getting anything done… like repealing regulations.

Yet the White House seems in no hurry to fill most of those jobs.

As of last week, more than four months into the Trump presidency, 79% (442 of 559) of the key positions requiring Senate confirmation still have no nominee. Click here to see the full list.

It’s unclear what is taking so long. One theory: The White House wants to leave those jobs vacant, thinking it will paralyze the bureaucracy.

But paralysis, in this context, simply keeps the status quo in place. It cedes power to unelected bureaucrats and Obama holdovers.

If you’re a business waiting on some kind of answer from the USDA, you could be waiting a long time. Ditto at other departments.

Those regulations business groups dislike will not rescind themselves. It will happen only when reform-minded people are in place and pushing for it. And that’s nowhere near happening yet.

Winners and Losers of Deregulation

What the deregulation people are betting on might eventually happen, but we don’t know when. Will it even matter?

You bet it will—but maybe not in the way you think.

Government regulations don’t affect every business equally. Compliance costs money that small newcomers often don’t have. This protects established industry leaders from new competition, which is bad for everyone.

Other things being equal, the winners of deregulation should be the smaller players that previously lacked compliance capacity.

Conversely, deregulation’s losers should be the larger companies whose size and lobbying muscle previously insulated them from innovative competitors.

Now, add something else to this equation.

As a general rule, the publicly traded companies whose shares you might own are among the biggest players in their markets. The start-ups that might disrupt them are usually private.

Why, then, do we assume deregulation is good for stocks? It might be the opposite. And why are public company CEOs pushing for it?

The answer is that larger businesses don’t want full deregulation. They want selective deregulation that reduces their compliance costs while still hindering potential competitors.

Unfortunately for them, they may not get anything at all.

How Regulation Influences Growth

Some regulations are necessary. They ought to serve the public interest—which may not be in the interest of whoever is being regulated.

However, some regulations are outdated or counterproductive, so periodic pruning is a good idea, if it’s done wisely.

At the Strategic Investment Conference last month, Jefferies & Co. strategist David Zervos estimated that needless regulation reduces economic growth by 10%. That means our present GDP growth rate of around 2% might rise to 2.2% if we rationalized the regulatory state.

While 2.2% would be an improvement, it still isn’t stellar. Trump administration officials say their agenda of tax reform, spending cuts, and deregulation can raise real GDP growth to the 3% range.

Very few economists think 3% growth is likely or sustainable, even if Trump and the Republicans get everything they want—and I’m very sure they won’t.

Without faster economic growth, it’s hard to justify today’s stock prices, let alone higher ones in the future. At some point, this will be obvious to everyone, and markets will adjust. The only question is when.

Subscribe to Connecting the Dots—and Get a Glimpse of the Future

We live in an era of rapid change… and only those who see and understand the shifting market, economic, and political trends can make wise investment decisions. Macroeconomic forecaster Patrick Watson spots the trends and spells what they mean every week in the free e-letter, Connecting the Dots. Subscribe now for his seasoned insight into the surprising forces driving global markets.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in