Some followers have a little trouble reconciling my strong objections to the economic policies of this administration with the success of the stock market in 2013.

In fact I have felt the stock market would do well for the last few years for a few reasons.

2009 was a strong overreaction to a liquidity crisis.  Publicly held assets had been discounted to a fraction of their book values.  Guided by the contrarian axiom that it especially pays to be a contrarian when the market moves to extremes, 2009- March to be exact- was the buying opportunity of a lifetime.

There were other factors which favored equities.

With interest rates at record lows, courtesy of the Fed’s stimulus, bond values had nowhere to go but down.  Gold reached to about $1800.  The contrarian in me said that if endless TV and radio commercials are advising common citizens to buy gold then that starts to look pretty toppy.  As a friend said it occurred to him that those same people who preached the worthlessness of paper currency and the true value of real gold seemed ever ready to exchange their gold for your worthless paper.  And relative to the total value of equities the total value of all the gold is a pittance.

Housing and land values bottomed but the recovery seemed to be centered on the areas that had the greatest collapse. Still, homes and new commercial construction has made for a weak real estate investment alternative.

Europe had its own collapse, partially from its association to our toxic real estate market and largely as a result of decades of failed policies that our current administration seems only too willing and committed to emulating.

While right wing reactionaries could only see doom and gloom in the government policies and over reacted to the financial collapse, the stock market boomed because there were not a lot of alternative places to invest cash.  Just as excessive optimism- irrational exuberance- causes investors to be blind to the risks they are accepting; excessive pessimism causes investors to be blind to opportunities.

Cash was flooding due to Fed policies yet inflation was moderate, an outcome that also defied predictions.  Inflation is a function of money times velocity.  Increased federal spending was offset by state and local declines and small businesses were reluctant to invest in new business startups and capital equipment.  The risk reward was burdened by thousand page laws and multiples of that in regulations.

Individuals reduced debt, cut consumption, and average household income dropped for the first time in many decades.  High unemployment kept a lid on wage increases to the improvement of the bottom lines of many larger companies. Money velocity has remained low- a sign of a stagnant economy.

I see few of the factors above changing substantially in 2014.  While there may be a consolidation of the equity gains I would still expect the stock market to be ahead in 2014 even if not at the pace of last year.

I see a sharp divide between Wall Street and Main Street.  The increased complexity of the economy favors the larger corporations with the administrative infrastructure to deal with regulations that increase and changes continuously.  The money that is available from the fed is heavily slanted to the public companies that have capital options that the Main Street companies do not have. Small businesses raise money from income. Higher income taxes impede their ability to raise capital and expand.

Wall Street can float stock- raising capital that does not have to be repaid and does not have to pay any interest.  Though highly regulated by the SEC, these firms can handle that in light of the vast sums they can raise.  Lines of credit are far more available to the larger firms.

While the economy is recovering it is a very slow recovery due to endless fiscal brakes.  Startups and new small businesses are very few and weak.

Part of this is due to cultural and historical shifts.  Periods of economic innovation comes in spurts and I am uncertain how much that is affected by fiscal policy. But the increased risks and burdens on starting a new business must have some negative impact especially on low tech startups.

There are notable exceptions: the western oil shale energy boom is having substantial positive returns for the wider economy.  Medical service stock have done well by having many new customers and services  driven to them by Obamacare but their fortunes are tied to this disastrous bill and their future may be erratic as the bill continues to unfold its endless surprises. High tech rock stars like Facebook will come and some will go, but these successes in the high tech field are usually a winner takes all victory and this success is not as broadly shared as industrial successes of past generations.

It is hard to argue that the Fed was not successful in moderating the fallout from the financial collapse, and I remain hopeful that they can remove the liquidity in a sufficient manner to avoid steep inflation and a return to recession.  This is a tall order.  The Fed seems to have more tools to solve problems than to avoid and foresee them. Their solution did come at some cost, largely in the returns on savers on fixed income- the retired.  But other costs are yet to be seen.  Will investors tired of tiny fixed income yield throw caution to the wind to get better equity returns, propelling equity returns too high?  Have they created a basis for a return to irrational exuberance?  Are there other consequences of further institutionalizing too big to fail? Both the squelching of innovation and the public assumption of risk will affect financial markets for years to come.

In the best of all possible scenarios, some sanity is restored to DC, Obamacare is repealed and replaced by true market based health care reform and the growth in wealth accrues to new ideas and innovations rather than government leaches that feed on increased government wealth and power. But my skepticism is coloured by the thought that this may require much more than a political shift, it may require a cultural shift that a population of 92 million people who do not work and many more who barely eke out an existence may have a hard time making.  Evan among the more successful it requires a shift in voting for a government that promises to right every social problem by removing the liberties that individuals, families and social groups once used to make their own choices.

In a country that is increasingly used to having the government demand on our behalf what we have become too unwilling to do ourselves, to dictate annoying details of how our toilets flush, what kind of bulbs we can use, what kind of wood our guitars are allowed to use, what size sodas we can buy, etc, it is a leap of faith to think that we can reverse this trend.

If we can then the sky is the limit.

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