Is 'Stupid' Replacing 'Silly' Good for Stocks?

September was a good month for stocks, and one undeniable factor in their rise was the growing consensus that the Democrats face an election-day rout in November. This column said at the outset of the Obama administration that the President's actions were authoring the capitulation of American liberalism, and polling data seems to confirm that projection.

Americans are a diverse lot, but as they almost all descend from courageous individuals around the world who chose the United States for its libertarian elevation of personal and economic freedom, Congress and the President's embrace of an ever encroaching government was surely going to end in tears for the ruling party. Assuming a gridlock scenario post-November whereby the congenital desire of politicians to create laws is hamstrung, the outlook could surely improve.

The problem with this assumption, however, is that the Republican Party set to regain control still doesn't seem to understand why its actions led to a Democrat takeover in the first place. So while the Democrats remain the "silly" party for promoting all manner of ideas rooted in redistribution from the productive to the indolent, it's increasingly apparent that a "stupid" Republican Party bereft of ideas will quickly discredit itself once back in power.

On the tax front the GOP is seeking permanence with regard to the 2003 tax cuts on income and capital gains, but rather than be bold about a greater reduction of penalties on work and investment that retard capital formation, they're standing firm on the '03 cuts in concert with tax subsidies that are dreamy for lawmakers and lobbyists, but bad for the economy. Specifically, the presumed new majority will try to legislate tax favors for small businesses rather than broader reductions overall.

Basically the stupid party will reward businesses for remaining small, and in the process complicate the tax code. Oblivious to the truth that Americans generally have no problem with the successful holding onto their earnings, the Republicans will play politics with the tax code through subsidies meant to support a faction of the business community at the expense of others not as well connected.

Regarding spending, the plan there is to reduce federal outlays to levels last seen in 2008. Apparently still unaware that one major area of voter discontent concerned nosebleed levels of spending when the GOP was in power, the stupid party will at best reduce the burden of government to what it was when voters aggressively pushed them out of the majority in 2006. GOP hero Milton Friedman long pointed out that federal spending is a tax like any other, but for a party that believes the notion of reducing the government's size is only a political tool, it seems the U.S. economy won't anytime soon achieve relief from the redistributionists that populate both the silly and stupid parties.

On health care, many voters are no doubt ecstatic at the mere mention of Obamacare repeal, but there again rhetoric doesn't match reality. Indeed, while the allegedly chastened GOP plans to chip away at some aspects of Obama's bill, there's no call to erase the mandate which says insurance companies can't refuse customers with pre-existing health conditions. In short, neither party believes in real insurance; rather both believe health care is a right and that the healthy should foot the bill for the supposedly deserving unhealthy.

Most scary of all is a House vote from last week on China. In that case a majority of witless Republicans joined up with their reliably dim counterparts across the aisle to threaten China with tariffs on its goods absent a revaluation of the yuan.

Naturally there was no mention of the tautological reality that the yuan is only weak insofar as the dollar is. Similarly unmentioned was that a call for a stronger yuan is a call for a weaker dollar, and unsurprisingly the proxy for the greenback's value - gold - spiked to an all-time high amid market acknowledgement that support for a weak currency among the silly and stupid is bipartisan in nature.

And for a stupid party that at least pays lip service to the notion of liberty, not acknowledged was that tariffs are nothing more than a tax on individual work for barriers to foreign goods disallowing Americans to trade with anyone they want, irrespective of country origin. Instead, the GOP is joining up with the reliably silly Democrats to subsidize weak American businesses at the expense of prospering firms that correctly understand that trade is always and everywhere a two-way street. To put it simply, if we're not buying, those we'd like to buy from us can't do so.

Of course if we assume that which is false, that a "weak" yuan somehow makes Chinese exports cheaper (no mention that a weak yuan would drive up production costs for Chinese producers), why should this bother us? Indeed, if the Chinese truly want to give us discounts on their goods, can we honestly say this is a bad thing amid economic hardship? Cheap goods enhance our living standards, all the while freeing up money saved for investment in tomorrow's innovators.

It's been frequently mentioned over the past week that a similar protectionist sentiment in 1929 led to the stock-market crash ahead of the 1930 passage of the economy-sapping Smoot-Hawley tariff. Unaware of economic history, a GOP that claims to understand how economies grow is thought to be set to regain some degree of legislative control in the coming months.  If so, we should curb our enthusiasm.

As evidenced by the lost market decade just passed, the stupid party doesn't have much of a clue either, and the expectation that it will regain power at the very least tells us that we should be careful before exposing our savings to a stock market that frowned on the stupid party's policies with great gusto not long ago. Equity buyers beware.