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Weighing The State Of The Union

 February 14, 2013 12:33 AM


As partygoers the world over enjoyed Mardi Gras revelry Tuesday evening, Washington's finest gathered for their own annual festivities: The State of the Union address.

Before we assess President Obama's speech, a public service announcement: Our political analysis, as always, is non-ideological and non-partisan. We disdain (and occasionally like) both parties equally—both have proven equally capable of enacting anti-business policies, and both have passed a handful of market-friendly measures over time. And in general, regardless of the president's party, we find State of the Union (SOTU) addresses to be long on show (and funny reaction shots) and short on substance, with few sensible or actionable proposals.

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By that token, this year's address went largely as we'd expect: President Obama made several sweeping-yet-vague references to supporting growth, creating jobs, boosting investment and going green—perfectly noble, seemingly good aims. But SOTU proposals rarely become reality. In fact, many never reach Congress, and those that do are often killed or watered down during debate. That likely doesn't change with this split Congress—extreme legislation remains highly unlikely.

Before you fret missed opportunities though, consider some key points. Previous green energy efforts haven't exactly worked—flagship solar investments were largely unprofitable (err, Solyndra) and, it turns out, may have churned out some hazardous waste. Moreover, overwhelming evidence shows government investments in industry just aren't spent as efficiently as private investment. When governments pick winners and losers, they're often out of step with what market forces would dictate, channeling money to areas where economic need isn't necessarily great.

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Case in point: Energy Department auditors just discovered a lithium ion battery manufacturer that received $150 million in federal funds in 2010—part of (often politically popular) efforts to stamp "Made in the USA" on all electric car components—hasn't produced even one battery and largely squandered the funds on idle employees. By contrast, private investors (who tend to have more skin in the game) likely would have weighed the cost/benefit of capital invested more jealously. What's more, private funds lost on a company that goes bust hurt only those investors—who likely know the risks. More often than not, profit motive drives private investment to (overall and on average) more competitive, economically viable industries, where their investments eventually foster more sustainable industry and job growth.

In a welcome departure, this year's SOTU did yield at least one productive economic policy initiative: President Obama pledged not only to complete Trans-Pacific Partnership talks, but to negotiate a free trade agreement (FTA) with the EU. And with broad support from EU leaders and both parties in Congress, the US-EU Transatlantic Trade and Investment Partnership (TTIP) has a good shot at becoming reality.

The benefits of free trade between the US and EU are obvious. Bilateral trade totaled $646 billion last year—more than US trade with Mexico, Canada or China—and each market presents huge export opportunities for the other. Transatlantic trade is already largely cheap or even tariff free, but market access—especially in agriculture, air travel and financial and other services—is often limited. Significant red tape on both sides makes trade difficult and costly for smaller firms. If this red tape went away, US businesses would benefit tremendously from full access to the EU's vast retail, industrial, agricultural and service markets, and consumers on both sides would enjoy cheaper imports and greater choice. It would also be easier for EU firms to expand here, providing foreign investment and even more job opportunities. For example, the US-Korea free trade agreement paved the way for a Korean conglomerate to build California's tallest skyscraper, where they plan to establish US headquarters and operate a hotel—bringing jobs, investment and tax revenue with them.

As ever though, negotiations will be sticky. EU agriculture is largely closed and heavily regulated, and some nations (ahem, France) aren't keen for change. Completing TTIP will likely require the EU to drop restrictions on genetically modified food and the US to be more open to European raw milk products. Agreeing on common standards in crop production, animal husbandry and food safety will take time. Ditto for agreements to broaden access to financial services and air travel markets. Both sides must also find at least some common ground on patent laws, financial regulation, accounting standards and pharmaceutical testing. These negotiations likely encounter significant popular and political resistance.

But resistance to free trade is nothing new. NAFTA, the US-Korea FTA, EU-Korea FTA and many more weathered years of debate and protests before taking effect. As long as officials remain committed to the deal and keep making steady progress, its chances look good.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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