WASHINGTON: How many multiple points on the S&P 500 are at risk if the populace gets to a place where they no longer believe we are a country of laws — laws that apply to everyone, including the politicians who happen to be in control at a given a moment. I don’t know the answer, but I guarantee you it’s not zero. It’s a number for sure. Matt Levine on this weekend’s chaos with respect to the latest executive order from the Trump administration: When you hear an investor compare US, UK, German and Japanese stock market valuations with the countries that make up the Emerging Markets index, try to keep in mind the fact that the discounts of the latter are nearly always warranted. We can debate about the degree of cheapness in emerging Latin American or Asian stock markets — this is subjective. What is not up for debate is whether or not there ought to be a discount. Of course there needs to be.
And the reason why, very simply, is the presence of a rule of law that applies to everyone — or, at least, the perception of a rule of law. Shares of stocks are contracts; agreements between the owners of a business and those who manage it on behalf of those owners. And these contracted agreements — regarding the payment and allocation of cash flows, safeguarding of intellectual property, continuance of competitive business practices, respect for minority shareholders, etc — are sacrosanct. The same could be said of the governance environment in which the companies operate. Investors need to feel that there is fairness and a set of rules that everyone must adhere to. No one would build a house on quicksand and no one would exchange currency for pieces of paper in an environment where legal protections no longer mattered.
