Stock Markets and the Rule of Law
https://thereformedbroker.com/2019/01/11/stock-markets-and-the-rule-of-law-2/?utm_source=dlvr.it&utm_medium=twitter
by Joshua M. Brown
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Matt Levine on this weekends chaos with respect to the latest executive order from the Trump administration:
If the president can, without consulting the courts or Congress, banish U.S. lawful permanent residents, then he can do anything. If there is no rule of law for some people, there is no rule of law for anyone. The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. Thats bad for business.
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.
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