A Romney Win Ends the Capital Strike

by Lawrence Meyers | June 5, 2012 11:31 am

investorpoliticsletters2 A Romney Win Ends the Capital Strike[1]Here’s the ugly truth the left-wing doesn’t want you to know about: There has been an ongoing capital strike in this country, and that’s one of the reasons why unemployment remains high and why two million people have given up looking for work. Of course, there’s a reason why there’s a capital strike at all. For that, you can thank the anti-business, anti-capitalist President Barack Obama.

Now, the capital strike is not the result of the wealthy deliberately keeping its boot pressed on the necks of the Left because of ideology. This isn’t Ayn Rand’s entrepreneur-hero John Galt saying that, “We are on strike, we, the men of the mind. We are on strike against self-immolation. We are on strike against the creed of unearned rewards and unrewarded duties. We are on strike against the dogma that the pursuit of one’s happiness is evil. We are on strike against the doctrine that life is guilt.”

This capital strike is because President Obama has instituted so many onerous regulations that private equity, and even public companies, do not want to invest their risk capital into industries that might be targeted. As a broker of some of the $2 trillion — that’s trillion –- of private equity sitting on the sidelines, I can report from personal experience that this is the reason. Here’s a synopsis of a situation I had with a financier of small businesses named Joe:

Joe has a credit line with a Gigantic American Bank. The Federal Reserve has slapped the Bank, and all other banks big and small, with new regulations regarding how they loan their money and who they loan it to, and issued a mountain of compliance rules. The Bank cannot rely on their internal compliance auditors any longer, either. They must use independent auditors.

The Bank, to remain in compliance, must shove all these same regulations and compliance rules onto whomever they loan money to, including Joe, who also must engage an independent compliance auditor. Joe must shove all these same regulations and compliance rules onto whomever he loans money to, including these entrepreneurs, who also must engage an independent compliance auditor.

The cost of all these regulations and compliance audits, at the entrepreneur level alone, is $30,000. It costs a heck of a lot more as you move up the chain. The entrepreneurs cannot afford this. As a result, the entrepreneurs’ dreams of starting their own businesses die on the vine. They now must go back into the depressed job market to (not) find a job. Sixty other jobs that would have been created by these entrepreneurs never get created. The money these employees would have spent never enters the economy.

The commission I would’ve earned by brokering the deal is never earned, so that money never gets spent into the economy. Joe never earns the interest he would have earned on the deal, so that money never gets spent into the economy, or invested in any other businesses. The Bank never earns the interest it would’ve earned from the financier, so it has less money to grow, return to shareholders, or to hire other people to work at the Bank. The independent auditors don’t even get hired because no deal exists to audit.

A friend in Florida reports to me that he has moved to Costa Rica because:

“When I closed my home theatre installation business, I was not an engineer; I was a paper-filler-outer. I have ZERO incentive to start my business in the USA between the taxes and the regulations. The last straw was this summer; there are now over 6,000 lamps I can no longer use in jobs. If I do, there is a fine of $5,000 PER LAMP all for some hoax called Global Warming. By the way, the new ‘better’ lamps are from 4x to 10x costlier, and the ‘environment-killing’ lamps are being used in every other non-EU country.”

Imagine these stories extrapolated to every type of industry in the country. Now ask yourself why there’s a capital strike. Ask yourself why public companies have record amounts of cash on their balance sheets (as of Q1, 2012):

And ask what happens if Mitt Romney –- of Bain Capital, a businessman –- wins in November?

The capital strike ends. It ends even quicker if Mr. Romney has the foresight to gut the most onerous of job-and-business-killing regulations out of the gate. I’m not saying American business should be completely deregulated. That’s ridiculous. I’m saying there are tons of onerous regulations that are unnecessary.

So imagine what happens if that $2 trillion of capital goes into investments in middle-market companies. If it gets invested in small businesses via brokers like me? If the cash on all those balance sheets mentioned above, and more, gets deployed?

I’ll tell you what happens: America starts working again. Unless you are a Kool-Aid-drinking Obama supporter, in which case you are content with your fellow Americans on the unemployment lines. It’s amazing that no matter how often I put these numbers out in public, there will always be people who don’t believe it.

What stocks do you buy if Mr. Romney wins? First up, buy Business Development Companies[10]. They invest in fast-growing middle market companies. Some of these include Prospect Capital (NASDAQ:PSEC[11]), Triangle Capital (NYSE:TCAP[12]) or the diversified UBS ETRACS Wells Fargo Business Development Company ETN (NYSE:BDCS[13]).

I would also go with manufacturing stocks, such as Caterpillar (NYSE:CAT[14]) and United Technologies (NYSE:UTX[15]). Once people start working again, leisure travel will see yet another bump on top of its already strong recovery, so I suggest a hotel REIT like Ashford Hospitality Trust (NYSE:AHT[16]). People will start spending money again, so I’d even suggest a credit card issuer like Visa (NYSE:V[17]). And of course, you could just go long with a diversified broad market ETF like the SPDR S&P 500 ETF (NYSE:SPY[18]).

Lawrence Meyers does not presently hold shares of any company mentioned.

The opinions contained in this column are solely those of the writer.

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Endnotes:
  1. [Image]: mailto:letters@investorplace.com
  2. AAPL: http://markets.financialcontent.com/investplace/quote?Symbol=AAPL
  3. MSFT: http://markets.financialcontent.com/investplace./quote?Symbol=537%3A951692
  4. GOOG: http://markets.financialcontent.com/investplace./quote?Symbol=GOOG
  5. AMZN: http://markets.financialcontent.com/investplace./quote?Symbol=AMZN
  6. BRK.A: http://markets.financialcontent.com/investplace./quote?Symbol=321%3A912499
  7. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  8. DELL: http://markets.financialcontent.com/investplace./quote?Symbol=DELL
  9. GE: http://markets.financialcontent.com/investplace./quote?Symbol=GE
  10. Business Development Companies: http://investorplace.com/2012/05/bdcs-mega-dividends/
  11. PSEC: http://markets.financialcontent.com/investplace./quote?Symbol=PSEC
  12. TCAP: http://markets.financialcontent.com/investplace./quote?Symbol=TCAP
  13. BDCS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BDCS
  14. CAT: http://markets.financialcontent.com/investplace./quote?Symbol=CAT
  15. UTX: http://markets.financialcontent.com/investplace./quote?Symbol=UTX
  16. AHT: http://markets.financialcontent.com/investplace./quote?Symbol=AHT
  17. V: http://markets.financialcontent.com/investplace/quote/detailedquote?Symbol=321%3A3826452
  18. SPY: http://markets.financialcontent.com/investplace./quote?Symbol=321%3A45088
  19. letters@investorplace.com: mailto:letters@investorplace.com

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