What is the goal of a state? Is it to secure the broadest possible prosperity for the highest number of people? Or rather, is it to ensure greatest extent of personal freedom that a functioning polity can provide? Or is it instead to maximize the prices of stock issues on publicly traded markets?
If your name is Steven Mnuchin, you might be going with the latter. In a CNBC interview Thursday morning, the Treasury secretary was asked if the stock market was a “report card” for the Trump administration one month into the presidency. “Absolutely,” Mnuchin replied. “This is a mark-to-market business and you see what the market thinks.”
Let’s take a step back here and unpack that. “This” in that sentence apparently refers to the U.S. government, a business whose merits can be measured in stock prices. To be clear, we’re talking mark-to-market, not book value, when we discuss what the United States of America is worth. In other words, we go by what the market is willing to pay for this here republic, not what we intrinsically feel it’s worth (a slight departure from Trump’s own private accounting methods).
There are a few immediate conclusions that come to mind from this formulation. First, it’s a nice compliment to Obama, who oversaw the second-longest bull market in history. But beyond that, it raises the question of whether Mnuchin will change his tune if and when the market turns south.
Thankfully we don’t have to wonder about that. Asked whether a bear market would similarly reflect on the administration’s performance, Mnuchin demurred. “I’ve always been focused in the markets on not day trading and where they are day-to-day,” the former hedge funder said. “Whether the market goes up on any given day, I’ve given up figuring out why that is.” If stocks rise, thank Trump. Should they fall, it’s just the vicissitudes of speculative market sentiment.
Mnuchin may not have intended it, but his answer serves as a useful demonstration as to why people criticize mark-to-market accounting. When times are good, mark-to-market valuations of assets provide a sunny picture of a portfolio’s collateralized debt obligations or whatever. When those markets collapse, one can then turn around and argue that their true book value isn’t reflected in the broader market environment. It’s a win-win!
The upshot here is that we don’t have to bother anymore with those phoney-baloney rigged polls. If you want to know how the Trump train is progressing, just type SPX into your Google machine.