Must-try-not-to-blog …

… aagh, can’t resist. OK, politicians should be able to purchase shares in peace and the disclosures made are to reveal conflicts of interest in real policy-making. The actions of Peter Dutton buying BHP shares two days after the Government revealed plans for the new tax doesn’t really fall in that category. But the whole ‘revealed belief’ thing is just too hard to resist commenting on.

Interestingly, the issue is revealed beliefs about what. One view is that he doesn’t believe the tax will harm BHP and, indeed, that the market has over-reacted to it. That gives us to potential hypocrisy line — you can’t attack the tax for harming mining companies at the same time as buying stock — but also a lack of belief in markets line — the markets don’t know how to evaluate these things as well as Dutton. Both beliefs are revealed by this story.

The alternative is that Dutton knows that the tax won’t actually be put in place. This requires a ‘being ahead of the market’ belief on the part of Dutton again, but this time he may actually know more than the market on this. Specifically, he may have information that others do not possess that the tax is likely to be blocked and so BHP shares are under-valued. Of course, this might just be a guess on his part in which case he doesn’t think the markets are working properly again.

So which is it? Markets don’t work properly or extra information that the market does not have, or both? Or, maybe these investments are not made with very much thought.

4 thoughts on “Must-try-not-to-blog …”

  1. Why should politicians be allowed to vote on issues in which they have a direct conflict of interest?  This makes no more sense than having a judge preside over the trial of a relative.
    Politicians should be required to place their investments in a blind trust, and should be moderately compensated in some way (for example, be compensated for the premature capital gains tax they have to pay for selling investments earlier than they otherwise would.)

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  2. If he did have “inside” information or even was just guessing, surely the $2000 would have been better spent leveraging the purchase by  using options rather direct purchase of the stock.  It will need a 3% increase in BHP’s stock price just to cover the brokerage costs. Methinks politicians are given far too much credit for their intelligence

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  3. The problem does not only relate to inside information.  The problem is that when a politician has a direct financial stake in a business, there is a high risk that the conflict of interest could alter their vote.
    I can’t believe anyone could seriously debate this point.  Would you allow a planning minister to approve her own development application?  How does this BHP investment differ?

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  4. I think the OP is more in the way of glib and skin-deep political speechifying than it is economic analysis.  I question the logic in alleging insider trading, hypocrisy and stupidity.

    While you lay out 2 alternatives (3 including the last throwaway one of stupidity), these alternatives are not exhaustive of the explanations for the observed action. 

    I understand that Dutton bought 2 days AFTER the public announcement of the tax.  Even if markets had been completely surprised by the tax, they had 2 days to reflect the new (presumably lower) value of BHP.   

    Thus, contrary to your argument that “both beliefs are revealed by this story”, the fact that Dutton purchased tells us nothing about whether or not he  has a “lack of belief in the markets”.

    The purchase occurred 2 days after the event.  The impact of the event would have been priced in (presumably lowering the price), so he was buying at an efficient (presumably lower) price.    The fact of his purchase affords us nothing to update our beliefs as to whether he “believes in the market”.

    Your other hypothesis (the other of the 2 beliefs you said this purchase revealed) was that the purchase revealed Dutton to be a hypocrite, because you argue that the purchase reveals that Dutton doesn’t think that the tax will hurt mining businesses.

    Again, the flaw in  your argument is that Dutton purchased 2 days after the public announcement of the tax.  When he purchased, the price is already lowered by reflect the market’s expectation as to the lowered valuation of the firm as a result of the tax.  In other words, a neccesary condition for your argument is that he should have bought BEFORE the market priced in the negative news.  But since he bought AFTER that event, your argument fails a neccesary condition.

    Finally, you allege that he was insider trading.

    Suppose that instead of having insider information that the tax will not take effect to the degree that the market currently believes it does, he simply has a subjective assessment that the tax will not take effect to the degree that the market currently believes it does.   That belief would be consistent with the self confidence a political leader has.  He happens to be a political leader whose party has sworn to undo the tax, and it is reasonable for him to believe that this is a winning strategy (if not, he should have switched parties; thus the fact that he didn’t reveals that he thinks it is a winning strategy). 

    So, you don’t need to appeal to insider trading, hypocrisy or your last ad hominen explanation — stupidity — to find it optimal for him to buy the stock.

      He buys after the market prices in the impact of the event.  Thus he is not hypocritical. 

    He buys because his subjective assessment of the probability that the tax will be rolled back exceeds that of the marketplace.   In fact the concluding sentence of the news  story to which you linked states precisely this: he says that he bought because he does not think that the tax will stand, and thus the stock is currently undervalued.  (BTW, notice, this means that he actually believe in the market!)

    Thus he values the stock more than does the market.  That condition defines when you buy: your subjective valuation exceeds the price.  This logic does not require any insider information whatsoever. 

    Finally, he is buying at a time when he expects to get supra-normal profits on the stock based on public information and his confidence in his party’s ability to convince the electorate that the tax should be rolled back.  That is not a stupid investment strategy.

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