Election analysis: does the repudiation of free market politics mean the U.S. is a less attractive place to invest?
The election reflected the fears of moderate income people that globalization will or has taken away their job.
In the era before globalization when a recession hit eventually the business cycle would recover, but with loss of old style moderate income jobs there is no solution for moderate income semi-skilled workers. For Republicans to tell people that more free enterprise would create more growth and jobs was not enough for them to win the election because it was perceived as an inadequate solution to unemployment. Yes, more free enterprise with lower taxes would create a boom but it might primarily be a continuance of the benefits from globalization which include more professional new tech style jobs rather than a source of employment for semi-skilled people. The critical problem of this era is that unemployment rates increase geometrically as skill sets decline. The unemployment rate for college graduates is half that of the national average. The unemployment rate for high school dropouts or for people under age 30 is far worse than the national average.
The problem with globalization reducing U.S. employment began in 1998 when real wages started to shrink. The problem was camouflaged by the great tech stock bubble euphoria of 1998-2000 and re-camouflaged by the real estate bubble of 1997-2007. Then when Lehman went bankrupt in September, 2008 and the stock market crashed then the camouflage was washed away by a powerful storm. The suffering job seeker could no longer pretend that there was a magic way to augment his income with stock or real estate speculation. For 14 years U.S. real wages have declined due to globalization. This occurred despite enormous stimulus from the credit market which enabled consumer debts to increase far faster than inflation or economic growth. The decline is further masked by the mixture of high skilled and low skilled workers. Highly skilled workers are needed to facilitate the complexities of globalization; thus their rising wages pull up the average worker’s wage. This means those who are below average are hurting even more than the average person.
This is a fundamental generational problem; it is not something that can be solved in a few years. Thus the majority of voters may feel a need to align themselves with a socialist, anti-free market party, which explains why the Republicans did so badly in the elections despite the fact that voters had reason to be dissatisfied with the Democrats. The implication is that we are in for a repeat of the 20 year Roosevelt-Truman era where the masses of people supported the left wing of the Democratic party and the Republican party was powerless.
No amount of salesmanship or marketing including becoming more diverse, multi-cultural, etc. can fix the Republican party’s problems because of the problem caused by globalization. The Republicans’ only hope is to educate people that they can cope with this by encouraging more free enterprise and growth and by encouraging more job skill training, etc. They need to demonstrate that the socialist policies of the left will only makes thing worse and that therefore workers are better off with a free market style government instead of a socialist government. However some semi-skilled workers may not be able to learn (even with free training) complex skills that will enable them to be a qualified candidate in the work force of the future. I think the economic pressures are so great that some workers can’t become relaxed and objective to weight the facts between the choices of the free market versus socialism so there will be a strong anti-business prejudice that the Republicans can’t overcome.
For hundreds of years American workers could look forward to sharing an ever-expanding economic pie with the bosses. Then in 1929 the Great Depression started. Congress legislated benefits for workers so their share of the national income increased. During the postwar recovery of 1945-1973 the economy grew so that workers were distracted from looking at how big a share of the pie they got. People got distracted from income distribution during the tech and real estate bubble eras of 1997-2007. Now those eras of legitimate growth or bubbles are over and the worker has no distractions and has become aware that his real income has declined for 14 years.
American workers are special, compared to workers of other countries. They are more sympathetic to free enterprise and less of a believer in class warfare-jealousy than people in other countries. The American workers have contributed to a pro-free enterprise political culture that has made America an attractive place for capital to flee to as a safe haven. This in turn lowered the cost of capital and lowered the unemployment rate. Now that virtuous cycle is at risk of reversing course as American workers, after suffering from a 14 year decline in real income and a five year Soft Depression with a 15% real unemployment rate (counting discouraged workers) may become like European voters with anti-free market tendencies.
The implication of the U.S. changing from a workforce of pro-free market workers to sullen, poor work quality European style socialists is that America will be a less friendly place for capital and thus capital will flee and the cost of capital will rise. Couple this with the eventual need for the Federal Reserve to raise interest rates to “normal” levels and the result will be that a higher hypothetical “discount rate” will be assigned by the market to assess the value of investments. This means investments will have a lower value as a result of a higher discount rate. This means a lower stock market, lower real estate values, less economic growth, less employment growth and a tendency towards a Japan-style Soft Depression.
Investors should be careful to avoid taking excessive risk and to consider that capital flees to safe havens and that they may need to do the same. Investors should seek independent financial advice.
The opinion polls have shown the two presidential candidates are relatively close to each other. The polls may miss a significant factor and that is the enthusiasm and discipline of a voter to keep his promise to vote for his candidate. Voter apathy can cause some voters to renege on their desire to show up and vote. Yes, pollsters often ask questions like “how committed are you” to see if the person being polled will live up to his professed goal. However, there is the tendency in human nature to lie to a pollster and say what is socially acceptable rather than admit that one is not really motivated to vote. So the answers to polls may be skewed. The type of voter most likely to mislead a pollster could be a young idealistic former Obama supporter who suffered the brunt of the high unemployment and is reluctant to criticize his former idol and reluctant to say he would be so lazy as to not bother to vote. But on election morning if such a voter wakes up feeling unhappy, unemployed, and discouraged he may decide he can’t make up his mind and will simply refuse to vote even if was nominally a supporter of the incumbent. This would hurt the incumbent rather than the challenger. The challenger is less likely to get blamed for the economy’s problems and is more likely to generate voter enthusiasm to seek a change which increases the odds of voter discipline to show up and vote. A difference of a few percentage points is all it may take to win the election.
Obama’s supporters take it for granted about the Iraq withdrawal and are not enthusiastic about that issue. The lack of that issue as a driving force means Obama will have a less motivated group of followers. Instead he may be seen by some of his young former supporters as simply another politician who cooperated too much with giant Wall Street firms. It’s unlikely a Romney supporter would become apathetic between now and the election, so Romney’s poll numbers have more credibility.
This view of polls reminds me of investment analysis where simply running the numbers doesn’t reveal the big picture because there maybe unquantifiable information that renders just enough of the quantifiable data to make that data irrelevant. Much of corporate profits comes from marketing and poll taking is important to that. Polls may be skewed by only getting the responses from a certain type of person with an easy, low stress job who has too much free time; the people too busy to take a poll are not included in it and thus that dynamic, prosperous type of person is not surveyed. Corporations that are successful try to enhance quantitative data with qualitative data to see if the quantitative data is accurate and relevant. One way this could be done by asking sales reps and post-sale servicing agents for anecdotal evidence to see if their observations correlate with formal customer surveys.
I wrote an article “Elections imply big economic change”.
Investors should seek independent financial advice.
How to allocate 401k if Republicans win
Typically the stock market does better when a Democratic president is elected because they overstimulate the economy. If a Republican is elected they may insist that the stock market get no taxpayer subsidies or Quantitative Easing from the Federal Reserve and this could make the stock market go down.
However if a very free market Republican was elected president he might try to cut corporate tax rates which would be bullish for stocks. He might try to cut personal tax rates which would put more free cash into the hands of investors who could then buy stocks or consumer good thus benefiting the stock market or corporate profits.
It is difficult to know what a Republican president would do because his actions could be filibustered by the Senate. He would have his hands tied by the need to work on paying down the huge federal budget deficit, so cutting taxes might not be feasible. The market could fantasize he will cut taxes only to find out that he can’t due to the Jupiter-sized gravitational tug of the massive deficit. Then investors could become discouraged a few months after the new president was in office and stocks would go down.
The amount of change from a Republican president
Obama was supposed to be a leftist anti-business president but the giant corporations and banks seemed to have gotten along just fine with him, thanks to their lobbyists, etc. So a switch to a Republican president who is constrained by possible Senate filibusters and a huge deficit may not result in much change.
Typically the start of a new four year term is the best time to introduce tax hikes and budget cuts which would make the stock market go down. The “fiscal cliff” coming on December 31, 2012 will be here soon and the market tends to anticipate bad news several months early, which will affect your 401k's stocks. The way to allocate a 401k if the Republicans win might be to assume that at first stocks go up but that after a few months disappointment sets in and stocks go down, retouching the lows of March, 2009 in the Spring of 2013. So allocate your 401k with low risk, high quality investment grade bonds (in a low cost mutual fund) and wait until the stock market has crashed before switching to stocks. Hopefully the coming crash will provoke congress and the president into making some major changes in the Spring of 2013 that will help businesses to grow out of the recession and this will provide a legitimate reason for an honest stock market boom instead of a false bubble.
I wrote an article “Elections imply big economic change”. The catch is that the implied change might never happen due to filibusters, etc. thus disappointing investors who would sell off their stocks.
Investors should seek independent financial advice.
How will the elections affect the stock market?
The investing public has not really become aware of the negative surprise that awaits investors when Obama is re-elected and the elections also produce no change in the control of Congress. When Obama is reelected he will be more confident and assertive and will demand tax laws be written more to his liking, which means higher taxes and less freedom for businesses. When Obama was inaugurated as president in 2009 he was very young and inexperienced. It was simply too much for new president to handle so the best way for him to handle it was to move to the center and seek advice from older, centrist political veterans. Thus his radical leftist background never resulted in the implementation of leftist policies. However, when the elections are over he will refuse to compromise with Republicans and the result will be a dangerous flirtation with budgetary sequestration. The combination of tax increases, a move away from the center by Obama, a less conciliatory tone by Obama in negotiating with Congress about the budget, are all things that could shock consumers and investors into bearish behavior.
A basic economic principle is to avoid raising taxes during a recession; instead taxes should be cut during a recession. Most people can only save a few percent of their income. This is roughly the amount by which taxes will rise in 88 days. The shock to the economy as consumers tighten their budget is that sales will decrease, the GNP will decrease, and employment will decrease. Stocks will go down.
I remember being a lonely housing bear in 2003-2007. It seemed like the bubble would never burst. But in the summer of 2007 investors became aware of the mortgage and real estate bubble and it burst. The same thing will soon occur with stocks. It seems to take forever for the bubble to burst, but it will burst. There are fundamental reasons why stocks are an overpriced bubble, yet they never seem to go down. Eventually the impact of the “Fiscal Cliff” will trigger a recession early in 2013 and a stock market crash. There is only so much consumption that the top 20% of the population can do to make up for the lack of consumption by the rest of the population. With huge tax increases scheduled to hit the top 20% of the income earners the result will be a recession and finally stocks will go down.
I wrote an article “Regime change effect on bonds”.
Investors should seek independent financial advice.
When forecasting election results use qualitative analysis.
Consider the experience of advertising great David Ogilvie who said when he polled people they would lie to him to so he found ways to use trick questions to get the truth. I think modern opinion polls provoke people into saying yes for some liberal issues because people may feel more noble saying to the pollster "Yes I want to give free food to the poor" instead of saying "I want to have a balanced budget". But when it comes time to vote then people may decide that fiscal responsibility is what they really want even if fiscally prudent behavior is seen as puritanically uncool.
Obama's potential supporters include or should have included young college graduates who supported him in 2008. But the recession has created a disproportionate amount of unemployment and underemployment among youth. Paul Ryan said Wednesday night that young people don't want to spend excessive time in their 20's being unemployed and living with their parents. These people in my opinion may either sulk and refuse to vote for anyone or else may decide that they want to punish the incumbent for their employment problems. Yet if asked by pollsters, a young liberal person who supported Obama in 2008 might be tempted to lie and pretend he still likes Obama because it would be uncool to vote for square old unhip Mr. Romney. However when election day comes and the young unemployed voter decides to assert himself in the privacy of a voting booth then something of a qualitative nature may happen that is not being recorded by quantitative pollsters.
The stereotype of an unemployed voter during an election is that they vote against the incumbent, with the exception of the 1936 election during the Great Depression. Today's "Great Recession" or Soft Depression" has a lot of comforts for the unemployed so they are less likely to go for the class warfare theme of the 1930's and support a liberal incumbent and instead may act more like the stereotype of the unemployed voter during an election and vote for change.
Also voters who used to be enthusiastic for Obama in 2008 have become unmotivated because there is no rallying cause like demanding an immediate withdrawal from Iraq, etc. And the main action of Obama's administration was the ACA health care bill but that mainly benefitted older people who needed health insurance but couldn't afford it or couldn't get an insurance contract because of pre-existing conditions. Young people's biggest needs are for more employment opportunities. At their age they can qualify to get and pay for a lost cost health care policy so the ACA law didn't help them. Thus the single most important thing the administration should have done to satisfy its followers was to have improved the job market rather than to get the ACA law passed. So I think young people who are moderate liberals or middle of the road may decide that Obama made them feel unsatisfied and they will use the vote as protest against the incumbent.
Another well known problem with opinion polls is that conservative voters tend to be more disciplined and show up at the polling booth on election day even if it is raining or they are having a busy day, while some liberal voters seem a bit less committed to making a firm goal to show up no matter what.
So the analogy between electoral opinion polls and predicting the stock market is that one should assume that unusual, counter-intuitive behavior can occur that is difficult to observe using naive quantitative methods. An excellent example of this was during the top of the 2006 housing bubble Fed chairman Bernanke was asked about the bubble and he replied that high house prices are a sign of a strong economy. He assumed that all buyers are honest, meek, logical, fair people who would never dream of risking their financial safety by buying a home that was unaffordable. He was totally wrong as house prices were high because of an evil mortgage bubble that allowed buyers to abuse their freedom and engage in a reckless bidding war and not because the borrowers had increased their earnings to qualify for a larger mortgage.
A lot of money is at stake in the election - study the polls carefully.
I expect unemployment to increase to 9% by election day. Since young people suffer from unemployment more than other age groups I expect a lot of angry young voters will surprise pollsters.
Investors should think creatively, avoid stereotyping, be open to new perspectives, and never assume the same old pattern will repeat. Assume Black Swans can come out of nowhere and use qualitative analysis to view the hidden patterns that others can’t see.
I wrote an article "Black swans and risk aware investing" and Four investment tools you must know"
Investors should seek independent financial advice.
Senator Lugar’s Loss Hints at Higher Taxes and Deflation
In conservative Indiana the incumbent Senator Richard Lugar was defeated in the primary today by a Tea Party Republican, state Treasurer Richard Mourdock. This gives the Democrats a chance to get this Senate seat which would increase the chances of no repeal of the tax increase scheduled in 2013. A tax increase during a time of high unemployment is a classic way to create deflationary economy. In less than eight months new Federal taxes will create 5% drag on the economy during a time when the population adjusted “real” rate of job creation is zero and the GDP growth rate on a warm weather adjusted basis is probably 1%, which is below the 2% “stall” speed. This means the economy will stall out into a recession. Since stock markets often anticipate events ahead of time then the crash may come months before January.
Of course if the Tea Party candidate wins the November election then there will be more budget deadlocks in Congress with the threat of Treasury default, which can hurt financial markets. And if the Tea Party actually did take full control of Congress they would have a massive austerity program that would not help to create jobs, although in the long run cutting government expenses, assuming taxes were also cut in tandem, could help the economy.
I wrote an article “Romney victory won’t fix stock market.”
Investors should seek independent financial advice.