Quote of the Day

As the Dow slides further into bear market territory, the WSJ Political Diary (subscription-only but cheaper than you think) suggests that factors are at work other than the poor state of the housing market and the Fed’s timidity about defending the dollar:

Are global investors anticipating a Barack Obama victory in November and the economic storm that his high-tax and anti-trade policies would bring? . . .

Now some smart analysts have decided to quantify the relationship. They find a definite inverse correlation between Mr. Obama’s probability of winning the election (as measured by the Intrade political futures market) and the ups and downs of the stock market. Intrade provides a trading market where investors can bet on who will win the election – such betting markets have a record of performing better than polls in forecasting election outcomes. University of Michigan Economist Mark Perry was perhaps the first to uncover the relationship between this Obama index and asset values. Radio host and fund manager Jerry Bowyer notes on CNBC.com that investors would have good reason for wanting to flee U.S. markets ahead of an Obama victory. Increases in capital gains and dividend taxes alone will “mean very large additional levies on investors.” Mr. Bowyer adds: “Of course, this affects stock prices. It is ludicrous to suggest that adding taxes directly on an asset class would have no effect on its value.” . . .

The lesson here for investors is to keep an eye on the betting markets as a leading indicator as to the direction of stocks. “If the political winds keep blowing left,” says Dan Clifton of Strategas, an investment advisory firm, “the market is going to tank. In that case, I advise, get out of the market while you still can.”

Also worth noting is that the latest market declines coincide with Senator Obama’s blurring of his image. Maybe, as some posit, that’s a slick political move. Its extraordinary clumsiness hints, however, that the candidate is in fact as ill-prepared for higher office as his sparse record and patent unfamiliarity with public affairs portend. The prospect of a President as bumbling as Jimmy Carter, as uninformed as Warren G. Harding and as personally radical as George McGovern hardly bodes well for a Dow-friendly future.

Update (7/15/08): MSN.Money columnist Jon Markman has the same idea, expounded in considerably greater detail.

Creating a disincentive for the rich to get richer may sound good in an election year, but it doesn’t make for great industrial policy. Especially at a time of broad economic stagnation when home prices are still plunging, consumer spending is weakening, credit is in short supply and a weakened financial system is already repellent to all but the bravest entrepreneurs.

Right or wrong, Wall Street’s message is that a policy of stripping more money from people with proven records of creating wealth to give more to people who are shopping for Asian-made goods at dollar stores will only exacerbate the tenuous current economic climate, not help it.

Comments

[pbh]

"Are global investors anticipating a Barack Obama victory in November and the economic storm that his high-tax and anti-trade policies would bring? . . ."

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