That was quick

Yesterday both Democrats and Republicans alike were savoring the fruits of democracy. I knew this election was going to be different when a close family friend who used to work for the ultra conservative Heritage Foundation confided to me that he not only planned to vote for Barack Obama, he had also given money to the campaign. And so, for the first time ever, the United States will have a black president.

That was all well and good until the stock market opened at 9:30 and suddenly, the post-election afterglow faded quickly. That sure was quick! After enjoying a strong Election Day rally, stocks gave back the previous day’s gains and then some. With the results of the election set in stone, investors were reminded that the economy is still in a precarious state. Data indicated that the service sector contracted and a weekly employment report portended at least a 200,000 job loss when Friday’s employment report is released.

The damage was broad-based: the Dow Jones Industrial Average, which had spiked 305 points on Election Day, fell 486.01 points, or 5.1%, to 9139.27. It was the biggest one-day loss for blue chips since Oct. 22, the twelfth worst point loss in history and the lowest close since Oct. 29. The S&P 500 fell 5.3% to 952.77, led down by the financial sector, which fell 9.2%. The Nasdaq Composite Index snapped a six-day winning streak, finishing down 5.5%, at 1681.64.

Of course we all knew that one day, one election, even a historic one, could not change what we know: the globe continues to be plagued by deleveraging and a widespread economic slowdown driven by lower consumption, investment and trade flows. Investors continue to wrestle with the right prices for stocks amid what could be the most significant recession since the early 1980’s. The depth and length of the recession will determine fair value, but of course it will only be known in retrospect.

For that reason, it is imperative for investors not to get too caught up in either the high-highs or the low-lows over the next few weeks or even months. This is going to take some time to work out and you might drive yourself crazy if you get sucked into the daily movements. If you do sucked in, remember that any extreme feeling is likely to fade when the next day starts…and you just might find yourself thinking, “Gee, that sure was quick…”

Finally Here

It has been an exhausting two-year campaign and today it will finally end. Two months ago, before the financial system nearly collapsed, the race felt different. We were all concerned about taxes and the economy, but there were other issues as well. Today the polls tell us what we already know: it’s the economy stupid!

Last week underscored the main issues that voters are confronting: the US economy finally went negative in terms of GDP and is likely to get worse, the housing market continued to contract and the stock market closed out a horrible month (October was the worst month for the Dow since August, 1998 and the worst month for the S&P 500 since October, 1987 -- yes, the October of the 22% one-day crash).

During the month, there were panic-driven sell-offs amid fears of a total systemic melt-down. The stomach-churning gyrations pushed stock indexes in massive swaths from day to day as the collapse of investment grade financial companies triggered a run on the financial system. In normal times, swings of more than 4% in a day are rare (there were 3 such days throughout the 1950’s, 2 in the 1960’s and none from 2003-2007), but in the month of October alone, there were nine. Until last month, September, 1932 held the record for the most days with big moves at eight.

And so the voting public starts today knowing that stock prices are at higher levels than the October lows, but they are not likely in a better frame of mind when it comes to considering the global economy. Many have already made up their minds as to which candidate is better equipped to navigate these treacherous times, but even to those, there is an understanding that we have never been here before.

The Wall Street Journal noted yesterday that there “are two relatively recent historical precedents for the current election, where a new president will take office amid a serious financial crisis. Whether John McCain or Barack Obama is elected, he will confront ugly economic challenges like Franklin D. Roosevelt did after his 1932 victory and Ronald Reagan did in 1980… the market posted big gains during their overall tenures, though it is unclear whether the main cause was their policies or the steep declines the market suffered before they took office.”

And that’s probably the most confounding issue for any voter: we can’t truly know which candidate will be better, or lucky or unlucky. The best we can do is gather the information and make the most informed decision possible when we enter the voting booth. Of course no matter what, the darned thing will be over and we can get back to obsessing about our investment accounts or future economic data. Yes, it is finally here.

Healthy Wealthy and Wise

Vice Presidential hopeful Sarah Palin had the biggest coming out party that any former-beauty pageant contestant could imagine at the Republican National Convention last week. Despite some who noted that Alaska is close to Canada and Russia, it is quite obvious that Governor Palin was not chosen for her foreign policy expertise -- Senator McCain has that pretty much taken care of, thank you very much.

Ms. Palin was added to the ticket to serve a number of purposes: she is a woman, which may help win over some more conservative Hillary supporters; like McCain, she is considered a maverick, willing to take on even her own party; she appeals to the conservative base on social issues; and she may be able to draw the “Sam’s Club Republicans” into the GOP tent. (To read more about this valuable voting group, see the 9/4/08 article -http://www.strategicpoint.com/spov/article_viewer.jsp?articlePath=/docman/Companies/SPIA00/webcontent/guest/spov/articles/2008/09/spov09042008.xml It is the “Sam’s Club Republicans” that interest me most.

Obama’s campaign is going after the 80% of Americans who earn less than $118,000 per year by advocating a middle-class tax cut. But in my non-scientific analysis (mostly conducted on an East coast beach), I have found that many folks who earn $100K or so are not wowed by Obama. While they do not want to pay more in taxes, that is not their hot button issue. Rather health care, energy policy and general fiscal discipline seemed to dominate their priority list, which is another way to say that people want to be healthy, wealthy and wise. I think that McCain may be able to bring over some Sam’s Club Republicans, Democrats and Independents with simple and direct solutions.

Every American agrees on one point: we need our health care system to operate better. Obama’s approach is to expand government-provided health care and create a form of “managed competition”. Obama supports expanding SCHIP and Medicaid eligibility, but does not support a health insurance mandate for adults (he does support a mandate for children and young adults 25 or under). Obama’s plan would be centered on a “pay-or-play” mandate, where all but the smallest employers would be required to provide health insurance and those who didn’t would be compelled to pay into a national fund covering these uninsured workers.

McCain wants to move towards more individually-provided health insurance, rather than expansion of government participation. His main policy initiative is a $2,500 health insurance refundable tax credit for individuals ($5,000 for families). The goal is to make health insurance more affordable, but make individuals incur the full cost of “better” health insurance at the margin. McCain is also considering risk-rating these vouchers so that individuals with severe health problems will receive a larger voucher. McCain would also allow individuals to buy health insurance from any state.

It appears Obama’s proposals will decrease insurance choice, increase regulation, and increase public funding of healthcare, which means it will be far more expensive than McCain’s, which would shift to individual–rather than employer-provided–health insurance accompanied by a decrease in regulation. That said, if it were to work, it would probably be a more comprehensive and lasting solution. The problem that I see is that most people do not have the patience to dig through the differences and so if McCain can present his plan as a simple “next step”, that may be enough for now.

On energy, McCain favors a gas-tax holiday, while Obama notes that it is a gimmick that most economists agree would not have any long-term effect. Palin’s addition to the ticket could help McCain because she lives in an oil-rich state that has negotiated both with big oil and environmentalists. Palin has advocated drilling in the Arctic National Wildlife Refuge, which has been a popular solution among Americans, although McCain had previously opposed drilling there.

The differences between the two on energy policy are clear: McCain would mandate reductions in greenhouse gasses, then largely rely on the free market to spur conservation, while Obama would tax oil companies and use the money to help low income people. He would also restrict greenhouse gasses, but charge more for companies to pollute and use the money to fund renewable energy research.

Finally, on the wisdom of politicians to spend more wisely, both parties have failed miserably over the past eight years. As always, in the campaign, both sides will argue that we need more discipline, but success will be determined after-the-fact, so don’t even try to guess who will stick to this promise.

“Sam’s Club Republicans”

What a bummer—you get passed over for VP, but then the party co-opts one of your very own phrases! Minnesota Governor Tim Pawlenty, who last week was seen as one of the top-two contenders for Republican VP, coined the term “Sam’s Club Republicans many years ago to describe working-class GOP voters. You can almost hear one of McCain’s people saying, “Ditch the guy, but keep his slogan!”

As we now know, Sarah Paling got the VP nod, not Mr. Pawlenty. Still, they were both considered because it was essential that the Republican VP nominee be able to appeal to working middle class voters, the so-called “Sam’s Club Republicans”. With the US experiencing a downturn and the political campaign heating up, you are going to hear a lot about the economy -- who has benefited and who has not, the reasons behind the current malaise and how we can get back to a more robust time. While each candidate or pundit will trot out numbers, they may not explain the whole story.

Here is what I can tell you: some people have made a lot of money over the past eight years, while others have not. There are a variety of reasons as to why that occurred and in fact, a “perfect storm” of events have conspired to create a new period of prosperity for some and a period of losing ground for many. This trend’s roots were formed as globalization took hold. From the time the Berlin Wall fell, the dynamics of the world’s economy entered a new phase. The mix of political transformation, technology and economic integration transformed the world and created unparalleled prosperity --- growth from 2002-2007 was the fastest since any time since the early 1970s.

Experts promised that everyone would win with worldwide economic progress. And in the end, it may be that on balance, the average citizen of the world will win. But averages are only averages and growth can be asymmetrical. The first beneficiaries of the process were low-wage workers in developing economies who entered the global economy initially through their involvement in export productions. By joining the global labor force, hundreds of millions in developing countries have escaped poverty. But if the masses in developing nations are gaining economic ground, it makes sense that some group is losing ground ---that group is the middle class in developed nations, like the US.

Sure consumers in developed nations enjoyed the fruits of globalization, like the decline in prices for many goods at Sam’s Club and the like. But as the world’s economy matures and emerging nations are less able to export dis-inflation, many Americans are finding that they are not in such great shape. Compounding this problem was the availability of easy credit during the housing boom, which allowed many to maintain a lifestyle that their incomes could not support. In a strange twist, at a time when the globe was growing and corporate profits soared, the middle-class lost ground, while those who already owned capital made great strides. The squeezed US middle feels isolated as never before, threatened by a rapidly changing dynamic and feeling left behind by the owners of capital. Their one option may be to turn to their elected officials for relief. The candidate that taps into this group will likely win the election in November.

Let the Next Games Begin

The Democratic Convention has started and with it, the next major event after the Olympics will fill our media outlets. Although we are still months away from the election, now is as good a time as any to highlight the differences between the candidates in terms of their view of the economy.

Rarely in my voting life have the differences between the two presidential candidates’ visions on the economy been so stark. Let me boil down the difference between the candidates with one sentence: Barack Obama wants to introduce redistributive tax policies into the economy (increase taxes for the rich—defined as income more than $118,000 or more than $250,000, depending on how you slice and dice the plan—and cut taxes for everyone else) and John McCain intends to grow the economy through supply-side tax cuts (cut taxes for everyone, but give the richest taxpayers the biggest benefits.)

Essentially, Obama believes that as the world’s greatest power, it is the government’s responsibility to address the deepening economic disparity among the citizenry. He is tapping into a multi-decade trend, which has accelerated in the past eight years under President Bush. New York Times economics columnist David Leonhardt noted that “for the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.”(NYT Magazine, August 24, 2008). Obama is hoping by helping those who have been “left behind” by the economic expansion, he will garner votes—enough to exceed the wealthier voters who will be hurt by his plan and may vote for McCain instead.

John McCain has embraced Ronald Regan’s supply-side economics which focuses on providing tax cuts to stimulate the nation's prosperity. Indeed, McCain sounded positively Regan-esque when he said “Wealth creates wealth,” during a primary debate in Michigan last year. This is a significant shift from the Senator who considered himself a deficit hawk and was a critic of the massive tax cuts launched in 2001 by the Bush administration. Supply-siders believe that when tax rates are high, as they were when President Reagan entered office in 1980, there is little incentive for wealthy people to put capital to work because so much of it goes to the government. Supply-siders contended that cutting taxes encourages investment and stimulates the economy, which benefits all taxpayers, regardless of wealth.

That’s about as stark a contrast as you can imagine. In the coming weeks and months, I will spend some time on the details of each candidate’s economic platform and under which administration you might find yourself in better financial shape.