Everyone’s been so busy searching for the alleged Bush recession that they’ve missed what the markets are trying to tell us about next year. As the attached chart shows (courtesy of Professor Mark Perry’s Carpe Diem blog), the current bear market corresponds fairly well with the drop in the probability of a McCain victory.
Intrade’s presidential future’s market (where investors buy and sell futures based on their estimate of the probability of a particular candidate’s victory) has been tracking the falling prospects of McCain and the rising expectations of an Obama victory. As of this writing, Obama futures are trading at more than a 30 point premium over McCain futures. This doesn’t, of course, mean that the market thinks Obama will win by 30 points. It means that the markets think that he is about 34% more likely to win than McCain. In other words, it’s not a margin of victory; it’s a margin of the probability of a victory.
I don’t think that the current Dow bear market was caused by last August’s credit crunch. Nor do I believe it’s being caused by a recession that is allegedly starting right now (having failed to appear in the first or second quarter). Stocks are forward looking; when they drop now, it means investors are worried about things that are coming later – 6 to 9 months later. In other words, they’re worried about Obama.
And why shouldn’t they be. He’s promised to erase Bush’s investor tax cuts. That means a hike in the tax rates for dividends and capital gains. This means very large additional levies directly on investors. Of course this affects stock prices. It is ludicrous to suggest that adding a tax directly on an asset class would have no effect on the value assigned to that asset. Add to that harrowing scenario our already high levels of inflation, which the tax code treats as a gain, even though it isn’t one, and we’re getting to some very high tax rates on capital. This is happening just as most of the developed world has been cutting its cost of capital.
The political class is shifting left. We’re likely to get Obama and Nancy and Harry running the most advanced economy in the world next year. The investor class doesn’t like what it sees coming. That’s why it is scaling back. Capital is going on strike, and we won’t come back to the table until we see that we have a chance to a fair deal.