Electing Uncertainty

The market doesn't really care whether Bush or Gore gets elected, it just hates uncertainty. Valuation decisions are based on predicting the future revenue streams of companies, so the farther into the future they can predict the more valuable long-term investments become. The less predictable the future seems, the less they're willing to pay for it, and the rest of us can buy in at bargain rates.

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By Rob Landley (TMF Oak)
November 20, 2000

So the election still isn't quite over yet. To quote Jon Stewart of The Daily Show, "It's never going to end." I think he's right, as I'll explain in a minute.

I've enjoyed the election. Fidel Castro offered to send observers to oversee the recount in Florida. Michael Moore (that Roger and Me guy, now hosting The Awful Truth on cable) requested the United Nations send Jimmy Carter into the disputed area -- which is governed by the brother of the heir apparent -- to investigate allegations of balloting irregularities (and warned them of the swampy terrain and the possible problems with multiple languages).

Judging by which candidate we're collectively making more fun of, I'd say Bush was in the lead by a "Don't let him wander through missile control hungry, or he'll press the 'Lunch' button." The best Gore can do is still "How do you tell Al from the Secret Service agents? He's the stiff one."

It's entirely possible Gore just isn't entertaining enough to be president, whereas Bush Jr. is sometimes the second coming of Dan Quayle. (Say what you will about Clinton, but the man was entertaining. Bush's father, meanwhile, got great ratings too with that "Gulf War" show. Before that, we elected an actor. Coincidence?)

The market, on the other hand, doesn't want to be entertained. It likes boring. It LOVES boring. More of the same is worth a premium. Risk goes with reward because it brings down the price at which you can buy into that investment opportunity. In a sane market, nobody pays extra for risk -- not if they can avoid it.

The market likes divided government because it reduces government's ability to exert enough influence to skew their predictions of how the future will turn out. Every valuation tool in existence, from discounted cash flow analysis to the simple price-to-earnings ratio, rests on an attempt to predict future earnings. Changes to that future, good OR bad, limit the future revenue stream we're willing to consider "real" and drive down the prices people are willing to pay for those future revenues. Uncertainty makes the market go down.

If Bush does win this election, which is probably up to the courts to decide at this point but looks the most likely, he'll have won the electoral vote after losing the popular vote to his opponent. The Palm Beach ballot will hang around his neck like an albatross. The market has to love that image, as it represents divided government. Stability, thy name is gridlock. If Gore wins (increasingly unlikely, but not quite ruled out yet), it will be because he failed in challenging the results after his core supporters deserted him for Ralph Nader.

Either way, our president will be light years away from a "mandate," starting with barely enough political capital to buy a cup of coffee. We get a reactive government, strong enough to deal with a crisis but unlikely to push any major new initiatives on its own, probably with a minority party strong enough to filibuster any congressional action to a standstill: Just what the market ordered.

The main distinction the market makes is conservative versus liberal, and it can deal with either one. A good liberal invests in the future, funding education and research, building infrastructure like roads and bridges, giving grants and loans to new businesses, and perhaps pushing pet projects like space exploration or building a stronger military. A bad liberal wastes money without accomplishing anything, raises taxes, and piles up mounds of debt.

Good conservatives save money. They cut spending, pay off debts, lower taxes, and generally try to increase efficiency and focus their efforts to get more bang for the buck with each dollar they spend. Bad conservatives abandon their responsibilities and leave important things undone, reducing the scope of the government's activities to the point of ineffectual apathy.

The difference, in essence, is save versus invest: Conservatives save, liberals invest. In theory, anyway. The confusing part is that by this measure, Reagan and Bush were liberals (building up the national debt with Star Wars defense spending programs), and Clinton was a conservative (deficit hawk, even during the first two years with a Democratic Congress).

Looking at the annual budgets (both the ones each president submitted to Congress and what they were eventually willing to veto or sign into law), as well as the specific programs they championed (both on the tax side and the spending side), the philosophies candidates espouse and the behavior they exhibit while in office aren't on speaking terms.

This drives macroeconomics majors crazy. For the past decade and a half we've had stability in the form of Federal Reserve Chairman Alan Greenspan, and several years of Paul Volker before him. But other federal policy has ranged from impending trillion-dollar deficits to complete government shutdown.

However this election goes, I think the market's going to like the result at this point. Weak, divided government, behaving predictably by basically not doing much for a while. But until the issue actually gets resolved, fund managers just can't sleep at night.

As I said, amusing to watch. :)

- Oak