WASHINGTON, Oct. 22 (UPI) -- Pop quiz time, bottomliners:
Can you name the last presidential election in which the winner received a majority of the popular vote?
The answer, of course, is George Bush -- but in 1988. It's been 16 years since a winner got a popular vote majority, and 20 since an incumbent was re-elected with a mandate. If present trends hold, we may have to wait another four.
And this, in combination with softness in the U.S. economy, and high oil and commodity prices, is why U.S. markets remain a good short, at least until November 3 and perhaps beyond.
"Bottom Line" recommended hedging or shorting U.S. equities twice in recent months, in both cases with the Dow north of 10,2000 and the Nasdaq hovering around its present range. In those cases, the reasoning behind this position was the possibility of a victory by John Kerry -- the possibility of which was not fully discounted by markets, especially during the Senator's swiftboat malaise of August.
Now, the logic has changed but the line remains the same.
A matter of measurements
Investor perceptions of Kerry have mollified, especially after his relatively -- emphasize relatively -- moderate tones on policy in the presidential debates. But the problem for U.S. markets no longer rests on the relative possibilities of a win by either Bush or Kerry. Indeed, a decisive victory by either would be bullish for U.S. and world stocks.
Rather, the problem for markets over the next 10 or so trading days is the possibility that either Bush or Kerry will win -- but by a razor-thin margin reminiscent of the election of 2000.
Whoever wins such an election, there will be a crisis of the American regime lasting days, perhaps weeks. (Though in the event Bush wins narrowly, which appears to be the most likely denouement, the country's political agony will be worse.)
A bitterly divided populace and elite will send lawyers, guns, and money -- and then some. Debates over absentee ballots, no-trail voter machines, and provisional ballots will erupt, perhaps, not just in Florida, but in several states. Uncertainty, uncertainty, uncertainty -- and a brand of it that goes not only to the legitimacy of either winner, but to the core of our democracy itself.
In one phrase, one more normally associated with emerging market countries than the United States, a "crise de regime." If this analysis is correct, it's not the who, but the margin, that matters.
Anyone who doubts the potential impact of trial lawyers on equities need only take a quick glance at the fate of insurance and healthcare stocks over the last few days. (This despite the fact that Elliot Spitzer's assault on the insurancocracy sector is not backed by solid evidence, but probably overdue.)
Similarly, in recent years, markets in Taiwan, Korea, and the U.S. itself (in 2000), have demonstrated ample cause for concern when the credibility of democracy itself comes into question.
Furthermore, it's possible that some signal event, here or overseas, will give President Bush or John Kerry a final push. Yet the very fact of this would heighten the recriminations -- possibly even if the winner manages to get a decent margin.
Few doubted that the election in Taiwan was determined by mechanical difficulties or fraud. But the assassination attempt against winner Chen Shui-bian, which opponents suspected was arranged by the government to generate sympathy, cast a pall not only over Chen's victory, but the country's social cohesion itself.
Mathematics suggests a danger too. It's true that incumbent re-elections tend to break decisively, as "bottom line" has observed all year. Yet a solid national victory might still leave the result hinging on microchip-sized results in a few key states: Ohio, Wisconsin, Florida, Pennsylvania, New Mexico.
What are the odds that Mr. Bush or Mr. Kerry not only surges to a clear popular majority nationally, but in all five or six of the on-the-margin states?
The bottom line
Describing the Pacific Ocean, but perhaps with an ear towards the global ideopolitical power curve, Robert Frost wrote:
It looked as if a night of dark intent was coming --
And not only a night, an age...
Someone had better be prepared for rage.
As an American and a citizen of the world, my own hope is that we avoid the regime crisis that appears to be taking shape. As investors, ours is not to question why, but to get out of the way.
If the tidal wave dissipates, you'll take a loss Nov. 3, and be well-positioned to go long as the world political economy sighs relief. If not, you'll profit substantially. Go short now.
Gregory Fossedal manages international investment research for Emerging Markets Group. His clients may (and usually do) hold long and short positions in many of the investment securities and opportunities mentioned in his reports. "The bottom line" is compiled from sources we believe to be reliable, but no representation is made that they are necessarily accurate or complete. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of UPI or EMG. Furthermore, they are subject to change without notice.
