More on the Business of Politics

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This commentary originally appeared at 9:05 a.m. EDT on Nov. 2 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

After today's opening missive, there will only be two more "More on the Business of Politics" columns before Tuesday's election, but I wanted to qualify this column -- for the last time -- and explain my reliance on FiveThirtyEight -- Nate Silver's Political Caucus as a most important source of election projections.

We are approaching the height of the election season and the stakes are high. The campaigns grow more heated, hyperbolic and more repulsive. Not surprisingly, many feel a need to express our own political views. Political views are like noses, everyone has one.

I have very strongly held political beliefs, but I feel as strongly that my platform in my diary on Real Money Pro is an inappropriate forum for me to deliver and voice my views. As a result, I have long avoided discussing my personal politics on this site -- in part because it is no one's business, and also, you shouldn't really care what my view is.

Whenever I mention the election and the markets or mention specific polls (especially Nate Silver's The New York Times poll), the comments section and my email box are filled with personal political opinions from subscribers and from friends. Typically, people automatically infer that since Silver's platform is The New York Times that the poll (and my attention to it) indicates a personal and liberal bias. This is not an accurate representation of the reason why I have chosen and present Silver's blog. Let me remind you that the left-leaning New York Times has conservative contributors to the editorial page and elsewhere, while the right-leaning Wall Street Journal possesses liberal contributors.

And just as you shouldn't care about my politics, I frankly couldn't care less what your view is either, but I respect everyone's right to have a view. I just don't think projecting it and venting in a public forum accomplishes much of anything.

And while I am ranting, I totally don't understand why wealthy citizens, on both sides of the pew, think that because of their net worth and privilege they should communicate their personal political views in the media (print and elsewhere). Why is their voice, whether Democratic or Republican, implicitly a more important deliverer of message than the fireman, teacher or librarian (who have an equal vote but cannot either afford an advertisement or don't have the celebrity that would cause them to be invited on CNBC, Bloomberg or Fox)? Why do the wealthy seem to have the sense (because they have loads of money) that they are more entitled to state their views in a more forceful and visible manner than those who cannot afford to present their political views? The answer seems to lie in our political campaign funding, which is the cause of more problems than benefits.

In conclusion, it is unclear why anyone projects his or her personal political views at all in a public forum such as Real Money Pro or TheStreet. I have spent 62 years formulating my political views and so have subscribers spent their lives in developing their own views. It is unlikely that my view will be changed, nor will yours, so why bother to vent?

What Really Matters

What I do care about (and what you should care about) is how the election will impact the capital markets, and in "The Business of Politics" that is exactly what I tried to spell out. Frankly, I tried to document/analyze it in an objective and detailed manner and many high-profile hedge-hogger friends from both sides of the pew have remarked to me that it was one of my best columns this year.

To those critics who suggest I am biased in what pollster to emphasize, I am not, as I am mining in the investment process and not in the political process. If you have a better, more exhaustive and historically successful analysis (not sound bites of conservatism or liberalism), let's compare. It is not that my selection is better, it is that I have spent a lot of time of thinking about the election's impact on stocks and bonds and in researching the pollsters.

Most recently, I have highlighted Nate Silver's FiveThirtyEight blog as my go-to blog in determining the ultimate election outcome. As I mentioned, many have written to me that Silver, ostensibly because he is a writer for The New York Times, is a flaming liberal and his polls are biased.

If one spent the time – unfortunately, I suspect few have done this, especially those that object the loudest -- in researching Silver's background and his forecasting methodology, you would likely come to the same conclusion I have come to: Silver's mathematical background (which started with a unique and widely successful baseball analysis) yields a unique, productive and objective forecast. Is his projection guaranteed? Of course not. But it is the best I can find.

Please read Silver's blog with emphasis on his scenario analysis and state-by-state projections on the right hand side of the blog. Read all the way down on the right side of his blog and tell me if there is any more comprehensive measurement system? (And please note, I include Intrade and Real Clear Politics polls in every column in addition to Silver's FiveThirtyEight.)

If you can find a more thorough and more objective analysis than Silver's, show it to me -- I am open to it. But I am not interested in biased polls. Give me something that is rigorous, but objective, and independent and that lies somewhere in between of MSNBC and Fox, something between The Wall Street Journal and The New York Times and something between Peggy Noonan and Maureen Dowd in its bias.

Silver's election projections might prove wrong. We only have to wait until Tuesday night. So, for now, please hold off your objections, and if Silver does prove incorrect, I will be the first to note it on Wednesday morning.

Six Possible Election Outcomes and Probabilities

  1. A relatively comfortable Electoral College win by Obama in which the Democrats keep control of the Senate -- 40% probability (baseline expectation): The fiscal drag is about 1%-1.5%, and 2013 real GDP growth is 1%-2%. Republicans briefly oppose Democratic policy but quickly acquiesce to Democrat policy initiatives. Stocks are range-bound and have limited downside (S&P 500 1390-1400) and limited upside (S&P 500 1450-1470) over the balance of the year.
  2. A narrow Obama presidential win and the Democrats retain control of the Senate -- 15% probability: The fiscal drag is 1.5%-2% (Republicans' opposition to Democratic policy continues for a few months, but, ultimately, they acquiesce. Stocks are range-bound and have limited downside (1390-1400) and limited upside (1450-1470) over the balance of the year.
  3. A narrow Obama presidential win and the Republicans regain control of the Senate -- 10% probability: The fiscal drag is 1.5%-2.5% (as partisanship escalates), and 2013 real GDP is barely positive. Stocks have 1350-1400 downside and limited upside (1450-1470) over the balance of the year.
  4. A narrow Romney presidential win and Democrats keep control of the Senate -- 20% probability: The fiscal drag is 2%-3% (as partisanship intensifies) and 2013 real GDP is flat to negative. After an initial but brief market rally, stocks have 1350-1400 downside and limited upside (1450-1470) over the balance of the year.
  5. A narrow Romney presidential win and Republicans regain control of the Senate -- 10% probability: The fiscal drag is 1%-2%. Democrats' opposition to Republican policy continues for a while but begins to abate as time moves forward and 2013 real GDP growth is 1%-1.5%. Stocks have limited downside (1390-1400) and limited upside (1450-1470) over the balance of the year.
  6. A relatively comfortable electoral college win by Romney and Republicans regain control of the Senate -- 5% probability: The fiscal drag is about 1.0%-1.5% -- Democrats' opposition to Republican policy continues for a brief period after which they give in to the Republican agenda -- and 2013 real GDP growth is 1%-2%. Stocks will likely rally in the near term. Over the balance of the year, equities would have limited downside (1390-1400) and upside to about 1470-1500.

That said, my baseline expectation (probability of 40%) remains that Obama achieves a relatively comfortable Electoral College win and that the Democrats keep control of the Senate.

This outcome has likely been discounted in the markets.

There are five other outcomes (with in aggregate amount to a 60% probability), however, that might occur and will have various impacts on the markets. Two of these outcomes, representing a nearly one-third probability, hold an adverse market outcome as they will likely result in more partisanship and rancor between the parties.

Regardless, some combination of the earnings cliff, the political cliff and the fiscal cliff will be in attendance next Wednesday, and I want to be in cash (as the melded risk/reward is not attractive to me over the near term).

I hope I am wrong.

I hope that magically the two parties coalesce and recognize the common good, as occurred between President Obama and Governor Christie in New Jersey this week.

Unfortunately, I am not optimistic, and there is no place for hope in the investment equation.

Forecast Update

With only four days left before the election -- and 60 days left for the fiscal cliff -- below is the third-to-last updated Nov. 6 election forecast by Nate Silver from his FiveThirtyEight blog (with changes since my last post in parentheses). As has been the case over the last week, the odds favoring Obama's reelection have consistently risen:

  • Electoral College: Obama 303.4 (+3.5) , Romney 234.5 (-3.5)
  • Chance of Winning: Obama 80.9% (+1.9%), Romney 19.1% (-1.9%)
  • Popular Vote: Obama 50.5% (0), Romney 48.4% (-0.1%)

And here is an interesting scenario analysis by Silver, which gauges how often the following situations occurred during repeated simulated elections:

  • Electoral College tie (269 electoral votes for each candidate) 0.3%
  • Recount (one or more decisive states within 0.5 percentage points) 9.4%
  • Obama wins popular vote 78.5%
  • Romney wins popular vote 21.5%
  • Obama wins popular vote but loses electoral college 2.0%
  • Romney wins popular vote but loses electoral college 4.4%
  • Obama landslide (double-digit popular vote margin) 0.5%
  • Romney landslide (double-digit popular vote margin)
  • Map exactly the same as in 2008
  • Map exactly the same as in 2004
  • Obama loses at least one state he carried in 2008 99.9%
  • Obama wins at least one state he failed to carry in 2008 5.4%

Here is the latest from Real Clear Politics, and here is Intrade -- Obama at 66.6% (+1.1% from yesterday) and Romney at 33.5% (-1.5% from yesterday).

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