Wednesday, November 8, 2006

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Nancy Pelosi's impact on the global economy

It would seem that the markets ain't thrilled with the midterm elections:

Global finance markets have wobbled on fears that a Democrat victory in the US Congressional elections could prompt less market-friendly policies in the world's biggest economy.

Investors watched nervously as jubilant Democrats seized power in the US House of Representatives for the first time since 1994 and edged closer to taking the Senate, pushing European and Asian equities lower and weighing also on the dollar.

European indices eased off fresh five-year highs struck the previous day, while Japanese shares tumbled by more than one percent, as investors also feared that a split in power in Washington would create legislative gridlock.

"The European market started slipping lower (on Wednesday) with the Democrats taking power from the Republicans, traditionally thought of as more business friendly," said Michael Davies, an analyst with the Sucden brokerage firm in London.

London's FTSE 100 index of leading shares slid 0.53 percent to 6,211.00 points, Frankfurt's DAX 30 index dipped 0.44 percent to 6,334.20 points and in Paris the CAC 40 index shed 0.47 percent to 5,412.18.

The DJ Euro Stoxx 50 index of top eurozone shares lost 0.41 percent to 4,055.98 points.

The US dollar meanwhile staged a slight retreat against the euro and the yen.

"Although the outcome of US elections is unlikely to have a huge effect on the greenback, there are many that argue that if the Democrats win control of the House of Representatives, this will lead to a rise in protectionist policies or to political deadlock that could slow reforms," Davies added.

It will be interesting to see how U.S. markets respond.

UPDATE: Kevin Drum labels this kind of story, "Idiotic Conventional Wisdom Watch." He might be right -- but that conventional wisdom seems pretty widespread in the business press. Consider Neil Dennis, "Stock markets stall after Democrats win House," Financial Times:

The win was seen as negative for equity markets, particularly if the Democratic Party also takes control of the Senate – a result which still hangs in the balance.

“A [overall] win for the Democrats would be considered negative for stocks as it would likely result in a less business friendly environment,” said Matt Buckland, a trader at CMC Markets.

US oil and drugs companies are expected to become subject to windfall taxes if the Democrats were to take control of the Senate, while companies are also likely to feel the pinch of a forecast rise in the minimum hourly wage.

“Unless we see an improvement in sentiment this could be the trigger to start booking some of the profits we’ve seen accrued since late September,” he added.

Meanwhile, the dollar remained mired at a six week low against the euro as uncertainty over control of the Senate led to cautious trade.

Or Wayne Arnold, "Asians wary of U.S. trade shift," International Herald-Tribune:
The victory by the Democratic party in U.S. congressional elections appears to have left President George W. Bush hampered in his efforts to push through free-trade agreements being negotiated with several Asian nations and facing an antagonistic legislature bent on placing its own stamp on policies from trade to defense to stem- cell research - all with potential ramifications for Asia and the rest of the world....

But analysts, diplomats and economists in Asia said that the vote could have much greater consequences for the region, as they appeared to herald a further turn inward for the United States, away from globalization and engagement with Asia.

"The message to the politicians is that we really don't want to get involved in foreign intrigues," said Tim Condon, an economist at ING Financial Markets in Singapore. "It reinforces this kind of populist thinking that there's only a downside to globalization."

The turn in his party's fortunes will undoubtedly weigh heavily on Bush during his trip planned for this month to attend the Asia Pacific Economic Cooperation summit in Hanoi. Analysts said a preoccupation in Washington with domestic issues was likely to play into the hands of China, which has been boosting its own diplomatic profile in Asia and the developing world.

Analysts said one of the clearest casualties of the Democratic victory was likely to be the Bush administration's trade policy.

Concerns that Congress will get tougher on China's trade surplus by pushing it to revalue the yuan are likely to push the dollar down in global markets, they said, on expectations that China and other Asian exporters will allow their currencies to rise to deflect such criticism.

"Democrats are seen as a bit more protectionist on that end," said Chua Hak Bin, an economist at Citigroup in Singapore. "Markets will expect a lot of these pressures to show up."

Jacob Weisberg, "The Lou Dobbs Democrats," Slate:
Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.
This Reuters report is downbeat on the U.S. stock market -- though the actual market decline seems pretty picayune to me.

On the other hand, this Forbes report attributes the equity market downturns to profit-taking rather than the Democratic takeover.

I agree that the reaction of equity markets is probably nothing -- but the effects on trade policy are nothing to be sneezed at.

UPDATE: Kevin Drum renews his ire at this kind of press coverage here -- he's got a decent case.

posted by Dan on 11.08.06 at 08:10 AM


Whoever wrote this is a moron. markets don't process just the event, but the probability of the event. The dow has been rallying all week on the possibility of a dem takeover. I am skeptical of whether this is actually happening, but its a theory.

posted by: vic on 11.08.06 at 08:10 AM [permalink]

My guess is some people are taking profits following those 5 year highs. If those traders are just realizing that the Dems could/are taking over Congress, I want to know their names so I will never, ever let them invest my money.

posted by: T-Fish on 11.08.06 at 08:10 AM [permalink]

This discussion seems to come up around each election. Last I remember, the consensus was that markets dislike uncertainty and, right now, it's unclear what's going to be happening in the near future. Is there any reason to think this is from specifically Democrat-related concerns, rather than general uncertainty?

posted by: Ivan on 11.08.06 at 08:10 AM [permalink]

Dan, I don't think you can blame this all on the Democrats getting control of the House. I'm more likely to see this as the indecision over the MT and VA races, which can be drawn out into a nasty mess. (And Allen is just the sort of pig-headed insufferable idiot who would like to do so if he continues to be on the losing side.)

posted by: grumpy realist on 11.08.06 at 08:10 AM [permalink]

Markets are discounting mechanisms. The house was certainly priced in to the market. Equity markets are 5year highs. The uncertainty in the senate might be part of the reason for moves that amount to noise .5% !!!

For a "free-market" academic you show only a foggy notion of how markets work, or else you are simply a party hack trying to trash a democratic house before it even takes power. I was sure after your gaff over Iraq you would stop blindly carrying water for the gop.

MARKETS DOWN .5%...DEMS TO BLAME!!! What a laugh!

posted by: centrist on 11.08.06 at 08:10 AM [permalink]

Unfortunately, Pat Buchanan is correct (as much as I hate to admit it).

This is the reason why the market responded the way it did, more than the typical unease at Democratic economic policies.

posted by: Ian on 11.08.06 at 08:10 AM [permalink]

This post reminds me of that so-called "business" show on Faux News by Cavuto, the one in which market movements are psuedo-correlated with whatever political issues Cavuto wants to rant about that night.

When I watch Cavuto, which isn't that often, I know I'm not watching business news. And I know I'm not witnessing economics thinking.

I guess I'll have to take a similar approach to this site.

posted by: T.R. Elliott on 11.08.06 at 08:10 AM [permalink]

simple buy the rumor, sell the fact.

posted by: spencer on 11.08.06 at 08:10 AM [permalink]

Dan, I don't know how often you read the business press, but here's a good rule of thumb: Ignore attributions of cause to daily market movements. There are exceptions, of course -- a truly unexpected Fed interest rate move, or the 9/11 terrorist attacks, but typically, the "reasons" for markets moving that are a ubiquitous feature of business news are just made up.

This is especially the case when (a) the market movements are of ordinary size, and/or (b) the event which is being attributed as the cause was widely predicted in advance. (a) is true for today's market movements, and (b) is certainly true for the Democratic House victory. The House takeover was priced in to the market already. You could try to argue that as-yet-undetermined Senate was not priced in, but I can't see that alone as having a big impact, especially as a Senate takeover by the Democrats had been widely reported as possible, if not probable.

posted by: Alex R on 11.08.06 at 08:10 AM [permalink]

S&P down -0.05%, hmmm doesn't even seem to be selling off much on fack

posted by: Steve on 11.08.06 at 08:10 AM [permalink]


I'm not buying your argument at all. And I'm surprised you are making it. You believe in the efficacy of markets, right? We have pretty efficient political markets right now that are instantaneous and online (see Tradesports site). We know what the markets thought about a democratic victor prior to the elections. Unless you think there is a huge market failure (or that stock market investors are much dumber and myopic than gamblers in these markets), then you have no good reason to think that the market dip today is related to the democratic victory.

And, to pile on with some of the comments above, I actually heard some idiot on the radio yesterday say that the reason the markets closed so high on Tuesday was the surprisingly strong showing of the democrats. Again, total nonsense. You don't attribute causal force to an EXPECTED outcome when you see a one day blip up or down after that EXPECTED outcome is observed. And, by the way, it was expected. Unlike 1994, the polls did a very good job predicting what would happen last night.

posted by: MT on 11.08.06 at 08:10 AM [permalink]

It's nice to see that the comments section is so full of good sense. Even if you didn't know that anticipation of a Democratic win in the House had been coincident with a rally in stocks (which anyone who presumes to write on such issues should know), you'd want some metric for establishing how big a significant move would be. Other than Mexico and Japan, each of which have their own news, I don't see any major national market that has moved more than 1% today. Given that 1% moves are pretty common, and that there is earnings news today that might also have an impact, and that some stocks (FNMA) are up while others (Pfizer) are down, and that whole sectors (petroleum) are up for reasons that may or may not have anything to do with the elections, how small a move were you going to allow as a market reaction to the election?

posted by: kharris on 11.08.06 at 08:10 AM [permalink]

The Pelosi effect? This is truly sad - but not quite as bad as all that Kudlow flip-flopping that we've documented over at Angrybear. Dan - I hated to associate you with Kudlow (my update) but me thinks you deserved it on this one.

posted by: pgl on 11.08.06 at 08:10 AM [permalink]

"... fears that a Democrat victory..."

Speaking of discounting, anytime I see that construct (not "...fears of a Democratic victory...") I discount whatever the writer/speaker has to say as his bias is showing.

posted by: FredW on 11.08.06 at 08:10 AM [permalink]

How soon we forget. What happened to the NYSE the day afer Bush first won election in 2000? The comments here are right--why are you even bothering with this drivel? While there's probably some reason to be concerned about pharmaceutical stocks, given an expectation that the Medicare gravy train ride of the past two years is about to go away, the rest of this is horse exhaust.

posted by: wufnik on 11.08.06 at 08:10 AM [permalink]

Note -- that if you had bought 3 month t bills in January 2001 when Bush took office you portfolio would be up 15.4% at the end of last month as compared to 11.2% for the S&P 500 with daily dividend reinvestment.

Don't you know that since WW II the average total return from stocks has been about 50% higher under democratic presidents then under republican presidents -- 15% vs 10%.

Remember the long term growth rate of US real gdp is 3.5% and in 5, going on 6 years Bush has only had one year of above trend growth.

posted by: spencer on 11.08.06 at 08:10 AM [permalink]

I don't get this. Didn't the Dow go up today? Even if you wanted to ascribe random fluctuations of the market to some cause (which as noted above is pretty dumb, really), isn't this backwards?

posted by: matt on 11.08.06 at 08:10 AM [permalink]

Does anyone care to address Dan's more substantive article on the fact that movement on trade issues is basically toast?

I don't believe in the whole "aw, the Dems are in and the economy is going to be crap" thing, but I gotta say, if I were a stock owner in oil or pharma, I'd be a little bit nervous.

posted by: Klug on 11.08.06 at 08:10 AM [permalink]

BTW, does anyone else think that the comments section at Political Animal is for crap?

posted by: Klug on 11.08.06 at 08:10 AM [permalink]

The commens here pretty well cover it. Just thought I'd pile on. The Democratic victory was no surprise, hence should not have had a big effect on the market.

Alex R. is correct about the business press also. The vast majority of "explanations" for market moves are simply post hoc rationalizations. They have to fill up the space somehow.

posted by: Bernard Yomtov on 11.08.06 at 08:10 AM [permalink]

The commens here pretty well cover it. Just thought I'd pile on. The Democratic victory was no surprise, hence should not have had a big effect on the market.

Alex R. is correct about the business press also. The vast majority of "explanations" for market moves are simply post hoc rationalizations. They have to fill up the space somehow.

posted by: Bernard Yomtov on 11.08.06 at 08:10 AM [permalink]

Since WW II real gdp growth has averaed 4.0% under democrats and 2.8% under Republicans -- it use to be 3% But Bush has brought down the average.

Do you have any evidence to support your belief that Democrats are bad for the economy/market and republicans are good.

The only President in modern times to increase tariffs or othewise restrict free trade is George Bush. The only president to have his trade talks complete fail is george bush with the Daha Rounds.

Again, do you have a single fact to support your contention that democrats are anti-free trade and the republicans are pro-free trade.

posted by: spencer on 11.08.06 at 08:10 AM [permalink]

Dan, are you SURE you know anything about economics? Because this sort of stuff is, frankly, undignified of anyone who's passed Stock Markets 101.

posted by: grumpy realist on 11.08.06 at 08:10 AM [permalink]

Drum has more than "a decent case." He's absolutely right.

posted by: Bernard Yomtov on 11.08.06 at 08:10 AM [permalink]

Everyone here is focusing on the idea that the markets "knew" the Dems would likely be winners. But no one's talking about the substance of the thing-- what will the Democrats actually do, or try to do? Let's face it, there will be no windfall tax. It would take 60 votes to get that through the Senate over a filibuster, and they aren't there. Even if they could get it through the Senate, it would take 2/3 majorities in both houses to override the inevitable veto. Further, both Pelosi and Reid have been very conciliatory in their public statements so far. They are both quite aware that their new majorities are small, fragile, and due largely to centrist/conservative Democrats. They not only need to actually govern from the center, but they very much need to avoid any appearance of radical leftism if they want these majorities to last through the next election cycle or two. Thus Pelosi's "no revenge" comments.

Maybe I have a major disillusioning coming, but I am actually quite optimistic at the moment.

posted by: Marc on 11.08.06 at 08:10 AM [permalink]

Out of curiosity, does anyone know (or know where to find out) what the markets did in the immediate aftermath of the big Republican wins in 1994?

posted by: Dave on 11.08.06 at 08:10 AM [permalink]

Ever since I turned down the chance of buying Microsoft at $13 -- yeah, sure, we'll all have "computers" in our homes! -- I've watched the market with no small amount of cynicism. The markets were jumpy every time Alan Greenspan farted, so "political analysis" predicated on a dip, bump, correction, or other change that will inevitably be part of the error term strikes me as the worst kind of "Economist" inspired bullshit.

posted by: Hemlock for Gadflies on 11.08.06 at 08:10 AM [permalink]

Bob Garfield at "On The media" pretty well debunked this Wall Street reporting a couple of year ago in his NPR show. Maybe it's still archived.

posted by: Mooneyguy on 11.08.06 at 08:10 AM [permalink]

Here's the transcript of the NPR, On The Media story I was talking about:

posted by: Mooneyguy on 11.08.06 at 08:10 AM [permalink]

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