10/31/12 – The Hurricane and the Election

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 31, 2012 11:07:49 AM

and tagged Politics and the Economy

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The hurricane has muddied a lot of waters but, surprisingly, may have helped to clear those around the election. Post-Sandy, Intrade continues to have President Obama as almost a two-to-one favorite, 65 to 35, and Nate Silver has him as more than a three-to-one favorite, at 77 to 22. Not all of the models call it for Obama, though. A recent political science paper I looked at reviewed 12 different political prediction models, with the models split evenly down the middle, 6 each.

Although I believe the numbers are closer than they seem, I do expect Obama to win. First, I think Hurricane Sandy has really reminded voters in a very concrete way of the role of the federal government, which is easy to criticize in the abstract but less so in the immediate presence of flooding. The change of focus from the problems of government to the active role of government successfully makes many of Obama’s points for him. As far as October surprises go, Sandy really is a surprise, at least politically.

The second reason I suspect Obama will win is in the bet hedging that has happened over the past 24 hours. Chris Christie, governor of New Jersey and significant Romney surrogate, has gone overboard saying how great the President has been in his Sandy response. Now, either Christie is saying these things without thinking of the political implications—doubtful—or he is doing so deliberately. If so, why? Perhaps because he thinks he’ll be dealing with Obama for the next four years, and the time to get right is now.

The other notable bet hedging has been by the heads of the major U.S. auto companies, who attacked one of Romney’s ads that accused Chrysler of planning to move Jeep production to China. This got wide notice and was written up in the Financial Times under the headline “Auto chiefs accuse Romney over Jeep ad” and in the New York Times (NYT) with “2 American Automakers Rebut Claims by Romney.” Again, either the heads of two major corporations decided to stick a finger in the eye of the next president, or they think that is not much of a risk.

The final major reason I expect Obama to win is the changing economic narrative. Housing continues to improve, per “Home Prices Climb Across Country” on page A2 of the Wall Street Journal (WSJ) and “Nation’s Home Prices Rose 2% in August” on page B9 of the NYT. Housing is foundational, but other components are showing strength as well, notably autos. “US Drives Ford Profit” (WSJ, page B2) focuses on how Ford has streamlined its operations, but the underlying point is that auto sales are up almost 20 percent year-to-date. Both houses and cars are long-term, big-ticket purchases that require significant financing. They don’t happen without confidence in the future, and the fact that both are up suggests confidence is on its way back, which can only be good for the incumbent.

Overall, we still have a horse race, but Sandy has helped to clarify some issues in ways that will probably help Obama. We don’t really know, as the storm limited polling, but we will find out shortly.

Happy Halloween!

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