Quote of the Day: Pollsters Find Comfort in a Crowd

Pollsters don’t like being very different from their competitors so they often fudge the turnout numbers so they don’t go out on a limb. Going out on a limb is great if you’re right. If you’re wrong, you look like an idiot. If you want to have an ongoing business, you don’t want to go out on a limb too often. So what looks like a consensus–an average of independent results, can actually represent, groupthink But that’s true of the national results, too.

This is from Professor Russ Roberts at the Cafe Hayek. This serves as another reason to look at surveys or polling trends with a skeptical eye.

The Likely Impact of US Presidential Elections on the Stock Markets

Thus elections, quite apart from who won them, performed a powerful cultural function for the elites. To the degree that -everyone had a right to vote, elections fostered the illusion of equality. Voting provided a mass ritual of reassurance, conveying to the people the idea that choices were being made systematically, with machine-like regularity, and hence, by, implication, rationally. Elections symbolically assured citizens that they were still in command—that they could, in theory at least, deselect as well as elect leaders. In both capitalist and socialist countries, these ritual reassurances often proved more important than the actual outcomes of many elections. Alvin Toffler, The Third Wave chapter 75

It’s the eve of the much awaited 2012 US national elections.

On November 6^th Tuesday many Americans will flock to their respective precincts to exercise their suffrage. The national elections will cover the executive (President-Vice President) and the legislative branches (Senate and House of Representatives) as well as some positions at the state level[1].

The Follies of Pattern Seeking Behavior

We are told that certain outcomes from the coming election may lead to specific results on the financial markets.

For instance, a Barclay’s survey on professional investors[2] proposed that a Romney victory would be good for stocks while Obama’s re-election will favor the bond markets.

Others suggested that the elected President’s political party matters. The median return for the S&P 500 favors a Democrat President over a four year period, as against a Republican President who may spur a short term rally. All these are based on statistics derived from historical data[3].

For me, surveys are hardly reliable measures of the tradeoffs between profits and risks.

What people say and what they actually do may be different. Many people talk to signal Social Desirability Bias or to say things in a matter that they will be viewed favorably[4]. 

People are also highly sensitive to changes in preferences due to many factors as new information, social pressures, and more. Besides, surveys can also yield distortive results based on the influence from how questions are framed by the pollster.

Further, candidness of the survey participants also account for as another important variable to be leery on.

On the other hand, statistical constructs based on historical events signify as veneer to people’s desire to seek patterns in order to deal with uncertainty or to simply tell stories again for social signaling purposes.

Yet historical events are complex phenomena that had been arrived at through multifarious causes. They cannot simply be oversimplified or seen or interpreted as homogenous replication of the current environment. Even Wall Street acknowledges this dynamic through the axiom: Past performance does not guarantee future results.

Thus assignment of numerical probabilities on partially similar episodes, are not only irrelevant in forecasting the future, but such accounts for a form of entertainment to its practitioners.

As I previously wrote[5],

numerical probabilities serve to gratify one’s cognitive biases which in essence is a form of self-entertainment rather than a dependable methodology for risk analysis

Pattern seeking behavior can also be representative of the gambler’s fallacy or the Monte Carlo fallacy, which Investopedia.com defines as[6]:

When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.

Yet there has been no precedent in terms of the scale of policymaking for any meaningful comparison to be made with past US national elections.

Such distinction even holds true in terms of other social phenomenon such as technological advances or innovation and of the diffusion of voluntary exchanges expressed as globalization

Yet social policies, which shape people’s incentives to save, invest, produce and consume, implemented and enforced through the political spectrum, have reached extraordinary proportions.

Regulatory growth has morphed into a large scale bureaucratic quagmire. Notes Mises Institute President Douglas French[7],

The Federal Register, a publication with all the country’s (federal, nonclassified) rules is now over 81,000 pages long. President Obama’s Affordable Care Act is 906 pages. The Dodd-Frank Act totals 849 pages. Once upon a time, in 1913, the Federal Reserve was created with only 31 pages. The U.S. Constitution required only six pages.

It would account for as a glaring mistake to construe neutral effects from these new-fangled edicts or rules or decrees on people’s economic and social activities.

Moreover, systemic debt has been ascending to unsustainable levels.

Chart from Dr. Ed Yardeni’s Flow of Funds[8]

Financial analyst and fund manager Doug Noland recently observed of the political imperative to keep the system afloat[9]

After beginning 1990 at $12.8 TN, Total System Marketable Debt ended June 2012 at $55.0 TN.  And Washington politicians and central bankers are now doing everything they can to sustain the Credit boom and avert the downside of an historic Credit cycle.  Similar efforts are afoot globally.  

The accelerating erosion of America’s productive dimensions has been due to the escalating welfare state, ballooning bureaucracy and other state based expenditures which transfers scarce and valuable resources to non-productive political based spending and entitlements, which has also been crowding out the private sector. Chart from Heritage Foundation[10]

America’s social policies have also led to the unparalleled deployment of the US Federal Reserve as chief provider of funds for the US government.

In 2011, more than half or 61% of US debts had been monetized by the US Federal Reserve. US Federal holding of US treasury debts of all maturities has surpassed $1.8 trillion (lower window).

This represents the highly fluid debt economics of the US government, where the Fed has stepped up the plate relative on the declining interests from the private sector, as well as, foreign public and private investors (upper window).

As Mr. Lawrence Goodman, president of the Center for Financial Stability wrote at the Wall Street Journal early this year

The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit.

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction.

The point being: The current state of imbalances borne out of America’s political dynamics has been unmatched in scale and depth. This only means that America’s future will depend on the actions of political authorities which will either deepen systemic fragility or take remedial but highly painful measures.

Risk Reward analysis, thus, requires a focus on the actions of policymakers.

Campaign Promises Hardly Are Reliable Measures of Projecting Future Policies

It would be conceivably naïve to rely on political rhetoric of competing candidates as basis for examining and projecting prospective policies.

Politicians usually appeal to the views the median voter to ensnare votes. In other words, politicians, who are running for office, are predisposed to say what the public wants or expects to hear.

On the obverse end, people hardly vote for policies but for symbolisms which these candidates represent. Thus aspiring politicians work hard to project themselves as symbols to reinforce people’s biases.

And this is why politicians usually end up with unfulfilled promises or have usually gone against their rhetorical assurances made during the campaign sorties.

Voters become useful only to politicians when election season arrives.

Take for instance, the Reason Magazine enumerates[11] some of the unmet campaign pledges by presidential candidate Barack Obama in 2008:

1. Creating five million green jobs.

Unfortunately President Obama’s green energy industry has been suffering from a string of high profile bankruptcies[12], which includes the controversial Solyndra scandal.

The highly influential think tank Council of Foreign Relations recently noted that Obama’s creation of green jobs from the green energy sector have penalized taxpayers heavily relative to the other non-renewable energy industries[13]

2. Balance the budget

As of Monday October 29^th, the US is on path to reach its debt limits before 2013. According to the Reuters[14], the U.S. Treasury was $235 billion below the $16.4 trillion statutory ceiling on the amount it can borrow.

3. Refusing to raise taxes on the Middle class

The passage of Obamacare translates to 21 new taxes or tax increases affecting the middle class too.

4. Reforming Immigration 

The Reason.com says that the Obama administration has been deporting illegal immigrants like crazy, leaving Hispanic Caucus Democrats in the awkward position of changing the subject to health care, and otherwise blaming Republicans.

5. Restoring America’s moral standing in the world

President Obama has been expanding the theatre of warfare to include Pakistan, Yemen and Libya and from the backdoor, Syria[15].

So whether Obama or Romney, there will unlikely be any radical changes in the political structure to headoff the looming debt crisis.

This goes to show that elections have mainly been used to justify policies which benefit many entrenched power blocs operating behind the scenes.

Given the above conditions, the pricing dynamics of the markets will, thus, represent expectations from the feedback loop mechanism between policies and market responses to them.

The late illustrious French American mathematician Benoit Mandelbrot in his book The Misbehavior of Markets[16] dealt with the difference of economics with natural science.

Finance is a black box covered by a veil. Not only are the inner workings hidden, but the inputs are also obscured, by bad economic data, conflicting news report or outright deception…And then there is the most confounding factor of all, anticipation. A stock price rises not because of good news from the company, but because the brightening outlook for the stock means investors anticipate it will rise further, and so they buy. Anticipation is a feature unique to economics. It is psychology individual and the mass—even harder to fathom than the paradoxes of quantum mechanics. Anticipation is the stuff of dreams and vapors.

Anticipation is part of human action. People’s divergent expectations, anticipations, and responses are what differentiate economics from natural sciences.

Yet anticipation of the prospective polices, the actual policies, and of its attendant effects on the marketplace will most likely anchor on market dynamics post-election season.

Unlikely Change of Direction for Fed Policies in case of a Change of Administration 

A good test of these will be to assess the scenario of a Romney victory (Although I have big doubts of a Romney win. In a close battle, the incumbent have the edge. This is because they hold the political machinery which can be used to their advantage through whatever means).

Yet under a Romney victory, would the new President discharge on his vows to replace the incumbent chairman US Federal Chairman Ben Bernanke at the expiry of the latter’s term? Will Mr. Romney spearhead through his appointee a massive overhaul to the US Federal Reserve’s current policies? I don’t think so.

Given the reality or the fact that the US government’s huge budget deficits heavily depend on the US Federal Reserve for financing, it is unlikely that the Romney appointee to rock on the establishment’s boat.

I have predicted in the past[17] and have been validated that Fed Chairman Ben Bernanke would work to ensure Obama’s re-election through “stock market friendly” policies. This places an ethical issue of the agency problem or conflict of interests between Mr. Bernanke and his policies which affects the average Americans on the political table. 

To downplay the political bias from his recent action, Ben Bernanke has floated to media the possibility of his retirement even if Obama wins[18]. Of course, the re-elected President Obama can always “persuade” Mr. Bernanke to change his mind. 

Mr. Bernanke seems to be applying the same communications signaling strategy to the public for his personal affairs. This leaves a bad taste on the mouth for Bernanke apologists.

As an aside, all the blarney about “QE forever” designed as monetary policy to supposedly aid the economy through the spending transmission channels of the wealth effect, has really been a diversion, if not a subordinated priority, to the real or primary objective: the FED as contingent financier to the US government’s intractable US budget deficit as expressed through surging debt levels.

Yet candidates floated by the mainstream[19], particularly Glenn Hubbard, Greg Mankiw and John Taylor, to replace Mr. Bernanke have mostly been “dovish” or in favor of the Fed’s contemporary policies (This is with the exception of John Taylor, of the Taylor rule fame, whom I don’t think stands a chance). 

In addition, the composition of voting members of the FOMC has been, and will be, most likely leaning towards the “doves” or conformists.

Such would include the previously vacant seats which were recently filled (Jeremy Stein and Jerome Powers), aside from the replacement of the 4 voting regional Federal Reserve Presidents, as part of the customary rotational process, which again favors the “doves”[20]

At the end of the day, regardless of whoever wins, US policies will remain embedded to the interests of the political economic establishment. Changing personalities who runs the same show hardly accounts for a change in the system.

And as such policies will likely remain accommodative primarily to shield the US government from interest rate and credit risks, which should for the meantime, benefit the financial markets, particularly stocks, bonds and commodities (yes despite last Friday’s shakeout) whom have been the secondary beneficiaries.

After all, the main risks I believe will emanate from the market’s ventilation of the unsustainable imbalances from the welfare-consumption-debt based political system, which eventually will render politicians utterly helpless in the face of market-economic chaos. But it is unclear if the day of reckoning is sooner or will surface later.

For the highly interconnected and interrelated global stock markets, including the Philippines, the actions of the US Federal Reserve will have very important transmission implications, and this will be backed by the actions of other major central banks, as well as, from the auxiliary effects of domestic policies. As far as the Philippine BSP is concerned they have aligned their policies to ease along with the US and with most of the major central banks.

---

[1] Wikipedia.org United States elections, 2012

[2] CSMonitor.com Stocks rise if Romney wins; bonds, if Obama does October 29^, 2012

[3] Frank Holmes Who Will Lead America Over the Next Four Years? US Global Investors November 2, 2012

[4] Wikipedia.org Social desirability bias

[5] See Numerical Probabilities as Metaphorical Expressions October 24, 2011

[6] Investopedia.com Gambler's Fallacy

[7] Douglas French Democracy Is a Terrible System, Period Laissez Faire Books

[8] Yardeni.com US Flow of Funds, October 29, 2012

[9] Doug Noland Sandy, Bernanke And Money November 2, 2012

[10] Heritage Foundation Entitlements and Interest Are Crowding Out Other Spending October 16, 2012

[11] Reason.com 5 Broken Democratic Promises from 2008, September 4, 2012

[12] See US President Obama’s Green Energy List of Failures October 26, 2012

[13] See CFR: US President Obama’s Renewable Energy Jobs Comes at High Cost to Taxpayers November 3, 2012

[14] Reuters.com UPDATE 3-U.S. gov't poised to hit debt limit before 2013 October 31, 2012

[15] Anthony Gregory America’s Unique Fascism Lew Rockwell.com September 6, 2011

[16] Benoit Mandlebrot and Richard L. Hudson The (MIS) Behaviour of Markets p.28

[17] See Phisix: The Correction Cycle is in Motion August 27, 2012

[18] Yahoo.com Bernanke probably won't stand for third term at Fed - NYT October 23, 2012

[19] New York Times Presidential Election Weighs on the Federal Reserve October 22, 2012

[20] Axel Merk and Yuan Fang Monetary Cliff? Merk Investments October 24, 2012

Chart of the Day: Stereotyping in Europe

From a poll conducted by Pew Research.

I don’t believe in stereotyping, but it must be emphasized that social policies (such as the welfare state or various forms of government interventionism) plays a significant influence on people’s value scales and preferences which consequently shapes work habits.

As former chancellor of West Germany known for his leading role in the "German Miracle" or West Germany's postwar economic recovery, Ludwig Wilhelm Erhard (1897–1977), once wrote,

Social policy must not damage national economic productivity even indirectly, and must not run counter to the basic principles of the market economic order.

If we desire to guarantee a permanent free economic and social order, then it becomes essential to achieve freedom with an equally freedom-loving social policy. That is why, for example, it is contradictory to exclude from the market economic order private initiative, foresight, and responsibility, even when the individual is not in a material position to exercise such virtues. Economic freedom and compulsory insurance are not compatible.

Poor and Middle Income Countries are ‘Happier’?

Based on self-reported happiness, poor to middle income countries have reportedly been happier than their rich counterparts

So says the Economist,

DESPITE the economic gloom, the world is happier than it was before the financial crisis set in (according to a recent poll from Ipsos which surveyed 19,000 adults in 24 countries). 77% of respondents describe themselves as "happy", three percentage points higher than in 2007. Those countries who report themselves as being the happiest tend to be in poor and middle-income countries, while the gloomiest are in rich countries (the figures for Italy and Spain were 13% and 11%).

Reasons? Again from the Economist,

Two conclusions emerge. Large, fast-growing emerging markets do not share rich industrialised countries’ pessimism. The already large “very happy” cohort rose 16 points in Turkey, ten points in Mexico and five points in India. Even rich-country pessimism is uneven. The share of “very happy” people rose six points in—of all places—Japan, defying tsunami and nuclear accidents. But growth amid global misery does not explain everything: the biggest falls in happiness also occurred in large emerging markets, in Indonesia, Brazil and—a perennial misery guts—Russia.

The second conclusion challenges the received notions of mankind’s moods. A tenet of political science is that happiness levels rise with wealth and then plateau, usually when a country’s national income per head reaches around $25,000 a year. “The richer a country gets,” argued Richard Wilkinson and Kate Pickett in “The Spirit Level”, an influential book of 2009, “the less getting still richer adds to the population’s happiness.” Many on the left have concluded that pursuing further economic growth is pointless. Even right-wing politicians such as Britain’s prime minister, David Cameron, and the French president, Nicolas Sarkozy, have set up projects to study “gross national happiness”.

I am tempted to say that polls like this seem to justify the political economy of fascism—since people are happier by being poor, then maintain their happiness by continued immersion to poverty. This by handing over economic opportunities to politicians and their cronies through “special interest group captured” political institutions.

Happiness is subjective or signifies an individual's state of mind or represent personal value scales expressed through expectations.

If the above account has some grain of truth in it, then I’d say that reference point matters: Poorer nations may have relatively lower expectations than those of rich economies. And trajectories of economic growth have been changing the underlying dynamics of expectations

With globalization (measured by trade volume and Industrial Production) at record highs (chart from Professor Mark Perry) economic opportunities have been brightening up for emerging markets compared to debt plagued developed economies.

In other words, optimism, for people who have been jaded or inured to poverty, have likely been derivative from increasing trade opportunities (through liberalization or more economic freedom) that has rewarded their drudgery.

Economic growth favors emerging markets; chart from another 2009 Economist article

Whereas people used or conditioned to living lavish lifestyles funded by intractable debt will have to face the realities of rebalancing their finances. So again, changes in expectations from base points seem to be shaped by the economic developments

There is another aspect: the welfare state. People in rich countries, many of whom are dependent on the welfare state may have seen a reduction in the essence of personal values; particularly family, responsibility, and value of work.

As economist Vedran Vuk writes at the Mises.org,

The agenda of the state is to break up the family. The more you depend on the state, the more you justify its existence, and the larger it grows. The idea that people can provide things for themselves either individually or through the family frightens the state. It delegitimizes its role. The role of the family is dangerous to its survival.

In contrast, the rewards in economic growth have not only been benefiting one’s material welfare, but importantly are magnified through personal values (again family, responsibility and work ethics) in lesser welfare dependent economies.

World Corruption Perception Index Charts

The following charts from Transparency International

Of the 183 countries surveyed, two thirds have been seen as “corrupt”.

Meanwhile the Philippines has been ranked 129^th with a score of 2.6, an ‘improvement’ from last year’s score of 2.4 and from the 134^th spot. Although I have yet to ascertain on the aspects where the Philippines have made ‘improvements’ on.

One more observation: Given that Somalia’s transitional government has just been a little over 1 year old, it would signify an oddity to include her in the index.

At the end of the day, Transparency International corruption perception index represents merely ‘perception’ or estimates from surveys, which could likely be off from the reality.

US Presidential Election Poll: Barack Obama versus Ron Paul in 2012?

According to the poll, taken before the announcement of Osama bin Laden's death, President Barack Obama has an edge over all the top GOP candidates in hypothetical match-ups.

Who does best against Obama? Paul. The congressman from Texas, who also ran as a libertarian candidate for president in 1988 and who is well liked by many in the tea party movement, trails the president by only seven points (52 to 45 percent) in a hypothetical general election showdown. Huckabee trails by eight points, with Romney down 11 points to Obama.

The poll indicates the president leading Gingrich by 17 points, Palin by 19, and Trump by 22 points.

That’s from the CNN.(Hat tip: Thomas DiLorenzo)

Amazing.

Classical Liberalism-Libertarianism appears to be gradually transitioning from the fringes into the mainstream.

Bloomberg Poll: BRIC Lose Out To US As Top Investment Choice

I don't know how accurate this Bloomberg's poll is, but according to them, the US has supplanted the BRIC as top investment choice.

Read the article here.

SEC-Goldman Sachs Row: The Rising Populist Tide Against Big Government

Professor Arnold Kling writes,

``perhaps it is not so crucial to bolster a financial sector that was misallocating capital or to bolster a state and local government sector that has been captured by unions. Perhaps these heroic efforts undertaken in the name of saving the economy only served to reward the looting classes. Perhaps we have arrived at a point in this country where looting is the most rewarding economic activity. In that case, it will not take many years before the wealth available to loot starts to shrink." (emphasis added)

He scorns the transformation to cronyism, which we totally agree. And that's why I see the latest Goldman controversy as part of the ploy to camouflage the "looting classes".

I guess some charts of Pew Research captures prevailing public sentiment.

From Pew Research, (bold highlights mine)

``By almost every conceivable measure Americans are less positive and more critical of government these days. A new Pew Research Center survey finds a perfect storm of conditions associated with distrust of government -- a dismal economy, an unhappy public, bitter partisan-based backlash, and epic discontent with Congress and elected officials.

``Rather than an activist government to deal with the nation's top problems, the public now wants government reformed and growing numbers want its power curtailed. With the exception of greater regulation of major financial institutions, there is less of an appetite for government solutions to the nation's problems -- including more government control over the economy -- than there was when Barack Obama first took office.

``The public's hostility toward government seems likely to be an important election issue favoring the Republicans this fall. However, the Democrats can take some solace in the fact that neither party can be confident that they have the advantage among such a disillusioned electorate. Favorable ratings for both major parties, as well as for Congress, have reached record lows while opposition to congressional incumbents, already approaching an all-time high, continues to climb.

``The Tea Party movement, which has a small but fervent anti-government constituency, could be a wild card in this election. On one hand, its sympathizers are highly energized and inclined to vote Republican this fall. On the other, many Republicans and Republican-leaning independents say the Tea Party represents their point of view better than does the GOP."

In contrast to those who see and think in terms of their political party lines, the polls suggest that there is ballooning discontent about bi-partisan polity.

And it's why perhaps both the Democratic Party and the Republican Party have felt the backlash from the public and thereby has seen their approval ratings plummet, which has mostly been a reflection of the performance of the US congress.

And it is also why the Tea Party has spontaneously emerged.

Yet some would stubbornly argue that more government activism is likely the answer. For instance more regulation in the financial sphere. This camp never seem to realize that in politics, what you see isn't what you get.

As Heritage's Conn Carroll comments on the proposed financial reform bill, ``So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill "would have prevented that kind of events from happening" he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice." (emphasis added)

This only goes to show that the proposed "new" regulatory reforms are being shaped to even benefit MORE (and not less) the looting class!

Not to mention that the controversial John Paulson who helped inspired the Goldman brouhaha, has been a generous political contributor.

According to Ben Smith of the Politico, ``Though many hedge fund managers lean Democratic, Paulson has split his giving, offering maximum six-figure contributions both the the Democratic Senatorial Campaign Committee and to the Republican National Committee. Paulson, ranked 45 on Forbes' list of America's richest individuals, made maximum contributions to the presidential campaigns of Mitt Romney, John McCain, and Rudy Giuliani in 2008, but has also given to key Democratic senators for the finance industry, including Chris Dodd and Max Baucus.

``Paulson hasn't given directly to Schumer, though he maxed out to Schumer's committee. But he did host a fundraiser for the senior New York senator earlier this month, describing him in the invitation as "one of the few members of Congress that has consistently supported the hedge fund industry." (bold emphasis mine)

And all these (lobby groups, contributions, biased laws, regulatory capture etc...) seemingly add to the reasons on why the public's attitude on politicians seems to have tipped over. Instead of big government, which they had earlier hoped to work, they now seem prefer "smaller" government.

Again from Pew, ``Despite the public's negative attitudes toward large corporations, most Americans (58%) say that "the government has gone too far in regulating business and interfering with the free enterprise system." This is about the same percentage that agreed with this statement in October 1997 (56%)."

The point is that the polls suggest that there seems to be a growing public recognition that the previous "big government" or "activist government" experiment has noticeably been a failure, from which is being manifested in politics, as shown in the intratrade.com prediction markets chart courtesy of Bespoke Invest.

And this gives even more motivation for the ruling political class to use the Goldman caper as a likely prop as the "fall guy" role for political ends.

We just don't oversimplistically regulate cartels out of existence, not when the cartel itself is lead by the government via the Federal Reserve.

To quote Dr. Antony Mueller, "There can be no honesty in a dishonest monetary system".

Poll Trends: Americans Fret Over Big and Too Much Government and High Taxes

From Gallup
From Rasmussen Reports
From Google Trends

High Taxes significantly leads Big government, big business or even global warming