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Post-Election Outlook


Ross M. Miller
Miller Risk Advisors
November 8, 2004

This weekly series of commentaries began back in April with The Bull That Will Not Die, a piece that explored the conventional wisdom that the financial markets would be propped up by Bush, Rove, Greenspan, etc. until the election was over and then all hell would break loose. Using a combination of game theory, macroeconomics, and some spare parts lying around in the garage, I argued that the bull market would not only endure through the election, but would continue well into 2005. That maiden commentary winged its way through the blogosphere and can still be found in bear dens as an example of bizarre contrary opinion.

In more recent commentaries, I have elaborated on the bull story—bringing deleveraging, oil, and black swans into the picture only to dismiss them. A black swan in the form of a major terrorist attack continues to lurk in the background; however, if another week or two should pass without incident, the VIX can sink below 10 before things get exciting again. (Incidentally, the faux-intellectual black swan crowd appears not to understand the subtext of the black swan—a "search inside" of their bible produces not a single reference to either Jan Sibelius or Finnish mythology. If VIX continues to drop, they may get to meet that black swan.)

Even if Walter Cronkite thinks that Karl Rove was pulling Osama Bin Laden's strings in his last snoozefest of a video, it is clear in retrospect that the Establishment has less influence than imagined. True enough, the bull lives on. But it has at best been running in place and at worst channeling down. (One of my favorite CNBC ads is for, an outfit that must be a front for the Mossad.) While the bear scenario has not arrived, neither has my "booming bull" scenario that was going to keep the stock market from falling off a cliff after the election. Despite massive fiscal and monetary stimulation—even with this coming week's "measured" rate hike the Fed funds rate is still at a shockingly low 2%—the U.S. economy has been behaving like something is holding it back.

If one is to believe conspiracy theories, these past months the stock market may have been battling against unnatural forces that only started to subside exactly one week before the election. In a previous commentary on rising oil and gasoline prices, I made the case that hoarding could explain much of the increase and that the unwinding of any hoards would lead to sudden downdrafts in the petroleum prices.

It is no secret that governments around the world were eager to see a "regime change" in the United States. Just as Bush and company had an incentive to artificially prop things up before the election, those favoring a regime change had an incentive to knock them down. One of the easiest ways to get the U.S. economy to unravel was to push oil prices up. Of course, manipulating energy markets does not come on the cheap. Once the damage of hoarding is done, it is time to dishoard (a word only an economist could love or consider a part of the English language).

There is no way to know just how many artificial impediments were placed in the way of the U.S. economy in an effort to disgorge Dubya. The Great Soros, currently wallowing in depression, has been suspected of manipulating the Tradesports futures markets for the presidential elections. Just imagine what mischief he (or someone like him, say a European central banker) could have been up to in other markets with a more real impact on the U.S. and beyond.

The passing of the election does not mean an end to the economic warfare, either overt or covert; it just makes it more costly to wage. And getting the election cleanly out of the way does not resolve the larger issue of the never-ending shaping and reshaping of the new economic order or whatever it is that Henry Kissinger, Big Daddy Bush, and all of the contributors to Foreign Affairs were planning for the world.

Still, the preconditions have been met for stock markets both in the U.S. and around the world to recapture some of their old exuberance. Google's hot IPO has been followed by a handful of similarly well-received offerings to the financial gods. Even if Google with the aid of the brokerage firm formerly known as PaineWebber took a breather last week, the technology sector still has enough wind in it to lead equity markets higher. (Technology is very much wind-driven.)

The inability of the powers that be to get the U.S. economy to do their bidding is now a good thing for the markets. Early in a presidential term is thought to be a good time to get a recession out of the way, but in the absence of a meaningful recovery the last thing that the economy needs is a recession. If history means anything, the Fed can continue on its measured course for another year before the pain begins in earnest.

To summarize: We made it past the election with the bull market, such as it is, intact. Stocks are priced far from perfection with room for surprises to the upside. Call me cautiously ragingly bullish.

Technology and technology spending had better lead the market forward right now because consumer is appearing less sprightly with each passing month's retail sales numbers. For the next several weeks (with breaks for Thanksgiving and to report back on Google), I will go beyond my original foray into Wal-Mart and provide a personal look at the state of retailing in the United States in a series called, "Adventures in Retailing." Part I will look at some shining lights in the otherwise drab world of grocers.

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to