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Saturday, October 11, 2008

Wait and See

The likelihood of Obama becoming president is inversely correlated with the price of the S&P 500 stock market index. The correlation coefficient is only about -0.4, which isn't a particularly strong correlation, and correlation certainly doesn't prove causation. However, I believe that the correlation is valid and I believe there is a mechanism for causation. In other words, I believe that the increasing likelihood of Obama becoming president is a cause for the cratering of the stock market that we are currently experiencing.

It seems clear that the drop in the stock market has been at least partially caused by the credit contraction, which has been at least partially caused by the mortgage securities problem, which has been at least partially caused by falling house prices. This is a train wreck that's been waiting to happen for more than a decade. The questions are why now, and why so severe?

My answers to those questions are based on my observations and my observations are based on my perspective. My perspective is that of an entrepreneur/businessman/technologist who has co-founded companies that have created jobs for and employed 100+ people over the last 25+ years.

Starting and running businesses is risky. Indeed, I would personally have been far, far better off if I had just taken a job that someone else created rather than building these companies.

The potential for change increases risk. The riskiest point in the political cycle is when there will be a change in administration and the new administration's political affiliation is likely to align with the party that controls Congress. This is further exacerbated (from my point of view) when the incoming Administration's mantra is "Change" and that change is promised to be higher taxes and more regulation, both of which increase the risk to businesses.

As a result, I personally have stopped investing in my company for several months now. I have stopped trying to grow the business. I have stopped trying to hire people. I'm now in a "wait and see" mode. The pain of growing and hiring new people only to have to retrench and lay them off is very, very painful and not something I'm willing to do except as a very last resort.

I hang out with other entrepreneurs1 and they tell me they're in the same boat. Let's wait and see, let's just wait and see.

Well, you don't really need all that many employers waiting and seeing before it has an adverse effect on at least parts of the economy. I think the housing markets softness was exacerbated by the softer job market which was exacerbated by waiting and seeing. The credit crunch and stock market drops are also exacerbated by waiting and seeing.

So I do think that Obama's successful candidacy has contributed to the precipitation and depth of the stock market plunge. Once elected, things will likely stabilize, since the waiting and seeing part will be over and I, and others, will reformulate our strategies based on the new rules of the game. Obama will then, of course, get credit for stabilizing the economy, in what I will consider to be the greatest irony of all.

1 Though I'm not actually a CEO, just a business owner who hired a CEO to take care of all the administrative BS that I don't like to do anyway, it looks like a solid majority of CEOs feel the way I and the other entrepreneurs that I know do about the election


Ali said...

Tech executives donate 5 times more to the Dems than they do to the GOP.

Bret said...

Not surprising that tech executives donate substantially more to Dems. First, I know one who's in the "wait-and-see" mode who's a strong Obama supporter. Locally (his own business) he thinks the political situation is bad, but globally he likes Obama very much and I guess he doesn't care if business goes less well as long as a Dem is elected.

Second, an awful lot of tech execs come from Silicon valley and other very, very left-wing areas of the country so they vote with the prevailing thoughts of their areas.

Third, they are low capital, low natural resource businesses, so while they will pay more taxes, they will gain in power relative to all other businesses (which will be hurt much more by Obama's election). After you have a certain amount of money, power is where it's at, and so they're voting to increase their own relative power. The heads of Google would no doubt love to smack down as hard as possible the oil, auto, and manufacturing execs and basically be kings. If my company was more successful and less reliant on manufacturing I might well be there with them. Remember, politics is only about taking from some and giving to others.

Again, consider that CEOs in general think Obama is bad for business by a factor of 3 to 1.