GO! MIDDLE MAN GO!

GO! GO! GO!

About 18 months ago, I bet a friend, giving him 3 to 1 odds that Hillary would not be the next president. At the time, I said I would almost make an even odds bet that she would not be the democratic nominee. Then I was surprised that no major player stepped up to give her a serious challenge. Al Gore apparently came close to making a run but, who can blame him of staying out of the race when he is enjoying huge profits by fanning the fears of environmental Armageddon. When the contest got down to two extreme liberals and Hillary, I thought I had lost my bet. I assumed she would win the nomination and be in good shape to win the support of moderates during the general election.

However, it turns out that, I underestimated the willingness of democrats to go left, go left, go left. For a long time, Hillary carefully chose her words such that she could still move toward the center for her general elections run. This was making me nervous because I felt that a moderate Hillary would have about a 50/50 shot at beating a moderate McCain. Here again, I found a new surprise. In recent weeks, Hillary has unsuccessfully tried to move to the left of Obama. It will never be known for sure but it appears that she could not win the democratic nomination by running as a centrist candidate. What was not clear early on was the amount of resentment the left wing has over the switch Bill Clinton made from democrat to "republican" for his second term. Clinton ultimately signed off on powerful and positive economic reforms, including welfare reform and free trade. He was even able to successfully run to the right of Bob Dole for his second term election. Bill's republican policies served the country well but Hillary has been forced to run against her own husbands record. By the way, Bush tried the Bill Clinton strategy in reverse. He attempted to dress up his conservative positions with a little bit of liberal sheep clothing. He passed democratic big spending programs such as "no child left behind" and "the prescription drug benefit" but ultimately got no credit from democrats and scorn from republicans for these poor substitutes for real reform.

Obama has done such a masterful job of keeping Hillary cornered that one has to respect his chances in the general election. What we are dealing with in regard to elections is the psychology of crowds, or according to Carl Jung the collective unconscious. Democrats are determined to elect a true liberal to the presidency and they intensely believe that they can win with a candidate from the extreme left. Gustave Le Bon was a student of crowd psychology back around the late 1800's in France. His book, La Psychologie des Foules is about how irrational crowd behavior can be. I can't remember the name of the researcher who did the study but it has been shown that if 7 of your friends say something is true, the odds are that you will decide to agree even if you know the something to be false. If 7 friends agree that "it is true" and if an 8th friend has not yet expressed his opinion, the odds jump to the 90% range that you will agree to the "false truth". Another way of saying this is that we really do want to avoid the potential of being ridiculed by our friends as the "odd man out". This is probably the reason the greatest inventions tend to be made by lonely individuals. People who had rather seek truth than to be told what is truth.

William Trotter talked about crowd psychology in terms of "heard instinct". Any student of the stock market is familiar with Bull and Bear Market Psychology. In a Bull Market, the crowd bids up the price of stocks far above their intrinsic worth and in a Bear Market, profits and value do not amount to a hill of beans. Right now, stocks earn an average of about 50% more than bonds but the public believes what they are being told by their friends in the media. This is sometimes referred to as the "halo effect"; if one teacher gives Johnny a good grade, the next teacher is more likely to grade him well and vice versa.

The current democratic nomination process has taken on a Bear Market "halo". No matter what the evidence shows, the war is going badly as is the economy. In the recent past, democrats have won and lost the presidency due to third party candidates. This time they are determined to nominate a candidate so far to the left that no Ralph Nader will rise up to siphon off votes primarily from democrats. That is the logical part of the current fervor for leftist positions, but, have the democrats moved so far to the left that they cannot hope to win the majority of "moderate" "independent minded" "middle of the road" voters?

Around 1966, a follow up to the study of "madding crowds" was done by William Schutz. His study showed that there are three stages to joining a crowd; inclusion, control and affection. In the last debate, when Hillary showed what seemed to be sincere affection for Obama, I almost fell on the floor. Obama has gradually moved Hillary from the centrist opponent to just another "me too liberal".

BIG PROBLEMS

There are big problems in the USA in need of a governmental nudge. Corporations should be required to submit executive pay packages for shareholder votes. Funding for universal preschool should be made available (perhaps by reducing government funding for 16 to 18 year olds). School choice should be the law of the land and funding should follow the student to the school of choice. Health care spending should be returned to the control of patients. Immigration reform should take control of our borders while allowing "competitive immigration"; we should welcome the most eager and most qualified to come to America. Corporate taxes need to be reduced in order to help consumers and in order to attract more jobs to America. Taxes on work and capital should be reduced dramatically and partially replaced with excise taxes on harmful activities such as burning dirty coal. Silly subsidies, such as payments for growing corn, should be eliminated. Social Security benefits should be indexed to wage inflation.

MARKET and ANTI MARKET SOLUTIONS

The Ambac re-cap will be a private transaction with no tax dollars going to bail out businesses, which is the right way to do business in America. Unfortunately, businesses are lobbying hard to add new "corporate" welfare programs. Duke Power, GE and others who stand to make billions off cap and trade systems, are eager for another big government program. Both McCain and Hill-Obama support these grand governmental schemes. All politicians find it hard to resist the mighty dollars available to those willing to support "corporate largess".

Another huge lobbying campaign is for companies to receive government funding for research and development. Believe you me that the company that is able to invent or discover the way to turn cellulose into fuel or a stem cell into a new heart will reap unimaginable rewards. Billions of dollars are being spent on all sorts of research; it makes absolutely no sense for politicians or bureaucrats with vested interest to pick or choose which projects should be funded. The idea that the government should give companies upfront bonuses for looking for profitable commercial processes is as silly as it gets. What a long way we have come from the days when Ben Franklin invented "stuff" as a public service to the current times when "pigs" want to feed at the government trough before sticking the royalty payments to consumers. By the way, there are tons of people who think they have great ideas worthy of research. When they can't find funding for their research they tend to blame the market place. The reality is that it may take some selling to find support in the market but the government is far more likely to turn down a good idea.

WANDERING AROUND ON EITHER SIDE OF COMMON SENSE

All is not lost because the mad crowd to the extreme left is almost matched by the size of the mad crowd to the extreme right. The political fight this fall will be to win the schizophrenic middle. Some in the middle will be for the republican strong position against terror while perhaps these same individuals might be against the republican position to reduce corporate taxes. Others, having a hard time making a choice, might be for the republican position for school choice while being for the democratic position for universal health care. Some will be swayed by the educated political skill of Obama and others by the educated military mind of McCain. We should all hope that neither party gains control of the house, senate and presidency because history has shown how wasteful one party control can be. It usually takes a very long time to repair the damage done by one sided legislation.

DIVIDED GOVERNMENT

The prospects for a divided government are the best they have been in a long time. The market is likely to begin to discount this improvement in the weeks ahead. The market had a very bad day the same day that the negative article broke in the NY Times was published. By Friday afternoon, it was clear that the article had no legs and that it had served to unite conservatives behind McCain. The market moved up Friday after the Ambac story broke but, the upturn for McCain might have smoothed the upward path.

In any event, I have taken a couple of Saturday hours to write because the market upside from here is great.