THE BLOG

Bull Market in Bailouts and President 08

10/23/2008 05:12 am ET | Updated May 25, 2011

Despite a brief rally for McCain's (47.6) contract post GOP convention, the primary Obama (51.2) bull market trend has apparently resumed on the President 2008 market.

Obama's price has surged in the past week or so as the U.S. financial crisis turns into the "worst since the Great Depression." In the same period, McCain's price has dropped back over 10 percent. After an explosive mid-August to early September where his price rocketed from the mid 30's to the mid 60's, McCain's contract is tumbling. Is this a correction in the beginning of a bull market for him? Or the resumption of his previous bear market trend?

How unusual is this sort of price action at this point in the cycle? These market prices are mirrored in the polls. According to fivethirtyeight.com:

"Over the course of the past several days, there has been a rather dramatic shift in this election toward Barack Obama. Our trendline estimate, which is engineered to be fairly conservative, registers the swing as equaling roughly 4 points over the course of the past week.

Changes of this velocity are unusual outside of the convention periods and the debates, especially in close elections. It took John McCain about 60 days and tens of millions of advertising dollars to whittle Obama's lead down from roughly 5 points at its peak in early June, to the 1-point lead that Obama held heading into the conventions. Obama has swung the numbers that much in barely a week."

If McCain's price collapse accelerates, perhaps he could appeal to the Bush Administration to extend the short selling ban to his own contract? Such intervention is not totally impossible in this new post-free market era. Alas, I doubt this will happen since McCain bizarrely threatened last week that if he were to become President, he would fire Christopher Cox, Chairman of the SEC. I don't think a short selling ban will come to McCain's rescue now.

Speaking of market interference, having seized control of vast swathes of the mortgage and insurance markets, the Republican administration has now introduced a trillion dollar bailout bill which comes with the added bonus of the biggest expansion of federal power over the financial markets since the Great Depression (there's that word again). Some analysts are comparing the Federal intervention in markets to the Soviet Union. Communism, schmommunism. Free market traders are loving it! Intrade contracts for end of year DJIA above 11250 jumped from 30 to 55 on the government bailout of the financial markets. Bets seem to be on that no stock price will ever be allowed to fall again. Price fixing didn't work for the Soviets -- in the long run, but perhaps in the short term, traders may be taking the right bet.

The Intrade Recession 2008 contract has also plummeted. Despite mass layoffs, home foreclosures, rocketing inflation, punters place only a 12 percent chance of a recession in 2008. Considering that negative GDP growth for two successive quarters is required and that the government is responsible for reporting GDP growth, well then, in this Soviet-like day and age, punters are betting that the US government will continue to maintain that inflation is only 1.2% and, hence, GDP growth will remain "robust." The Soviet Union you might recall was also a "fundamentally sound" economy -- right up until the day it collapsed into a whole heap of nothing in 1989.

Following on the nationalization theme, I was speaking to a central banker from Venezuela. He told me that the US nationalization of the mortgage market was a good idea. I said, "Of course you think that. But when Venezuela does the same thing, like when you nationalized the oil industry, you are harangued by the United States." He laughed and responded, "That's just politics."

So, where next for the new found American lust for nationalization? I notice someone has started a contract over at Intrade.net on whether the US will nationalize the oil industry in order to finance the banking bailout! Punters are so far placing a 50% chance of that outcome.

With all these bailouts and nationalizations, I'm surprised nobody has started a US dollar contract on Intrade.net? What fate awaits the greenback?