Why political futures markets got the health care bill so wrong.

Commentary about business and finance.
March 22 2010 6:05 PM

Don't Short Obama

Why political futures markets got the health care bill so wrong.

Barack Obama. Click image to expand.
Barack Obama

It would be very difficult to tote up all the times pundits pronounced the health care bill dead, and the prospects for the Obama administration dire—especially after the election of Scott Brown in January. Intrade, the political futures market, which functions as a conventional-wisdom-processing machine, also got health care wrong. Check out this chart for the contract on health care reform being passed by June 2010. The contract is worth 100 if it is passed, zero if it is not. After Brown's election, it slumped to as low as 20. As recently as March 17, it was below 40. Even as late as Friday, it was trading in the mid-80s. These trading data show that "investors" in this market were skeptical of the Obama administration's ability to pass significant health care legislation, right up until the end.

Is there a larger lesson here? (Aside from the obvious one, which is political futures markets usually aren't very good at predicting what actually will happen in the future?) I think so. And it's this: Don't short Obama. In fact, that's been the lesson of Obama's entire career so far.

Think of Obama as a stock. When he came onto the national scene, he was small and undercapitalized. Some investors (i.e., donors and organizers) went long, but plenty of the heaviest hitters bet against him. During the campaign, the prospects of his success were continually downplayed by the Clintons, the national media, and the Republicans.

Those shorting the Obama candidacy got crushed. And since January 2009, so, too, have those who have shorted the Obama presidency—especially the performance of the markets and economy under Obama. The same Republican politicians and economic pundits who (wrongly) said Bill Clinton's 1993 budget would destroy the economy and the stock markets, and who (wrongly) said President Bush's tax cuts would usher in an era of endless prosperity and wonderful market performance, warned again that the presence of a Democrat in the White House would spell doom for the Dow.

Here's a two-year chart of the S&P 500; if you shorted the market after the election, or after the inauguration, you've lost money. And if you shorted in March 2009, after the passage of the stimulus package, when Stanford economist Michael Boskin penned the foolish op-ed in the Wall Street Journal with the headline's "Obama's Radicalism is Killing the Dow," you'd really be feeling some pain. The S&P 500 is up 72 percent since then.

The shorting of the economy's performance under Obama wasn't limited to the ideologues who populate the Journal's editorial page. Economist forecasters have also effectively shorted Obama, arguing that the economy would not respond to the stimulus and other efforts. In the second quarter of 2009, economic forecasters surveyed by the Philadelphia Fed said the economy would grow at a 0.4 percent rate in the third quarter of 2009 and a 1.7 percent rate in the fourth quarter of 2009. The reality: The economy grew at a 2.2 percent rate in the third quarter (more than five times the rate they projected) and at 5.9 percent in the fourth quarter (more than three times the rate they projected). Oh, and if you shorted the dollar on the grounds Obama's policies would debase our currency, you've lost money, too.

On some level, it's tough to blame the Intrade crowd for getting Obama and health care wrong. The type of people who trade there, folks who think they're quite savvy about money, the market, and politics, are the same conventional wisdom hawkers who were so monumentally wrong before the financial crisis. If you've tuned into CNBC or Fox Business Channel, or read the Wall Street Journal since January 2009, you would have been subject to a constant stream of money managers, pundits, talking heads, and policy wonks declaring that the U.S. economy is becoming a socialist hellhole that is hostile to business and investors. (If there were a way to short Fox Business Channel, I'd do it in a hurry.)

The conventional wisdom market has not yet internalized the message that it's dangerous to your financial and professional health to short Obama. Judging by the debate in the House last night, by the talk on cable news shows this morning (full of talk about how this is going to kill Democrats in November), and by the chatter on the business networks this morning (full of talk about how the tax increases in the health care bill will destroy the markets and the economy), the shorts haven't learned anything.

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