Election 2008: Dawning of Democratic Convention Illuminates a Few Bright Spots For Investors

"Election 2008" is an ongoing Money Morning series that examines the investor implications of the presidential election campaign.

By Martin Hutchinson
Contributing Editor

No matter who wins the looming presidential election – Barack Obama or John McCain – investors are likely to see a similar outcome: The new president will quickly remove the distortions in the U.S. and world economies that have resulted from this lengthy period of low interest rates, and he’ll do so without eviscerating portfolio values.

But while the outcomes will be similar – as we’ve reported – the routes the candidates will follow to achieve those similar outcomes are decidedly different. This week – in observance of the Democratic National Convention in Denver (see accompanying graphic) – I will look at the potential effect on investors of a Barack Obama presidency, which most experts refer to as “Obamanomics.” Then next week, in observance of the Republican National Convention in Minneapolis-St. Paul, I will examine how a McCain presidency would affect investors.

This exercise in analysis is made all the more worthwhile by the fact that Obama and McCain are now in a dead heat in the latest political poll, according to CNN.

Taxes Will Climb…

The main bad news from an Obama presidency is higher taxes. The Obamanomics platform includes a promise to repeal most of the Bush tax cuts. Obama has also vowed to stop the estate tax from disappearing as was scheduled in 2010, and to increase Social Security taxes on high incomes. He also said last week that both the capital gains tax and the dividend tax should be 20% compared to the current 15%.  At first glance, all those tax increases appear depressing for the stock market itself, as well as for U.S. investors’ pocketbooks directly.

However, the alternative to higher taxes may well be an out-of-control budget deficit, which is far more dangerous in the long run. We already have a deficit of close to $500 billion, without there having been an official recession. What’s more, that figure does not include the full costs of the Iraq War (which are funded by “supplementals”) and does not include the cost of the dual bailouts of Fannie Mae (FNM) and Freddie Mac (FRE), which is certainly a substantial multiple of the $25 billion lowball estimate posed by the Congressional Budget Office (CBO). Given that we’re not electing Calvin Coolidge as president with a promise to make Ebenezer Scrooge the U.S. treasury secretary – meaning that spending is only going to be kept marginally under control, tax increases are pretty well inevitable, anyway.

…as Spending Does, Too

On the spending side, Obama is pretty much a standard-issue Democrat. He will introduce a new healthcare plan, which will be expensive, though not as expensive as Hillary Rodham Clinton’s would have been (because it will not include a “universal mandate” forcing everyone to participate). He will wind down the Iraq War and is fairly unlikely to engage in further adventures that turn out to be expensive (though one can never tell here, particularly with Vladimir Putin on the prowl). He may take a bit of an ax to corporate welfare, farm subsidies and ethanol subsidies, none of which are important to the major Democratic constituencies. Thus, overall spending under Obama is likely to be higher than under McCain, but not by much.

On monetary policy, Obama is advised by former U.S. Federal Reserve Chairman Paul Volcker, a believer in fighting inflation through high interest rates – a strategy he successfully employed in the early 1980s. Further, current Fed Chairman Ben S. Bernanke is a Republican appointee whose term expires in January 2010. And since former Fed chief Alan Greenspan served throughout the Clinton years, there has not been a Democrat-appointed Fed chairman since Volcker himself in 1979.  It is thus very probable that Obama will replace Bernanke, and quite possible that he will replace him with a monetary “hawk” who will push interest rates higher. This will make Wall Street squawk, and will likely cause a temporary crash in stock prices, but will end up being very much to the long-term benefit of the U.S. economy. Enough with the financial bubbles that we’ve seen!

Key Obama Policies Will Create Investment Opportunities

Obama’s other major initiative is to combat global warming by instituting a system of carbon emissions permits that – unlike Sen. McCain’s equivalent permits – would be sold, rather than given, to the major emitters. This is a much less efficient way of reducing carbon emissions than a carbon tax, and involves government more deeply in the details of how emissions are reduced (for example, government gets to decide how many permits to sell). The additional revenue from the permits may help balance the budget, although Obama has plans for a $150 billion government investment in clean energy technology over the next decade.

Internationally, Obama is likely to pursue a more multilateral foreign policy than current U.S. President George W. Bush or McCain. He appears reasonably committed to international trade, and may indeed through his charisma have the ability to make progress on the Doha round of international trade talks, stalled since 2003.  That would increase investment opportunities in such emerging markets as India and China – particularly when patents or other intellectual property are involved.

In terms of sectors that investors should either consider or avoid altogether, an Obama presidency is likely to be bad news for the pharmaceutical majors producing patented drugs. Prescription drug costs are one of the key catalysts behind soaring medical costs, and any kind of public sector healthcare scheme is likely to attack this area, viewing it as a major opportunity for cutting costs. The medical sector in general might also suffer, not so much because of Obama’s policies as because of the greater license a Democratic administration would give to the trial lawyers.

The major beneficiaries of a policy of higher interest rates will be companies with large piles of cash, who will earn better returns on that money and have cheaper opportunities to deploy it as the share prices of their highly leveraged rivals crash to earth.

Finally, you might look for a new energy company that could benefit from Obama’s afore-mentioned $150 billion alternative-energy fund.

[Editor’s Note: Money Morning Contributing Editor Martin Hutchinson has personally interviewed the economic advisors for candidates McCain, Obama and Edwards, and very early on concluded that Obama and McCain would be the best candidates for investors. For a full report on the "presidential profit plays," please click here. The report is free of charge.]

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