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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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  1. H Niehaus | August 26, 2008

    Has a presidential candidate ever thought of an typical industry cost controls of a hiring freeze and early retirement packages. I have no idea what the Federal payroll is, but I bet there would be billions to be saved there. Maybe you can enlighten us on the amount.

  2. Don A. Smith, Jr. | August 26, 2008

    You are dillusional if you believe there will only be a slight difference in the amount of tax increase if Obama is elected. The media has invested so much in not only anointing Obama, but in also dragging more liberal democrats into the House and Senate, that if they succede in fleecing the American people into electing Obama and the liberal democracts, taxes will increase so much on anyone making $25,000 or more, that the economy will come to a halt, just to fund all the programs they want to increase and begin. Obama's plan to fund a program to increase fatherhood in the welfare state is so unbelievable it is laughable. The father is already there, at least one of them, but they do not marry or take responsibilty, therefore keeping the welfare money flowing. Everyone wants to say the people in the welfare system are a certain color or lack of income level, but the truth is the lack of responsibilty on all the parents involved, and the government wants to continue rewarding this behavior.
    No, if Obama and the liberal democrats take control of our goverment, our economy and life style for anyone working and making more than $25,000/yr.will go down hill so fast it will make your head swim. Of course that is what they want, they want to bring people down, not raise people up. Their idea of life is socialism. Don't skim over points of the democrat's agenda that will cost this country it's freedom.

  3. John Holland | August 26, 2008

    As election time nears, I believe we should remember that the new President cannot get everything he wants without Congressional support. Who we elect to Congress has never been more important and the need for accountability never greater, in Legislative, Executive and Judicial branches. We must choose the best and demand accountibility from all.–

  4. John Adair | August 26, 2008

    Horacio if you think there is no difference between Obama or McCain you are high on something other than life. Apparently you are not to concerned about your freedom!! Maybe we should just give in to these terrorists. Freedom is probably over rated. I can not believe you people. Lets stay home and not fight for freedom. What good are your investments if you live under socialist rule or you are dead. John

  5. savant9 | August 27, 2008

    yeah right, horacio. maybe you don't but i remember when jimmy carter became prez with his devastating socialist ideas. in his admin we experienced 21% interest rates and 14% inflation rate and it took reagan all of his 1st term to get us back on track to growth. that is just what we'll get also with an obama/socialist agenda. if obama wins, that great plopping sound you'll hear is the stock market falling through the floor…

  6. Bob Caragol | August 28, 2008

    Martin, your examination of an Obama presidency leaves out one very important aspect of his agenda. Obama's spending proposals would seriously impact the deficit and lead to a sharp decline in the dollar. It is interesting that you omitted this point since it undermines your belief there would be little difference between the presidencies of the two candidates. Perhaps you are trying to be non-partisan but frankly you sound to me like a democrat.

  7. John | August 28, 2008

    Wow, Martin, I thought that I was not very bright, but, after reading most of the responses you received on your article, I am convinced that there is still some hope for me. Do you actually read alll that drivel? Some of it actually scares me because it borders on the idiotic and psychotic.
    One question, however, on the interesting notion that John Holland champions: "Who [sic] we elect to Congress has never been more important and the need for accountability never greater, in Legislative, Executive and Judicial branches. We must choose the best and demand accountibility from all.–". To whom shall we make the Judicial Branch (ultimately the Supreme Court) accountable?" The People? The Executive Branch? The Legislative Branch? Quite some time ago, before I became a citizen of the United States of America, I studied the three branches of government and I was left with the impression that accountability by the judicial would endanger, if not negate, minority rights.
    John

  8. Jeff Buuck | August 31, 2008

    Whatever happened to good fiscal policies. You know cutting taxes will increase revenue. Cutting spending is always a good place to start balancing the budget. How can you expect us to take your financial advice if you don't even understand such basic stuff?

    Jeff

  9. spike | August 31, 2008

    John our recent citizen, the only point you got right was your first point,
    I agree you are not very bright.

    Martin, if you think that by implemeinting a 33% increase in cap gains and
    dividends tax you will increase net revenue to the govt. you are delusional.
    I believe revenue will decrease and of course I do agree with you, spending under Obama will significantly increase. The last time we had anyone introduce this kind of spending was LBJ and his Great Society program.
    We all know what that eventually led to, Carter's admin. recieved the bill when it finally came due and of course thier attempt to pay was to print money and increase taxes. That only made things worse. Obama seems to be proposing the same plan to fund his new initiatives.
    Right now our economy has pulled back a bit from the largess it showered us with for quite a few years but it is still an economy the rest of the world can only envy.
    I am anxious to read your analysis of McCains proposals on our economy.
    I hope I your Dem. leaning don't overwhelm your objectivity.

  10. Luigi hdez | August 31, 2008

    I get really upset when people talk about socialism without knowing what the heck their are talking about it.I invite you to se Canada ,live there is great but to cool for many right.China ,what you people think about china ,all the paper we make in wall street is bought by china and now days if this country want to make a desscion have to call china and ask then becouse they are our money supplier among other things,check how many US company have being sold to chinise investors.
    I guees when you look at the word Socialism you think in the old USSR or Soviet Union or what they tell you in the news like everyone is equal and make the same amount of money and none of that is true.One of the priciple of the Socialism is everyone will have the basic needs cover ,like food,clothing,roof where to live,and medical attention,I will said Canada is close to a Socialism System and US ony need two things a better health care system like Canada and have a better planned economy to avoid this crisis and people will be able to keep their homes and have more stables jobs.
    Taxes ,we need it of course but they have to be fair and Goverent need to stop espending money in wars and unesesaries issues ,issues that most of it only represent the interest of the wealthiest perople(helth care and insurance companies,oil and car manufatures,weapons etc) and not the people of the united of state.
    If you make more than 25k a year why you so worry of paying a little bit more taxes, you take your kids to better schools and you may have better oportunities than other becouse the previous vicios system allows you to be there were you are .Now is the time for a change and US really need it and Mcain is not the answer.
    If we want to be succesfull at this moment we need to be together and try to work side by side with your neighboor,we have to change the way we think about only solve our problems or fill our pocket with money,yes we have a family and we will continue to do so but we have to be more humble and do it bu at the same time help the other.
    I see on the news a Diaz Balar talkng about the issues with Cuba and we need a Republican to help them to solve the problem with Cuba , i have heard that for 50 years and Castros remain there.Is not by force that we solve conflicts,How many years af cold war agins the Soviets and when did it end,When US acted smart and get inside the peoples mind on the siviets people and they only archive that working with the soviet ex president Gorbachov ad was the end of the USSR.We need to do the same thing with Cuba , pretend to be the good guys and wotk like the Troya Horse and work from the inside and get into the system.
    The Soviet Union was not the answer to all of the problem on that region back in the time but after the desintegration of the USSR how many more war conflict we have on that side of the world and how many nuclear weapon are now in so many diferent countries that can be used one day agains us,US was wrong geting in to that country bussiness , now is worst.
    What is what CUba can do agains US, nothing , just becouse a bunch of cuban politician that are getting reach from those policies agains Cuba wants to keep that subject alive putting money on their pocket not becouse is in the best interest of the US people is becouse is on the best interest of that group of politician.
    People we need to face each issue if it is the best for a group of people or for the all the people living in this country.
    I dont know if Obama is the Best but sure is not the other ,I will give him a chance and he fail which i dont think he will becouse Democrats need to make a good impresion and settle to stay and being Obama from a minority he own that to those people and those other minorities ,may be that is why the white people are afraid to vote for him to loose that control that had have for centuries but dont be afraid everything is for the best of everyone not for just a few.
    I know many will disagree but this is one of the beauty of this country,The Freedom of speech.Good bless America and all the American working for a better United Stated.
    Just my 50 cents.

  11. peter moore | August 31, 2008

    Obama is not elgible=not born in usa. Convention endorsement was not legal.Hillary still looks good.Why is Bill so happy-he knows.Obama s Hawii papers are bogus.His Kenya certificate of birth is true.

  12. Ed | September 3, 2008

    The real question (hopefully we solve) is getting the right combination of government and private sector stimulus to get our economy chugging along at a healthier pace. Obviously Democrats favor government stimulus while Republicans favor private stimulus. I wish i knew the right mix to our current situation but i don't. One thing that is interesting that might be the real determining factor is religious ferver. The USA and South America were both explored during the same time. Many came to the USA to practice their Christian faith free of government impositions, while many went to South America looking for gold and the fountain of youth. Today the largest christian movement is an underground one in China, followed by India and other emerging countries. While the governments do not endorse such moves they also cannot control a heart and mind that is looking for something beyond material gains and thus (no disrespect to Islam which apart from the oil underneath their land cannot make this claim) where Christian revival occurs it seems God blesses those people.

    So as the Obama motto "change you can believe in" is only a cute saying to fool the gullible into believing this, a real heart change by our citizens as we look past the economics and towards things that are eternal may be the firm foundation upon which to move forward as a responsible nation. This is the change i believe in.

Trackbacks

  1. […] Election 2008: Dawning of Democratic Convention Illuminates a Few Bright Spots For Investors addthis_url = […]

  2. […] Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.  […]

  3. […] Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.  […]

  4. […] Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.  […]

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