Your Chances of Getting the Flu

SURPRISED

I thought the bill would pass – and that the Dow would drop 300 points because the markets delight in not doing the obvious. ‘Buy on the rumor, sell on the news,’ runs the old saw. Meaning that if something good is expected to happen, buy before it happens – and sell when it does.

Instead, in a display of irresponsibility unusual even for Congress, the bill failed. (John McCain and George Bush were supposed to deliver 100 votes; they delivered only 65. Democrats were supposed to deliver 120 votes; they delivered 140.)

So the market really dropped. Surprises move markets. (‘Buy on the rumor, sell BIG if the news fails to materialize.’)

The 777 point drop, at roughly 7% – lucky sevens! – was nothing like the 22.6% (509 point) drop of October 19, 1987. Then again, a lot of stocks dropped more than 7% yesterday (just as a lot of them dropped more than 22.6% October 19, 1987) – the Dow tends to be stodgy compared to smaller stocks. So as painful as 7% is, for the average portfolio, which is less conservative, yesterday was even worse.

I assume the rescue plan will pass later this week. Many others must be assuming the same thing or the market would have dropped more yesterday.

If no rescue plan does pass, we could have a problem worse – at least in some ways – than any economic problem we’ve seen before, because our economy is so much more complex and interconnected – and so much more leveraged. There were no credit cards in 1929. No home equity loans. No no-money-down mortgages. The National Debt was less than 20% of Gross Domestic Product; today it approaches 70% (up from 30% when Reagan/Bush took over). And who can even quantify the leverage of some of our more esoteric financial derivatives.

A true collapse of the kind Congress is being asked to avert could also hurt worse because the era of cheap domestic resources – oil gushers and firewood aplenty – seems to have waned. And because we have more to lose. As Roaring as the Twenties were, families didn’t need air-conditioning to be happy – or flat screen TVs or washer/dryers or SUVs. There were no such things.

All that said, don’t get too scared. Congress will pass a bill. And unlike 1929, we have FDIC insurance, we have Social Security, we have unemployment insurance.

NOT SURPRISED

From the January 2005 edition of The Only Investment Guide You’ll Ever Need:

I am dismayed by the reelection of George Bush. Yes, my taxes are likely to stay low, but I don’t see how we become more prosperous if much of the world hates us . . . if we are adding to our national debt at a tremendous rate . . . if we are investing in missile systems instead of education . . . if we are giving tax incentives to encourage the purchase of Hummers rather than fuel-efficient vehicles. And that just begins the list.

Under either Bush or Kerry, we would have faced challenges: Terrorism, which even when it doesn’t strike costs us dearly (security guards make us safer but they do not make us richer). Globalization, which will make the whole world more prosperous in the long run, including us, but which threatens our manufacturing base and puts high-wage jobs at risk of being teleported abroad. And more. (The likelihood of high energy prices for a very long time could be another.)

But under Bush, I see the problems just getting worse, not better.

[ . . . ]

When Alan Greenspan spooked the world by talking about ‘irrational exuberance’ in December of 1996, the Dow was 6500. Well, we’ve all worked very hard and smart these last few years, and earnings are up and we’ve built the Internet and laid a zillion miles of fiber optic cable and made astonishing breakthroughs in medicine-we’re richer than we were-so maybe 6500 on the Dow is no longer irrational at all. . . .

☞ But 14,000 sure was. And even once the bailout does pass, we’ll want to be realistic. I think we have to view the next decade as an exciting opportunity for our nation to tighten its belt, rebuild its infrastructure, achieve energy independence, and repair its balance sheet. At which point, in real terms (who knows what inflation or deflation will do the actual number), the Dow might reach 14,000 again.

For all our problems, we also have tremendous strengths. And technological progress is an economic tailwind. But as the last 8 years have so tragically shown (and as the 8 years before that also showed, by contrast), who runs the show really matters.

Which brings us to . . .

HOW SURPRISING WOULD A PALIN PRESIDENCY BE?

This piece by Bob Rice (Three Moves Ahead: What Chess Can Teach You About Business) takes the fairly conservative view that it would be a one in six or seven chance if John McCain were elected.

My view, of course, is that a McCain Presidency alone – never mind a handoff to Governor Palin – would be a calamity. Our country and the world yearn for a fresh start. Our youth, in particular, yearn for an inspirational call. We can do this. But it is not four more years of Republican leadership that will provide the fresh start. And it is not John McCain who is best suited to issue to our youth – who are our future – that inspirational call.

But what if it did become a Palin presidency? Rice helps us think through what a one in six or seven chance means.

If McCain is elected, he notes, a Palin Presidency is more likely than your getting the flu this winter.

Or about as likely as your rolling doubles with a pair of dice.

A Palin presidency would be three times more likely than that either one of the presidential candidates were left-handed. (And as it happens, both are.)

HOW SCARY WOULD IT BE?

Newsweek’s Fareed Zakaria puts the chance of a Palin Presidency, if we elect Senator McCain, at about one in five. Others put it higher still. But the point is – unless you’d sleep well knowing you had a round of Russian roulette to play tomorrow, a six-gun to your left temple – you really need to decide whether you’d be okay with a Palin presidency.

Zakaria is not. Like the conservative columnist I linked to yesterday, he thinks she should step down. On CNN yesterday he said, ‘it’s not that she doesn’t know the right answer; it’s that she clearly does not understand the question.’ To her claim of ‘executive experience,’ Zakaria responds that 85% of Alaska’s budget comes from oil revenues, and that her main job is in distributing that oil money to the citizenry: ‘This is good training to be president of Saudi Arabia, not the United States.’

The whole clip is worth watching.

We live in interesting times.