About
In 1972 with an election beckoning and a Richard Nixon determined to be re-elected, the then chairman of the Federal Reserve, Arthur Burns was issued an ultimatum. “No recession…see to it” were the orders to Burns by Nixon. Burns seeing no option but to obey Nixon strikes a Faustian bargain: if Nixon will establish price and wage controls, the Federal Reserve would keep interest rates low. Everyone got what they desired. Burns got his wage and price controls. Nixon got reelected. The American people who cheered the wage and price controls and reelected Nixon in a historic landslide got a decade of high inflation and economic malaise. Politically popular and expedient policies, provided the tiniest of short-term benefits and very destructive long-term consequences.
The aftermath of the great Greenspan housing bubble is another example of politically expedient economic policy generating minor short-term benefits and significant and material long-term consequences. Nixonomics is a political and economic journal that examines the intersection of politics and economics. This intersection perceived to have been eliminated due to the long economic boom spanning two decades is now front and center of both politics and economics.
The US Federal government in 2008 has taken numerous unprecedented actions to mitigate the after-effects of the end of the great Greenspan housing bubble. The US government is now the owner of Fannie Mae, Freddie Mac, AIG Group, previously the premier financial companies in mortgage finance and insurance company in the world. The US government has facilitated the acquisition of Bear Stearns to J.P. Morgan through loans. The US government has also injected capital into the nations largest banks, by ultimatum.
What will the effects of these actions be? If history is any indicator, expectations that these various government interventions are likely to benign are delusional. If history is an indicator, the government is a poor active manager of private enterprise. The magnitude of the amounts being utilized to bailout and rescue private enterprises is unparalleled in economic history. A new chapter of economic history is about to be written and Nixonomics will be there to document it.
Coinciding with the governments interventions in the economy are the spread of political markets, where one can wager on various political and econonomic outcomes. These markets which were very exotic in the past are now mainstream. Obama and McCain contracts trade by the millions on Intrade. State by state electoral colege contracts are available for the 2008 presidential elections as are voter turnout contracts.
Political contracts are the second focus of Nixonomics. Some of the contracts are purely political ans many are a mix of social, political and economic. We expect political markets to expand in the years ahead. These markets are a tool to help set expectations and they address a blind spot in analysis — what’s the probability of a certain outcome occurring? Markets can provide a objective estimate of the probability of that outcome.
Markets however are not gods. Markets are merely a mechanism by which an estimate or a probability can be derived. Markets are not prediction machines but rather an effective and objective mechanism by which to determine the likelihood of an event. Markets are often wrong. In our experience they are they are wrong usually for reasons associated with human behavior, primarily groupthink, where all participants presume that only one outcome is likely, because everyone believes it - a behavioral bubble. The future is never singular, except in hindsight. There are many futures, but only one actually occurs. Markets are also guilty of behavioral errors like using the most available information instead of the most relevant information to analyze the likelihood of events.
Nixonomics will evaluate political event contracts on Intrade using behavioral analysis. The probabilities associated with the contracts will be analyzed using our unique behavioral point of view and we’ll let you know what our views. We’ll keep track of our analysis and the results will be tallied. Please note that Nixonomics is NOT a Registered Investment Advisor (RIA) and does NOT give individual investment advice. Our comments are an expression of OPINION ONLY and should NOT be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Futures, options and other leveraged instruments carry the potential for catastrophic financial losses that may drastically impair your financial well being. Although, we believe, our statements to be true, they always depend on the reliability and credibility of our sources. We cannot assure you that the information we use is accurate or complete. We do NOT in any way warrant or guarantee the success of any action you take in reliance on our statements. Investments in the securities markets are speculative and involve substantial risk. Capital loss is always a possibility. We recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions. Further, we encourage you to confirm the facts on your own before making important investment commitments. Past performance is no guarantee of future results. Our personnel generally own positions and transact in the securities mentioned in our reports. Disclosures of positions if any are current as of date of publication of each report. Archived reports may NOT represent current opinions and positions. Contact us at Capuchinomics@gmail.com if you have questions or concerns regarding any issue raised in our DISCLAIMER or DISCLOSURES. We are not compensated by companies or organizations in any way for publishing information about them. Copyright © Nixonomics a division of The Capuchin Group LLC 2003 – 2008.
So, welcome to Nixonomics. This is a new chapter in US political and economic history. We expect this will be a period of unusual events and unknown expectations.