National Pulse Index - Halloween Edition

Until the last three or four days, the month of October was basically a wash between the parties. Now the late break towards the GOP is clear. Over the last three days, the Republicans have enjoyed an average of 25 net points of polling upticks nationally per day, the biggest three-day reading yet. Over the last six days, the have a total net of 118. That's a big number. This is happening despite Dems solidifying their races in places like California and New York. Given their isolation, there might be some softness in those states' numbers, though.

House model still at +71 seats for the Republicans.

National Pulse Index - October 30th

Republicans continue to have the late momentum. Interestingly, all the back and forth for the month of October has been roughly even, with the Republicans netting a positive 17 points of polling upticks vs. Dems. Not much, in the scheme of things.

For an explanation, go here: National Pulse Index Explanation

House model steady at +71 for Repubs.

Elections and the Gravity of the Cocktail Party Middle

Elections tend to swing on the whims of independents, that is, voters not affiliated with any party. The overall percentage of independents has grown dramatically over the last couple of decades, so politicians ignore them at their peril.

But who are these folks? It seems to matter, because the media gives us breathless reports on them almost hourly. The message I get is that they are the thoughtful voters, the ones who carefully weigh every candidate on the issues, and then come down from the mount close to election time, brows furrowed with the weight of all that cogitation, to deliver their verdict.

What a load of hooey. 

Before I get into exactly why, I will say that there are smart independents out there. Many of them have grown weary of one party or the other and have thrown in the towel, and I am somewhat sympathetic of this decision. But on the whole, I don’t think they are the enlightened bunch they are made out to be. I am on to them.

Here’s why. Have you ever noticed that when two people sit opposite each other, they tend to copy each other's postures? One leans back, the other leans back. One crosses their legs, so does the other, without conscious thought. This is a well documented phenomenon known among psychologists as postural mirroring.

The same precise effect happens with preference sets. People tend to gauge the viewpoints and behavior of others around them and modify their own positions accordingly. Over time, certain viewpoints or behaviors will become acceptable that weren't previously. Blogger Glenn Reynolds once pointed out, by way of example, the sudden appearance of American flags across our landscape (particularly on cars) post-9/11. Were people suddenly more patriotic? Probably not, but opinions and behavior are highly contagious. Once a few opinion leaders started waving the flag, others took this as an "all clear" signal that they could overtly display their patriotism, and they did. This is sometimes called a "preference cascade."

A year later, the flags were gone as the process reversed itself. Investment bubbles  and fashion trends come and go in much the same way.

Nowhere is this phenomenon more acute than in the realm of politics and political issues. The explanation is rooted in the fact that most people don't pay much attention, but they don't want other people to catch on to this fact. No one wants to appear uninformed.

This is where the cocktail party theory comes in. I know this doesn't describe anyone reading this, but let's pretend for a moment that you are that uninformed person, and you find yourself at a party. Suddenly, much to your horror, the conversation turns to politics. You very much don't want to look like an idiot. What to do?

The answer, assuming you are forced into the conversation, is to take a position as close as possible to those around you - the cocktail party center. No one will challenge you if you're agreeing with them. Disagree about anything and you might be forced to back up your opinion with facts or logical argument. That would be risky.

This ends up being self-reinforcing: the more you observe and mimic others, particularly from your own social milieu, the more you end up truly embracing their opinions, and the more you, in turn, tend to then influence others.

In my own hometown, this phenomenon was rampant in the last election cycle. Probably around 2005, it became unfashionable to voice support for George Bush. Not our kind, dear. Can’t even pronounce “nuclear.”  I watched as the independents and more than a few Republicans quickly modified their views to reflect those of progressive opinion leaders, who were pumping up the volume at the same time that conservatives turned mute.

When Obama came along, the table was set. Supporting him was "enlightened" and "sophisticated." Nod your head and watch your social stock rise.

Now, the process has completely reversed. Progressives are dispirited and conservatives are making the most noise. The prevailing view is that Obama has been a disappointment. "I voted for him, but he hasn't lived up to my expectations," is now the precise cocktail party center. The preference cascade has flipped over, maybe in record time.

I don't begrudge the uninformed. Well, maybe a little. And maybe occasionally a lot. People want to live their lives and not spend hours figuring out the pros and cons of every issue and candidate. That's their prerogative. But hey, let's not pretend they're Stephen Hawking.

National Pulse Index - October 28th

Modest comeback for Dems.

House model still at +71 for Repubs.

Bond Bubble Redux - the "Quality Bubble"

Two years ago, we watched a credit bubble burst. The bubble centered around low quality borrowers, primarily in the sub-prime mortgage area. Now, we have a different kind of bubble: a quality bubble.

Ask yourself, what happens when the government issues, say, a ten-year note? Investors buy it and collect interest for ten years and then get their principal back. Simple enough. 

But where does the government get the money to pay investors back? Well, if the government starts to run surpluses between now and then, it can use cash to pay investors back.

What’s that, Sparky? You’re laughing, so I can’t quite understand you…oh, you think I was joking about the surpluses? Okay, gotta agree with you there. Seems we’re careening in the other direction, actually.

Option two is we get more investors to invest in new debt in order to pay the old investors back. That should be easy, right? It’s never been a problem before.

A what? A Ponzi, you say? Well, that sounds extreme, Sparky. New investors will simply be lured in to pay off the early investors before everyone figures out that…hey wait, that sounds just like…okay, you got me again. In fact, now that I think of it, the government will have to borrow money not just to pay off bondholders, but also to finance all the new deficit spending between now and then…eventually, we run out of “greater fools.”

But wait, there’s still one more option! The government can always print money to pay people back. The Fed can just buy our debt from us! Good to know that’s always an option of last resort. Wouldn’t want the U.S. to drop to junk bond status.

The Fed is already doing that, you say? C’mon, be serious. You are? $1.5 trillion worth in 2009 alone? Holy Quantitative Easing, Batman!

Gosh, no wonder government bond rates are so low. The Fed is eating its own cooking. Plus, banks have been incentivized to be heavy buyers to repair their balance sheets. So 10-year rates are down around 2.6%. 2-year rates are – get this – at 0.38%. Just curious, Sparky, who do suppose finds this an acceptable return over two years? Give a hundred bucks and get back $100 plus 76 cents. Nice!

Actually, this is basically happening all around the world. Here are some sample 10-year bond rates.

UK             3.14%
France        2.96
Germany    2.56
Italy           3.92
Japan         0.90

Japanese debt is almost 200% of GDP, exceeding all countries of the world other than Zimbabwe, and yet people loan them money at close to zero. They, and others, will run out of greater fools soon.

Which leads me back to the notion of the quality bubble. There are systemic reasons – the government and bank buying I mentioned – why the yields on debt of highly profligate nations (including our own, alas), are being driven to record lows. These systemic forces are completely at odds with the fundamentals. Which do you think prevails? 

Sparky asks if this is a trick question. No, Sparky.

The trigger will be inflation. 

Hey, that reminds me, where the heck is it, anyway? It’s there, hiding in the weeds, waiting. Inflation hasn’t come back because there’s no “velocity” of money, which is to say the trillions of dollars of cash out there is hiding in our nation’s mattresses, both personal and corporate. It starts moving again when there’s loan demand, and that doesn’t happen until employment comes back. There is a tight correlation between employment and money velocity:

The correlation here is 0.75, which is really high for anything in economics land.

When people start getting jobs, inflation comes back. This time it will be nasty.