Politics and Market Volatility

Politics and Market Volatility
David R Kotok
Cumberland, November 28, 2016



The story about the proportion of protestors who didn’t vote originated on November 14 with Station KGW, the NBC TV affiliate in Portland, which reported detailed statistics on the 112 arrested protestors and their voting history. Here is the link.

A few readers disputed the facts and noted that Snopes affirmed the existence of the KGW report but cited other factors that cast doubt on KGW’s conclusions. Our readers’ opinions on this matter divided sharply, according to their political leanings, as one might expect. Note that we spoke only about the 112 who were arrested, and the basic facts reported by KGW are not disputed by Snopes: “Most of the 112 protesters arrested in Portland last week didn’t vote in Oregon, according to state election records. Approximately 30 percent did cast a ballot in Oregon or in another state. At least seventy-nine demonstrators either didn’t turn in a ballot or weren’t registered to vote in the state.”

Some readers on both sides responded vehemently to my mention of the proportion of protestors who had not voted.

“I’ve made up my mind, so don’t confuse me with the facts” is an old comedy line that springs to mind. One reader accused me of inadequate or purposefully deceptive research. Another took me to task over my misreading of Snopes. And a third asked what difference voting makes anyway, since the whole system is “rigged.” I found the salvos coming at me from both political left and right. That type of response usually indicates that the message I drafted was properly centered.

No one praised the ingenuity of the KGW journalists who figured out an approach to extracting voting data from public records. They had the arrest records, which were public. They had access to the voter registration lists, which were public. And they had the record of who voted among the registered voters in the state. They took the time to cross-reference these records and derive their estimates. To the detractors who dispute the count of 79 not voting out of 112, I would just ask that they calmly consider KGW’s research methodology and ask them to examine whether they would have gone to the trouble and applied all the effort necessary to do this research. The conclusions about the 112 arrested protestors were carefully researched. There is no doubt that “over half” had not voted.

Let’s get to the bigger issue. It is the apparent widespread lack of voting that is most troubling. It has implications for our society and for markets.

More than 62 million people voted for Donald Trump (46.5% of voters), and he is the president-elect because of the rules that govern the Electoral College (EC). Following his victory we are witnessing the quadrennial debate over changes in the EC. The debate will rage until the EC vote is completed on December 19 and confirmed by Congress on January 6 – and it will continue for long thereafter. Protests over the election outcome and possible election irregularities notwithstanding, we expect the EC to select Donald Trump as our next president. Attempts to undermine or circumvent our constitutional structure and its traditional implementation are likely to fail, as they have in the past.

More than 64 million people voted for Hillary Clinton (48.1% of voters), so she clearly had a 2-million-vote edge. The other side of that analysis is that the Trump campaign did not spend much effort or money in states like California or Oregon, and we can only speculate what the popular vote might have been if they had. Here in Florida we were besieged by both campaigns at every level of media and personal encounter. My friends in those states that were not strongly contested were not accorded such lavish attention by the campaigns.

5.4% of voters selected alternative candidates to Clinton or Trump. And then there are the 96 million people who were registered but did not vote, not to mention the 50 million or so who were eligible to register but didn’t. (See heavy.com/news/2016/11/eligible-voter-turnout-for-2016-data-hillary-clinton-donald-trump-republican-democrat-popular-vote-registered-results/ for exact numbers.) When all potential voters are counted, it is the nonparticipation in our national political process that is most worrisome. That is true for the 79 out of the 112 arrested in Oregon, and it is true for about half of the rest of the country.

It is pretty clear that the two political parties have rigged a system whereby they perpetuate themselves and exclude other possibilities. Many primaries are closed (voters may select only candidates of the party in which they are registered), and a long period is required to change political parties. Some states have laws that disenfranchise voters. A marijuana conviction in Florida will do that, even after citizens have served their sentences. For those who have been excluded from voting, the application process to become voters again is tedious.  An estimated 1.7 million Floridians, or 10.4% of the state’s voting-age population, are disenfranchised because of a criminal conviction; and Florida leads the nation in denying former felons the right to vote. (See brennancenter.org/analysis/voting-rights-restoration-efforts-florida.)

The US is the only major mature economy with a two-party system, and attempts to alter this system have so far failed. I will quote from a research paper by Barclays on this subject:

“In the past century, five third-party candidates (six elections) have garnered more than 1% of the popular vote in the US presidential elections: Robert La Follette Sr., Progressive, 1924, 16.6% of popular vote, 13 Electoral College votes; Strom Thurmond, Dixiecrat, 1948, 2.4% of popular vote, 39 Electoral College votes; George Wallace, American Independent, 1968, 13.5% of popular vote, 46 Electoral College votes; John Anderson, Independent, 1980, 6.6% of popular vote, 0 Electoral College votes; and Ross Perot, Independent, 1992, 18.9% of popular vote, 0 Electoral College votes, and 1996 as Reform Party candidate, 8.4% of popular vote, 0 Electoral College votes.”

Meanwhile, four-fifths of Americans do not trust their government. They believe politicians (public officials) are “selfish” or “lazy” or “less intelligent” or “put their interests ahead of the country.” The attitudinal surveys suggest reasons why Americans opt out. See the Pew Research Center paper “Beyond Distrust: How Americans View Their Government” (people-press.org/2015/11/23/beyond-distrust-how-americans-view-their-government/).

Serious readers will find a lot of literature suggesting that direct democracy with high participation results in more efficient and accountable government. Start with “The Efficiency of Direct Democracy” in the Journal of Political Economy, vol. 88(4), August 1980 (journals.uchicago.edu/doi/abs/10.1086/260903), and “Direct Democracy Works,” Journal of Economic Perspectives, vol. 19(2), Spring 2005 (aeaweb.org/articles?id=10.1257/0895330054048713).

Some analysis suggests that populist successes like Trump’s in the US or Brexit in the UK are the result of a lack of true representative democracy. As frustration with incumbents and embedded systems grows, people increasingly respond to alternative forms when they find them attractive or see in them a means for expression. Thus politics that thwart direct democracy may be the source of their own demise over time.

Earlier this year we suggested that 2016 was the year of politics (see cumber.com/stocks-and-politics/). That forecast has proven true. We also suggested that politics would be the source of rising volatility. That has proven true as well.

There are more tests ahead in various mature economies, and we expect more volatility and more populist responses. The market roller coaster of Brexit and Clinton/Trump is only the beginning of rising, politically induced volatility. The 79 nonvoters among the 112 arrested haven’t discovered their power yet in the polling booth. That discovery still lies ahead.


David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and an M.A. in philosophy from the University of Pennsylvania.

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