Until I read Weekly Standard editor William Kristol yesterday, I hadn't even considered the prospect of another Speaker Pelosi term. Then this morning I checked out Intrade, the Irish gambling Web site, and found the odds of a Speaker Pelosi (28%) were very close to the chances of a President Romney (26%), though the numbers do bounce around a lot. Three weeks ago, Romney was just above 40%.
Here's what Kristol, a former Chief of Staff to ex-Vice President Dan Quayle, wrote:
"Maybe things will move in a Republican direction. Or maybe Republicans will hold on in an even popular vote election with the help of incumbency advantages and post-2010 redistricting. But it's also possible that an Obama +3 victory on Election Day would drag the Democrats to an edge in the congressional vote-and control of the House. In any case, based on current polling, I don't think one can say that it's now out of the question that we could wake up on the morning of November 7 to the prospect of ... Speaker Nancy Pelosi."
It's hard to imagine the financial markets would react well to such an outcome. In reality, Kristol is a loyal Republican who is dismayed with the Romney campaign-he called Romney's 47%, Moocherpalooza remark "arrogant and stupid" and insulting to millions of older Republican voters-so he may just be trying to convince GOP contributors to steer money to Congressional candidates in tight races.
I've always been dubious about the authority many pundits assign to Intrade. The reasoning underlying this handicapping system essentially is the wisdom-of-crowds theory. At times, it has proven remarkably accurate. At other times-it most recently overestimated the odds of the Supreme Court overturning the Affordable Care Act-it has failed miserably. Granted, predicting the actions of nine men and women is a very different exercise than guessing the decisions of hundreds of millions of voters.
Other political handicapping systems that rely on the Moneyball-style use of Bayesian conditional probability are equally questionable. With veteran pitchers and batters, one typically has much larger sample sizes with which to make predictions than they do with polls of elections that occur every two or four years.
Polls that show President Obama leading Romney by 12% in swing states like Wisconsin are highly suspicious. Critics like Fox News commentator Karl Rove have pointed out that they appear to oversample Democrats dramatically, though Fox News' own polls don't diverge much from others.
If Romney has a strong performance in the first debate next week, it could well alter the dynamics of the race, while simultaneously upending the Intrade numbers. Whoever wins, the election should be closer than many think.
However unlikely, the prospect of a Speaker Pelosi would be a game changer for the financial markets-and not a good one. Last spring, Loomis Sayles senior equity strategist issued a bullish outlook for equities and said the markets would be quite comfortable with a President Obama or Romney. I can't believe he was factoring a Speaker Pelosi into that equation. When I mentioned this possibility to two moderate Democrats yesterday, their reaction was: OMG.
Most polls of affluent Americans indicate that they are resigned to higher tax rates. But I would presume these folks are envisioning Clinton-era marginal tax rates in the high 30% area. It's unlikely they are imagining rates dreamed up by a Speaker Pelosi, inflamed by academic types like Paul Krugman, that could extend far higher.
Even Romney has started to back away from lower taxes in recent days. As DoubleLine CEO Jeffrey Gundlach noted at our Alternative Investments conference in late July, the possibility of "humongous tax increases" is real in light of the budget deficits and a looming tidal wave of senior citizens. And I don't think he conceived of a new Speaker Pelosi term.
Others, like former Reagan Budget Director David Stockman and Fed Chairman Alan Greenspan, have advocated for simply cutting spending while allowing the so-called Bush tax cuts to expire. Suddenly, that scenario might look pretty good. But why this equity market is so complacent-except for the fact there is nowhere for investors to go-is beyond me.
My own guess is that the odds of a President Romney are more like 45% and the odds of a Speaker Pelosi are more like 10%. However, those are pure guesses. Charlie Cook is the Beltway's smartest handicapper in my book, and as of today, he sees a maximum Democratic gain in the House of eight seats.