A Forecast That Obama Could Love

22-Nov-2010

I like this.

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By JEFF SOMMER, NY Times,

THINGS are looking up for Barack Obama.

You might not think so, given the flow of news lately. His foreign policy has met with limited success, at best. And, back home, unemployment is mired at 9.6 percent. Earlier this month, in a major political blow, Democrats lost more than 60 seats and control of the House of Representatives.

So what is there for Mr. Obama and his supporters to cheer about?

Try this: Based on the facts at hand right now, Mr. Obama is likely to win the 2012 election in a landslide. That, at least, is the prediction of Ray C. Fair, a Yale economist and an expert on econometrics and on the relationship of economics and politics.

What’s the basis of this forecast? In a nutshell: “It’s the economy, stupid.”

That’s the smart-alecky slogan that James Carville, the Democratic strategist, used to focus the 1992 presidential election campaign and propel Bill Clinton to victory. But after many years of study, Professor Fair has found that it embodies a certain truth: The state of the economy — which includes the wealth effect produced by rising and falling asset prices — has a dominant influence on national elections.

In recent columns, I’ve explored how elections — and Wall Street’s beliefs about them — affect the markets and the economy. Professor Fair has studied the flip side: how the economy helps to determine elections.

While updating his 2002 book, “Predicting Presidential Elections and Other Things,” he has calculated his first prediction for the next national election and posted it on his Yale Web site. He says the likely outcome is an Obama victory, regardless of whom he runs against. “If my model’s right, it couldn’t look better for Obama,” he said.

Still, this is hardly a rock-solid judgment. “I don’t want to push this too hard,” said Mr. Fair, 68, a veteran marathoner who has also used statistical techniques to gauge the effects of aging on runners. But there is considerable data behind his election prediction, using his econometric models. One produces a forecast for the overall, or macro, economy, while another uses economic inputs to forecast the national popular vote. At the moment, he says, the data augurs well for the president.

“The model certainly suggests that if the economy is good and improving as an election approaches, it’s very difficult to defeat an incumbent president,” he said. At the root of his conclusion is an economic forecast: he expects a significant improvement in the American economy by 2012.

While growth is relatively weak today, prices in financial markets — even if not the housing market — have already rebounded from their levels at the nadir of the financial crisis. Assuming relative stability over the next year or two, the effect of those rebounds — which ought to induce consumers and businesses to spend and invest more — should be feeding into the overall economy, he said.

Another important factor in his forecast, he said, is the assumption that “stimulative fiscal and monetary policies will continue.”

The first condition, stimulative monetary policy, is clearly in place. The Federal Reserve has said that it will keep short-term interest rates at their current near-zero level for an extended period. And, this month, the Fed embarked on a second bout of quantitative easing, or QE2 — large-scale purchases of longer-term Treasuries and perhaps other instruments, aimed at loosening monetary policy even further. Ben S. Bernanke, the Fed chairman, has confirmed that the central bank’s policies are partly aimed at keeping asset prices high.

What about fiscal policy? Barring another major economic crisis, the Republican election victory might seem to have ruled out another large fiscal stimulus. But Republicans are pushing hard to extend all the Bush-era tax cuts, not just those for lower- and middle-income taxpayers. If they get their way, Professor Fair said, a result may be a short-term budget deficit well above $1 trillion.

“That amounts to a highly stimulative fiscal policy,” he said.

His presidential prediction doesn’t depend on the accuracy of his own macroeconomic projections, which, he says, “look quite optimistic compared to the consensus right now.”

His model forecasts real annualized growth in gross domestic product of 3.69 percent for the first three quarters of 2012. A survey of leading economists by Blue Chip Economic Indicators shows an average forecast of 3.2 percent growth in real G.D.P. in 2012, while the Congressional Budget Office estimates 3.4 percent. Plug either of these estimates into his election algorithm and the result is the same: President Obama wins.

In the quarter that just ended, however, the economy was growing at a rate of just 2 percent. If that sluggish pace continued — or, more ominously, if there were a double-dip recession or a steep plunge in the markets — that forecast would change.

Under those circumstances, regardless of other issues or the identity of President Obama’s opponent, the model shows the president losing.

And there’s another problem. Professor Fair makes no claim to being able to predict “exogenous events,” like a financial crisis — he didn’t predict the 2008 crisis, for example — or a major war or an oil shock, which could radically change the landscape.

EVEN if the data for 2012 were somehow perfectly clear, the presidential prediction model is imperfect. The economy certainly has enormous sway over elections, but as Professor Fair has indicated in a series of academic papers, the model’s statistical accuracy is limited.

It has, however, done a very good job of predicting recent results. In November 2006, for example, long before the 2008 candidates had been chosen or the campaign issues had been clearly formed, Professor Fair ran the numbers for 2008. His prediction? A weak economy, and a Democratic landslide.


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