Kerry Risk Premium

I think I’ve finally solved the riddle of the ever increasing oil futures price that I’ve been ranting about for a while now. The polls in the Presidential election have failed to give Bush a clear lead and the oil markets are factoring in a Kerry risk premium. Why specifically Kerry? Well, a Kerry Presidency would mean higher oil prices:

  • Kerry lacks a clear energy plan. Yes, Kerry says he has a plan at every opportunity. He also encourages people to visit his website to look at his plan. When you check his website, his plan basically amounts to…”I have a plan.” Markets abhor an information vacuum and Kerry’s lack of a real plan is precisely that.
  • Kerry lacks any clear philosophical base. In the absence of a specific plan, even a solid philosophical base might give markets some comfort. Kerry lacks that, voting for things before he votes against them, abandoning twenty years of liberal voting to paint himself as a fiscal conservative, being Catholic but supporting abortion and getting divorced.
  • Kerry is fundamentally dishonest. Kerry’s pattern of lies aren’t mistakes caused by bad information, they are part of a pattern of pathological inability to tell the truth about even the most trivial matters like the score of a baseball game. Not since Richard Nixon has a high level American politician approached this height of dishonesty and I’m not sure that even Nixon made it to this level. Again, markets abhor a lack of good information and if you can’t believe that the potential President at least intends to tell the truth, all bets are off.
  • A Kerry Presidency will mean instability internationally. Whether it’s the Middle East, Venezuela or Nigeria, a Kerry administration will be too weak to deal with problems. Admittedly there are two factors here. First is Kerry’s own wishy-washy character and lack of integrity that will cause a Kerry administration to lack credibility. Second, Kerry will not have the backing of the Senate. But the lack of Senate backing is miniscule compared to the problem of speaking loudly and carrying no stick at all (unless it meets a global test).

On the other hand:

  • Bush offers a real detailed plan for energy independence that includes conservation, new production and alternative sources.
    • Bush offers a clear philosophical vision that allows us (and markets) to fill in the blanks with pretty good guesses where a definite policy isn’t already laid out.
    • Bush has fundamental integrity. This isn’t about political spin or reliance on information which turns out to be faulty. This is about a man who will mean it when he (again) puts his hand on the Bible and swears to “preserve, protect and defend the Constitution of the United States.”
    • Bush will mean international stability. Democrats cry because America is not loved abroad. Interestingly, people still want to come here, so I doubt that even that is true, but in spite of what Kerry may imply America is much more respected internationally than it was under Bill Clinton. Bush has followed through on commitments once made and increased the credibility of the United States. When trouble occurs, Bush will be ready with firm but quiet words and a big stick.

Bottom line, markets abhor a vacuum. Right now we have one. November 2, the Kerry risk premium will either be realized and prices will firm or Bush will be reelected and prices will fall. Now, I need to consult a few more polls and call a commodities broker….

NV1962 takes a different perspective based on oil market movement 11/1. I suppose that it’s a matter of interpretation, as much as my attributing the risk premium to Kerry in the first place was. The polls on Monday (Rasmussen, Mason-Dixon) are trending Bush, so unless we’re basing the conclusion on the Redskins game, it would seem to be world oil markets endorsing George Bush. I’ll also throw out two other possibilities: that the markets are simply (finally) correcting because of a bit of “irrational exuberance” by speculators or the markets may simply be breathing a sigh of relief that there are hopefully only two days of uncertainty left whichever way it ends up.

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