Candidates and Fuel Prices

Sophisticated market observers and economists joined today in objecting to Presidential candidate positions on energy issues.

The Statements

Sen. McCain was first with a proposal for a "gas tax holiday" this summer.  Sen. Clinton joined in, leaving Sen. Obama as the only holdout for maintaining federal gasoline taxes.

Sen. Clinton has been even more aggressive about high profits for oil companies.  This afternoon, as spotted by Colin Barr, her campaign complained about the decline in ExxonMobil stock, in spite of excellent earnings. 

There is something seriously wrong with our economy when Exxon’s record
$11 billion in quarterly profits are seen as a disappointment by Wall
Street,” Clinton said. She went on to use the company’s latest gains to
reiterate her call for a gas tax holiday — a proposal has been criticized by economists who say it won’t result in lower prices for consumers. “I believe we
should impose a windfall profits tax on big oil companies and use that
money to suspend the gas tax and give families relief at the pump.

The Reaction

Not surprisingly, these proposals generated near-universal dissent from the economic community.  The complaints about profits and the ExxonMobil stock decline of 3.6% created similar objections among sophisticated market observers, like the panel on Kudlow and Company.

Barry Ritholtz is ready to give a good lesson to the candidates.  Check out his article about how the candidates fail Econ 101 (a course frequently cited at The Big Picture!).

We are delighted to find ourselves in agreement with Barry, the economists, and the savvy market observers on Kudlow’s excellent program.

But here is the question:  Do the candidates really not understand how economics and markets work, even at the level of Econ 101?  Or is their motive a different one?

Is This Credible?

Well — McCain admitted that he was soft on economics and was reading Greenspan’s book to bone up!!  In spite of this, we think his team has enough economic horsepower to "speak truth to power" as we say in the public policy business.

Senator Clinton’s case is even more clearcut.  She turned $1000 into $100,000 in only ten months of cattle futures trading, a record that none of us can claim.  She did it by "following the market closely" and "making her own decisions".

So she understands markets.  Her campaign also knows the proper role of experts, according to the Wall Street Journal.

Clinton’s position on the gas tax runs counter to that of economists
across the political spectrum who argue that a temporary tax reprieve
would do little to lower gas prices this summer.

“There are times a president will take a position that a group of
quote-unquote experts will agree with and there are times when a
president will take a position that a group of quote-unquote experts
won’t agree with it,” campaign spokesman Howard Wolfson told reporters today, “Sen. Clinton believes this is the right policy.”

An Alternative Explanation

Instead of assuming that people intelligent and successful enough to be Presidential candidates are stupid, let us instead assume that they are smart.  As time winds down in a life-or-death struggle, the candidate looks for anything that might work.

It is natural to look at the issues of the day and gauge the public reaction.  Everyone is worried about high fuel prices.  Whom do they blame?

Here are data from a 2007 poll.  We follow such polling questions constantly and the numbers do not change that much.  The data show that the average person blames big oil or government for high fuel prices.  They do not understand much about market forces.  They go for conspiracies and simple-minded answers.  It is a winning tactic, at least in the short run.

If you were a candidate, would you try to educate the 2/3 of the people who are wrong-headed, or would you "go with the flow?"

Here is the poll question:

Who do you blame the most for the recent increase in gasoline prices
– oil producing countries, oil companies, President Bush, Americans who
drive vehicles that use a lot of gasoline or normal supply and demand

Oil companies


President Bush


Supply and demand


Oil countries


American drivers


Not sure



Barry calls the candidate efforts "pandering" and the term seems to fit.  Let us take careful note of the circumstances:

  • An issue where nearly all of the top experts — people who have relevant credentials and have reflected carefully — draw a conclusion different from many average  people.
  • Many consumers of the information believe in conspiracies and simple, common-man explanations.
  • The candidate, someone in a position of leadership, chooses to exploit the public mis-perception rather than to educate and to lead.
  • The resulting pandering helps the candidate, but might well hurt the average voter — the person consuming the candidate’s message.

This all has an eerily familiar pattern.  It is something to think about.

And by the way, we do not think any of the energy proposals have a ghost of a chance of passage.

Weekly Sector Update

The apparent shift in Fed policy was partly anticipated by the markets.  As a result, the expectations concerning the dollar changed.  The TCA-ETF portfolio from last week had a number of "weak dollar" plays, foreign markets, energy, and basic materials.  The data for this week (as of Wednesday’s close) show a shift in the rankings, with more emphasis on technology.  (This is evolving rapidly).

The table below shows this week’s rankings.  Vince has adjusted the strength scale to aid in the interpretation.  The underlying method has not changed.  A reading of zero indicates the average expected performance of a sector over a one-month time frame, the general time horizon for the model.  A reading of 50 indicates an expected return that is one standard deviation above the average, roughly the top third of returns.  A reading of 100 indicates an expected return of two standard deviations above the average.

While we update the model daily, we have introduced a program for average investors that does weekly trades unless emergency adjustments are required.  A report on this program is available upon request.

(Click to see the chart)


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  • Banker May 3, 2008  

    If crude prices do not come off quickly and in a substantial way, the U.S. economy is really going to be hit hard. The dollar starting to strengthen is a good first step.
    Any thoughts

  • Commuting Distance May 4, 2008  

    Look for the states to pick up the slack.
    All of the spendthrifts are hurting from falling real estate sales and prices and slowing sales tax receipts*. Plus none of the financial companies will be paying tax for the next couple years. By the time Labor Day rolls around, the price of oil will have dropped (supported now by anti-Bush speculators for maximum anti-Republican sentiment) and the unwashed will not notice the Feds putting their 25Cent tax back on. And since the lapse will merely sunset without a vote, no one will care anyway.
    *this is why sales tax on internet purchases may go through this year. It’s for the children.

  • Jeff Miller May 4, 2008  

    Banker – I agree that a stronger dollar would help. This is part of the Fed approach to getting liquidity where it is needed rather than just cutting rates.
    The market has been slow to understand this approach, but more are commenting on it.
    Do we need lower oil prices? That would help, but we might well ask what would happen if oil stabilized in the $100 range.
    A good question —

  • jcfogerty May 5, 2008  

    Those cattle futures gains by Hillary had nothing to do with market savvy. This was high-end payola.

  • Jeff Miller May 5, 2008  

    JC – The cattle futures trading credentials reference was intended as a little joke, in the same spirit as McCain reading Greenspan.
    Sorry. I should put in some of those smiley’s or something.
    Thanks for giving me the chance to comment.

  • Mike C May 6, 2008  

    I am an Indiana resident. Originally, I hadn’t planned on voting in the primary as I am neither Democrat or Republican (independent with libertarian leanings).
    However, I was so repulsed by Clinton’s blatant populist pandering on this gas tax issue, that I went today to the polls and voted for Obama.