The scenario that could paralyze Wall Street

Two words in politics truly scare financial markets: Ron Paul.

By The Fiscal Times Mar 7, 2012 6:36PM
Image: Politics (© Jim Zook/ Suzanne McGee, The Fiscal TimesThe Fiscal Times

Trying to predict how financial markets will respond to politics is a mug's game, especially when it's still impossible to tell who's going to challenge President Obama as the Republican Party's presidential candidate.

Republicans portray themselves as the party devoted to free markets and unrestrained capitalism, and any market-shaking comments in debate forums or political ads will likely be more prevalent in the final race, rather than the Republican primary battle.

Still, Super Tuesday's results -- which, by early Wednesday morning, awarded six states to Mitt Romney, three to Rick Santorum and one to Newt Gingrich -- is possibly the worst possible scenario, not only for Republicans but also for investors trying to get an edge on what sectors win or lose as the November election looms. Had Romney walked away with a decisive edge over Santorum, some investors argue, that would have been good news for financial stocks, at least.

Romney is widely viewed as the candidate with the best chance of unseating Obama in November, and also highly unlikely -- given his background -- to aggressively implement reforms in the Dodd-Frank Act or pursue more regulations that are unpopular on Wall Street. He's not likely to impose higher tax burdens on hedge funds and private capital investment funds, like the one he ran himself that generated a large part of his fortune.

As for Santorum, who has won support by emphasizing his socially conservative views, pundits from the investment world worry that while a win of both the nomination and the presidency would be great news for manufacturing stocks (as a candidate, Santorum has pledged to eliminate corporate income taxes for these companies as a bid to revive manufacturing), the same opinions that appealed so much to a vocal section of the Republican party may not fly with the broader electorate.

Unlike Romney, Santorum can't point to experience running a business or a state's finances. Sure, that means he's immune to charges being levied against Romney that his state healthcare policies prepared the way for Obama's healthcare reforms, but come the general election in November, that’s not going to matter.

The wildest card of all right now is Ron Paul. He has no incentive to quit the race and every incentive, once either Romney or Santorum is reluctantly accepted as the party's official candidate, to emerge as a spoiler, and an independent candidate.

If you're looking for a scenario that really scares Wall Street, that's it. Some of Paul's more maverick views -- dismantling the Federal Reserve, returning to the gold standard -- are those they find downright frightening, regardless of their political affiliations. "What happens if this dude comes back as an Independent?" frets one hedge fund trader. "What happens if he forces everyone to discuss this as if it's serious?"

There's no certainty on the Street that a Republican would be better for financial markets than a Democrat, or even better for stock-market sectors, with the possible exceptions of healthcare and financial services. Still, volatility aside, stock markets have fared well in the Obama years: The S&P 500 ($INX) is up 48% from its December 2008 levels.

Healthcare reform has so far proved less oppressive to companies in the industry than they had feared; in practice, financial industry reforms are being watered down as they are implemented (under pressure from heavy industry lobbying). Even defense stocks aren't likely to suffer, as long as tension with Iran lingers. So any market moves in the coming months are most likely to come in response to ad hoc comments that one or another of the candidates lets drop, rather than any dramatic policy shifts.

For the time being, it’s not likely that candidates’ policy differences are going to register much for traders. What is being noted, however, is the uncertainty on the Republican front, and what that might mean in terms of future uncertainty. If there is one thing that Wall Streeters hate far more than the most oppressive regulator in the world, it is uncertainty.

This is a particularly bad time for the outlook to be murky: The sanctions against Iran are driving crude oil prices higher; there's still little clarity on whether the economy is really moving forward; and there's no certainty that a Republican victory in November would mark an end to gridlock in Washington.

Some traders, at least, have one important point in common with Mitt Romney at this point in the race: They wish he was the clear winner, if only so that the debate can shift to the Republican nominee vs. Obama, and they can begin to formulate strategies for what happens after November.

Related links:
Taxes to Abortion: Where Romney and Santorum Stand
Obama, Romney Sweep Real Tax Reform Under the Rug
The Two Issues That Can Bring Down the Economy

Mar 7, 2012 9:36PM
I couldn't care less what happens with Romney, Santorum, or Obama. But what's so bad about dismantling the Federal Reserve and going back to a gold standard - or, in other words, having money that is backed by something other than debt? 

The biggest criticism I've heard about Ron Paul is that he's crazy...that he's a "fringe" candidate because of his "lunatic" ideas regarding monetary policy. Since when is fiat currency that can be (and is constantly) inflated away to oblivion preferable to a currency with a globally accepted standard of value? And why do so many people believe that it's preferable to have an entity creating "money" from nothing and selling it to our government so that they can spend as much as they want, while putting all of us in debt to the aforementioned entity? 

You can call Ron Paul many things, but claiming that he's "scary" or "frightening" because of his views on monetary policy is just plain stupid. 

And by the way...his views on this happen to be in line with the federal constitution. Does anyone remember that document? 
Mar 7, 2012 9:51PM

The sad thing is that this entire country is so far in debt now ....there seems to be little to do accept just keep printing money until the presses run out of recycled paper.

None of the candidates running are speaking the language of a nation so poorly run but perhaps no one can.

Mar 8, 2012 10:06AM
This article smells like propaganda.
Mar 8, 2012 9:50AM



With due respect, Do you have a clue as to what you are talking about?


Healthcare reform has so far proved less oppressive to companies in the industry than they had feared; in practice, financial industry reforms are being watered down as they are implemented (under pressure from heavy industry lobbying).

That's because it doesn't start till 2014!


I can tell where your political leanings are! I could pick your whole article apart but it is so pathetic I don't know where to start!



Mar 8, 2012 9:02AM
The FED was created to make banks rich by creating money out of thin air and charging the government interest. It should go, but that is easier said than done. The concept is so much a part of our economy that getting rid of it would be very painful. Plus the fact they will kill anyone who tries. How many people even know Kennedy was trying to cut the FED's power when he was killed?
Mar 8, 2012 2:43AM
i hope you enjoy four more years of obama!?
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