- The Washington Times - Wednesday, August 11, 2004

You might think George W. Bush will be the overwhelming choice of shareholders in his bid for re-election. He cut taxes on capital gains and dividends while John Kerry wants to undo them. The Democrats oppose limits on runaway lawsuits that decimate corporate profits. They also want to double-tax profits earned abroad and impose price controls on domestic health-care providers and pharmaceutical companies.

But the latest reading on the Rasmussen overnight polling survey of likely voters shows Mr. Kerry ahead of Mr. Bush 48 percent to 45 percent. This shocking result should be a wake-up call to the Bush campaign. Investors are a core Bush constituency. It seems today’s higher gasoline prices and lower stock market averages are making for a nasty political mix that’s turning off investors to Mr. Bush.

Already, the Nasdaq has toppled 18 percent and the Dow and Standard & Poor’s have dropped 9 percent from their early-year peaks. Mr. Bush might still win despite these disappointing stock market figures. But if he does, he will buck the trend of the past four elections.

Over the first nine months of 1988 and 1996, stocks were up more than 10 percent in pre-election trading. Both times the party in power in the White House was re-elected: George H.W. Bush as Ronald Reagan’s heir in 1988 and Bill Clinton with a second term in 1996.

During the first nine months of 1992, however, stocks were about flat. Predictably, Papa Bush was defeated. In March 2000, the stock market began a steady slide, undercutting the Clinton-Gore prosperity argument and helping challenger George W. Bush win by a razor-thin Electoral College margin.

Should stocks continue sliding and oil continue rising in the weeks running up to the election, it will be the handwriting on the wall of a Bush defeat.

While economists in both political camps intensely argue over jobs and the so-called middle-class squeeze, they ignore the electoral potency of the stock market. Two decades ago, only about 1 in 8 U.S. households owned shares, so stocks didn’t really matter in political terms. Today nearly half of all households own shares, with almost 2 in 3 voters belonging to the investor class.

Recent polling data show a big Bush opportunity here. Mr. Kerry lost 9 percentage points from the investor vote following his speech at the Democratic Convention in Boston, according to an Investor’s Business Daily/TIPP survey. Surely the president can do better by reminding shareholders of his pledge to make the dividend and capital-gains tax cuts permanent.

Investors also would welcome a renewed push on personal savings accounts for Social Security reform as well as a surprise move toward pro-growth tax reform and simplification (as recently argued by House Speaker Dennis Hastert).

But if you scratch an investor deep enough these days, you are likely to find his biggest worry is spiking energy prices. The president has been silent on this.

At the beginning of the year, oil was at $30 a barrel while the U.S. and Chinese economies were booming full-speed ahead. Now, however, though the world economy has slowed, oil has shot up to $45. Why? The answer is wave after wave of terrorist threats, especially in Iraq and Saudi Arabia, have added a risk premium of as much as $10 to $15 a barrel. Oil-supply disruption threats have also come from Russia and Venezuela.

Mr. Bush must now answer why the U.S. would let terror threats disrupt our stock market and economy. Solving this is exactly why the Strategic Petroleum Reserve (SPR) is there. As a last resort, reserves should be used to counter these terrorist-related oil-price spikes.

Behind the scenes, oil-market traders, knowing they are back-stopped by continuing purchases from SPRs, keep betting on higher prices by buying contracts with impunity. So long as the U.S. keeps adding to its reserves, traders are confident of a one-sided market that will keep pushing oil prices much higher than softening commercial conditions can justify.

If the administration would simply cease filling the SPR, or better yet begin releasing small amounts of crude oil reserves onto the market, then oil markets would become two-sided again. This would force a rapid unwinding of long positions that would bring down oil prices by $10 a barrel or more. It would electrify investors (and consumers) and would surely contribute to a big pre-election rally.

Thirteen years ago Papa Bush employed a similar tactic during the Persian Gulf war. Oil prices crashed.

Sometimes politicians have to act like short-term traders and weigh in when least expected. In the political mind’s eye of the investor class, a government action to short oil would make a whole lot of shareholders willing to go long on Mr. Bush.

Lawrence Kudlow is a nationally syndicated columnist and is chief executive officer of Kudlow & Co., LLC, and CNBC’s economics commentator.


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