Welcome Back Stagflation.

The market never seems to make sense. The fed cuts rates, it goes down, companies come in with good earnings its down, bad news about employment and its up. Most of the time the underlying news is not the driver. Market moves can be as mysterious as the lockness monster or a UFO sighting. Everybody things they can explain the unexplainable. In the case of the stock market people get paid big money to explain the unexplainable.

Today there is a very rational explanation. Because economists still have two hands, to the dismay of Harry Truman, there are differing opinions. On the one hand economists/traders are saying its because people are putting money on the sidelines until the bigger rate cuts predicted within the week. On the other hand, this is a major sign of deep fundamental problems with the economy.

Not surprisingly I am siding with the latter. If you have read this blog in the last month you know i have been predicting doom and gloom for the economy. Why? Because of a contracted capital market. Lenders are squeezing the amount of money their willing to lend basically because they just got burned and they are low on reserves. This course was headed straight to a recession (don't pass go), but what is happening now is leading us to stagflation scenario.

At the same time companies are spending and hiring less,and financial institutions are lending less, the federal government is going to try and flood the market again with worthless dollars. The fed wants to continue to cut rates that are still historically low, and the geniuses on the hill want to send people checks indiscriminately. The result is economic slowdown combined with worthless dollars let loose: stagflation. Its not like im the only one out there saying this, but too many pundits act like reality isn't reality or they believe that the liberal media is just making this all up.

For those of us in fairyland (otherwise known as DC) it probably wont hurt too bad. For the rest of you...

New Hampshire Predictions

Republican:
1. McCain
2. Willard
3. Giuliani
4. Paul
5. Huckabee
6. Thompson

Democrat:
1. Obama
2. Clinton
3. Is there any other Democrats still in the race?

Rational:
I think a similar type of scenario will play out in both the Republican and Democratic primaries. The front runners (Willard and Hillary) were stung hard in Iowa and will lose in New Hampshire.

On the Republican side, Willard went from front runner in Iowa to losing badly against a guy with no money and a tiny organization. It's tough to pull out of that especially considering McCain's strength in New Hampshire. With that said, he may still take it if Obama pulls enough independents over to vote on the D side then Willard can win. That analysis goes against my belief about independents (the vast majority of them are partisans who enjoy the distinction of independence), but the landscape in New Hampshire is rapidly shifting left. In recent history it has been somewhat of a swing state but in the coming years it will become solidly blue (thanks W). Advantage: McCain. My Paul prediction this time may be wishful thinking (slightly) but I have a hard time seeing the non-existent evangelical vote in New Hampshire showing up to pull Huckabee over Paul. This may be a bad prediction because the dead have turned out in many past elections so don't discount them.

On the Democratic side, it is not momentum that will kill Hillary. She can withstand an onslaught. The problem is the exit polls from Iowa. Obama won the female vote. If Hillary, the first real chance for a woman to be President of the United States ever, can't win the female vote then she is done. Second, voters seemed to favor change over experience. Although that only captures the sentiment of Democratic voters in Iowa, it is probably not much different from New Hampshire. If the sentiment is even remotely similar, then it is too late for her to change the entire rational for her candidacy.

Overall Picture:
The winners of New Hampshire on both sides will go on to take their parties nomination. To me, this is much clearer on the Republican side. If McCain wins New Hampshire, he will win Michigan next (He and Willard are close in the polls there) which will provide the necessary boost for South Carolina. This will kill Rudy for good and finish Thompson and Huckabee. Replace the name McCain with Willard and the same analysis holds true (especially considering Willard will probably also win Nevada). It isn't as clear on the Democratic side, but I can't see how Hillary can take South Carolina, a state with a black Democratic base, away from a surging black man. Sounds simplistic, but such is life. If she loses all of the early states then she will be done. Her money and organization will mean nothing on February 5th because Obama has tons of money himself.


Note: Considering I F-ed up the Iowa predictions these thoughts may be useful inverse.

Iowa Predictions

I have been away for the holidays but I must put in my picks before its too late.

Republican:
1. Romney
2. Huckabee
3. Paul
4. McCain
5. Thompson
6. Rudy who?

Democrat:
1. Hilary
2. Obama
3. Edwards

Rational:
Having Ron Paul in the third spot is more than wishful thinking. In multiple polls he has double digit support among likely caucus goers in Iowa. A double digit number for Ron Paul is a much larger statement than any of the other candidates. If you say your for Ron Paul your not saying it because you kinda-sorta like him. You say it because you are solidly in his corner. That isn't true of the others.

On the Democratic side I am predicting Hillary because the candidates who do not have enough caucus supporters at any given polling station will lose them to the front runner: Hillary. I thought twice about predicting this because Kucinich has instructed his supporters to support Obama when they are outnumbered, but the remainder should go to Hillary.