Set forth below is the text of an e-mail that I sent to Washington Post Columnist E.J. Dionne on January 18, 2010:
I read your book (Why Americans Hate Politics) some years back and have read hundreds of your columns over the years. Thanks for the learning experiences you have provided.
I was prompted to write you after reading your recent column entitled Mass. Senate Race’s Lesson for Obama. I do not agree with everything that you say, probably because I come at these questions from a different political perspective (I am a Sarah Palin supporter). However, I strongly agree with your argument that one of the biggest factors working against President Obama is that he came into office at a time when the odds of voters seeing a good economic performance were exceedingly low REGARDLESS of the policies pursued.
I believe that stock valuations affect long-term returns. If this is so, then the extent of overvaluation that applies at any given point of time is money that investors view as real and belonging to them but money that is fated to go “Poof!” within the next few years. At the top of the recent bubble, the amount of overvaluation in the U.S. stock market was roughly $12 trillion. The Going-Poof Process began during the last months of the Bush Administration, but, in the event that stocks perform this time anything at all as they have on every earlier occasion on which prices went to insanely dangerous levels, we are likely to see at least one more major price crash before this Bull/Bear cycle is complete. That obviously would take trillions more out of the pockets of middle-class Americans and cause Obama great political distress.
I have recorded a podcast that uses P/E10 (the most effective valuation metric according to people like Yale Professor Robert Shiller) to “predict” presidential success (looking backwards, I made “predictions” as to how each president since Eisenhower should have done in office based on the P/E10 level that applied on the day he was sworn in and then offered comments as to how effective each of these predictions turned out to be).
I think the P/E10 tool does a reasonably good job of predicting presidential success. It’s not hard to understand why this would be so. How the economy is doing is the most important concern of most voters. The economy is obviously far less likely to do well at a time when stocks are priced so as to cause trillions in middle-class losses than it is when stocks are priced so as to cause trillions in middle-class gains.
Here is a link to the podcast (#88, “Predicting Presidential Success Using P/E10”):
Please let me know if you have any thoughts or questions. I would be thrilled to get another political junkie interested in this idea of using stock valuations to gain insight into whether new presidents have the winds at their backs or blowing in their faces.