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Bush or Gore?

Given the choice between handing the nuclear button to a robotic Green Groupie or to an oil-man, who appears to be a near retard, what would you do? Around half the voting populace of the US took a holiday instead of exercising their franchise. A lot of those who did bother to vote, proved their functional illiteracy by mispunching the ballot.

This US election reminded us of many things. The most important thing is that it doesn't matter much of the time just who occupies the White House. The point was made most cogently by novelist/scriptwriter Jerzy Kozinsky in his novel/film "Being There".

There, Chance (Peter Sellers) is a semi-retarded middle-aged gardener, brought up by an eccentric millionaire who dies suddenly. He hits the street wearing his late employer's old clothes. The only things he has ever done are tend gardens and watch TV. His biggest asset is an impenetrable smile. He is adopted by a billionairess with political connections (Shirley McClaine).

She introduces him into high-flying circles. Chance rapidly gains a reputation for wisdom since he speaks only in the metaphor of gardening and flashes the smile when he doesn't understand what's going on. The FBI, CIA and several private agencies check him out and discover nothing, adding to the confusion.

So when the next presidential election comes along, guess who's contesting? He does very well in campaigning since he's a friendly bloke who likes babies, shaking hands and kissing cheeks. Nobody feels threatened by him. Nobody knows his views on abortion, the Middle East, racial tension and sexual licence, for the excellent reason that he doesn't have any.

He thrashes the opposition in debates by talking endlessly about tending flowers carefully during the frost and watching them bloom in the springtime. He wins a landslide verdict. And just like Ronald Reagan, Chance makes a popular president who leads the nation back into prosperity.

It would matter if Alan Greenspan was a moron. Greenspan makes decisions about monetary policy. It does matter that Congress isn't filled with sparkling minds, since Congress votes on fiscal policy. But so long as the president doesn't actually press the nuclear button, he isn't all that important. A good president can make a difference. But mainly in the area of foreign policy, rather than pure economics.

The last time an American president could justly claim to have influenced the economy was when Nixon pulled USA off the gold standard, long before many of Rediff's readers were born. And, of course, Roosevelt decided to give Keynes' prescription a chance in the 1930s New Deal.

For what it's worth, Gore and Bush are not particularly likely to rock the boat. Gore is a mass of contradictions wrapped inside a boring exterior. He loves labour and will do his best to protect US blue-collar jobs. Large chunks of organised labour hates him since Gore also wants to legislate the internal combustion engine out of existence. Gore is also liable to suddenly feel exercised about non-issues such as Third World labour not being paid at First World rates.

On the other hand, preposterous claims about inventing the Internet notwithstanding, Gore is a friend of IT with a fair understanding of Silicon Valley's needs. He would probably raise H1-B visa quotas and cut access for old economy exports simultaneously. He may just look for long-term alternatives to fossil fuels since he is sensitive about environmental damage and energy sustainability.

Bush won't do any of that. He comes from a state that thrives on high crude prices and the attitude will almost certainly spill over into a new assignment. He is also ignorant about conditions in the Third World and seems proud of it. He is thus unlikely to cut access to the US markets. As to H1-B visas, the Valley will lobby for increases anyhow and Bush is not likely to refuse.

Thus the ownership of the presidency will have a fringe impact on India. What is interesting is that Dalal Street doesn't seem to have figured this out. Every operator seems to be betting on a non-issue.

Another interesting point is that the linkages between Dalal Street and Wall Street are changing in puzzling fashion. If one goes by stock price correlations, they've changed quite a bit in the last calendar year. The statistical quants certainly know this already, but the general public doesn't.

Briefly, we could use a set of indices as surrogates for the Indian and US economy. If those indices rise and fall in tandem, we have a trading tool. It's a powerful trading tool because of the 12-hour time difference. What Wall Street did last evening, Dalal Street may do this morning. In the longer run, a high degree of correlation would imply that the Indian and US economies tend to move together in their GDP growth fluctuations.

The old US economy (including Microsoft and IBM) can be represented by the Dow Jones Industrial Averages (DJIA). The new economy can be represented by the Nasdaq-100. The Indian economy can be represented by the Sensex.

The Indian IT economy moves almost in exact tandem with the Sensex. This is because the big guns of the ICE economy (Infosys, Satyam) are also the big guns of the Sensex. We would have examined Indian ICE separately as well, but the credible ICE indices don't reach back very far.

In the mathematical sense, any correlation between Indian and American stock prices must be lagged by one session to be meaningful because of the time-difference. A perfect correlation is 1, which means that the two series always move in tandem. A negative correlation means that the moves are in opposite directions, while a correlation of more than +/- 0.64 is statistically significant. We are examining only three relationships because of the time-lag. That of DJIA-Nasdaq, DJIA-Sensex and Nasdaq-Sensex.

We have chosen not to examine volatility. That is worth a separate study. For what it's worth, the Nasdaq is the most volatile averaging 2.5 per cent moves per session, the Sensex moves 2.44 per cent in an average session and the DJIA moves only 1.95 per cent.

Between May 1998 and now, the correlation of Sensex to DJIA is a healthy 0.79. The Nasdaq and DJIA logs a lower but still significant 0.74 while the Nasdaq-Sensex correlation is 0.85. This implies that they move in tandem most of the time, with Nasdaq-Sensex moving in the same direction better than nine sessions out of ten.

Take the shorter timeframe of this calendar year, and the numbers change drastically. The DJIA-Sensex has a statistically insignificant 0.06 correlation while the DJIA-Nasdaq has a negative correlation at -0.09. The Sensex-Nasdaq correlation is still high at 0.76 but it's lower than across the entire timeframe. Between May 1998 and December 1999, the correlations are much higher. DJIA-Nasdaq is 0.88, DJIA-Sensex is 0.86 and Nasdaq-Sensex is 0.84.

The implications are interesting. Translating those numbers into plain English, old economy US stock prices are more correlated to the Sensex than to the US new economy. And, Indian stocks in general are more correlated to the US new economy than either of the other relationships. But in the last year, the US old and new economies have traded completely out of sync, while Indian stocks have remained highly correlated to the US new economy.

This is somewhat counter-intuitive and throws up several questions. Is the Indian economy quite as dependent on Indo-US trade and especially on the US new economy as this implies? Does the US new economy operate independently of the US old economy? Why would the correlations between the various segments of the US economy change so radically in the last eleven months?

The off the cuff answers would be respectively "No", "No", and "I don't know". India is not really an export-oriented economy although the IT sector is indeed driven by exports to the US. The US new economy depends to a significant extent on US old economy investment plans for its growth. A complete divorce between US old economy and new economy stock movements suggests that mispricing is occurring somewhere. I wouldn't care which of Gore or Bush makes it to the presidency. But I'd love to hear really convincing answers to these questions.

Devangshu Datta

Money

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