Devangshu Datta: Don't buy into the rhetoric

WORM'S EYE VIEW / Illogical investors often misread political trends

Wall Street and its clones have truisms for most occasions: "Sell on news, buy on rumour", "Buy when there's blood on the street", and so on. One of these relates to bad times "" during the Great Depression from 1929 to 1937, investors were advised to buy into auctioneers and makers of red ink.

The logic was that these were counter-cyclical industries. Red ink-makers would gain in sales volumes due to the preponderance of red ink on balance-sheets. (In reality, ink-makers produce the whole spectrum of colours and they suffered due to the number of businesses that simply stopped preparing balance-sheets.)

The auctioneer argument held up to analysis. Auctioneers buy cheap from bankrupt businesses. When everybody is cutting expenses, auctioneers' markets expand. An auction house is the first port of call for a bargain-hunter. So, auctioneers gain in terms of both supply and demand during recessions.

Wall Street and its clones also tend to get political opinions wrong. Investors are more prone to buying into rhetoric than they would like to believe. There's a sucker born every minute and he's probably donating money to the wrong political candidate.

Take, for example, the relationship between Franklin Delano Roosevelt and Wall Street. FDR adopted the policies that re-inflated the US economy and ended the Great Depression. It's possible that Wall Street would not have survived without his measures.

FDR was a patrician from a famous political family; it could have been expected that he would have started with the respect of Wall Street on account of his lineage and subsequently earned its gratitude through performance. Nope "" through each of his four terms, his opponents received the support of Wall Street in knee-jerk reflex.

That illogical pattern hasn't changed. Take the current incumbent of the Oval Office. George W Bush has presided over the most painful US joblessness since the Great Depression. He's created the biggest fiscal deficit in history.

He's led the US into its most disastrous military campaign since Vietnam. His reign has coincided with the biggest bear market in 30 years. Is he reviled and hated on Wall Street? Nope "" he's also collected the biggest election war-chest in history "" beating his own record for 2000.

Bush's predecessor, Clinton, was elected on a slogan of "It's the economy, stupid!" He presided over the biggest economic expansion in history, a bull market that lasted through two terms and left a massive budget surplus. All this while Wall Street consistently backed his opponents!

On the basis of the above, Big Business probably doesn't know what's good for it. That seems to hold true in the Indian context as well. In retrospect, Indian business should have thrown its lot solidly behind Narasimha Rao in 1995. It wouldn't have suffered through so many years of uncertainty.

There's a clue that investors miss when making political decisions. Politicians don't emerge full-grown from the thighs of their parties. Even the scions of Indian political families have usually pursued other callings at some stage.

Some politicians are lawyers, others are former film-stars, a few are retired airlines pilots, some are retired service men, others are trade union leaders and, of course, there are lots of petty criminals.

Some of these are economically-neutral professions. Most are not and a few are counter-cyclical. A politician who hails from a counter-cyclical profession will probably make a poor economic manager.

I think that's what happened with Bush. He's an oil-man and energy is the one industry that makes profits when the US is in recession. He's never been able to make the leap of imagination required to conceptualise a situation where his old mates are doing badly and everyone else is doing well.

My rule for Big Business would be simple: Never support a man who's worked in a counter-cyclical industry or one whose family works in counter-cyclical industries. In the confusion of an upcoming general election, this may prove a more useful rule of thumb than wading through the rhetoric.