Pop! Why the Obama Bubble Has Collapsed

Investors know that what goes up—tulips, tech stocks, or politicians—must come down.

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The Obama campaign seems to have experienced a "Minsky Moment." That, as any financial bubblologist worth his weight in tulips knows, is the particular point in time when no more "greater fools" can be found to support a bubble and a Great Deflation finally begins. Sssssss. (The financial phenomenon is named after economist Hyman Minksy.)

Now Obama's Minsky Moment is morphing into the McCain Moment. The evidence? Here goes: 1) The final 10 national polls in June had Barack Obama up by an average of 7 percentage points. The past eight polls this month have John McCain up by a bit more than 2 points, according to RealClearPolitics. 2) Right around the same time that Obama's polling lead was entering landslide territory in June, his odds of victory over at the Intrade betting markets were hovering at a sky-high 70 percent. Today, Obama's chances are right around 50-50 vs. McCain. 3) And now, according to a New York Times story yesterday, the deluge of donations has started drying up: "Pushing a fundraiser later this month, a finance staff member sent a sharply worded note last week to Illinois members of its national finance committee, calling their recent efforts 'extremely anemic.'"

Speculative bubbles have come in many different varieties: flowers, railway shares, Florida property, Beanie Babies, comic books, technology stocks, exurb McMansions. Does Candidate Obama qualify? Well, the candidate does sound a bit like a lot of the hot Internet companies back in the late 1990s. Not much of a track record. Lots of media hype. Parabolic ascent. And now a stomach-dropping decline.

Maybe that's all a bit too cynical. But take a look at the following description of a bubblicious scenario from the preface of the 1841 classic Extraordinary Delusions and the Madness of Crowds by Charles Mackay. Tell me it doesn't sound like Peak Obamamania, from celebrity-packed, will.i.am YouTube videos to weak-kneed supporters at rallies (bold is mine):

In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.... Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Two events firm the Obama-tech stock analogy in my mind. First is Obama's selection of Joe Biden as his running mate. (This may have been the exact Minsky Moment for Obama.) The logic behind the move was that Mr. Change needed to be balanced by Mr. Experience. New Economy Obama acquires Old Economy Biden. It reminds one of the January 2000 purchase of Time Warner by AOL, a combination which turned out to be a synergistic dud. The amateur explainers at Wikipedia got this one spot-on: "The acquisition thus became a symbol of the dot-coms' challenge to "old economy" companies and the old economy's ultimate survival. The revolutionary optimism of the boom faded, and analysts once again recognized the relevance of traditional business thinking."

Has the "revolutionary optimism" of Obamamania faded? Let's turn to a second event. I was recently chatting with a top Obama adviser who was explaining in detail the campaign's ambitious 50-state strategy, how legions of Obamamaniacs were turning up in the reddest counties of the red states. If that was all true, I asked him, how come the polls were so close? If Obama was surging in places where John Kerry and Al Gore got clobbered, shouldn't the Democratic nominee be ahead by a country mile? The only answer I got was something about how the structure of the American electorate is historically biased against Democrats.

Huh? I felt like a Wall Street analyst during the tech boom sitting through a glitzy PowerPoint presentation—filled with buzzwords like "stickiness" and "eyeballs" and, of course, "sticky eyeballs"—who finally had the temerity to ask: "So if things are so great, why aren't you making any money?" It's like the old joke, "Sure, we lose money on each sale, but we make up for it on volume!" (The adviser finally admitted that Obama hadn't closed the deal on national security.)

Is Obama doomed to go from hero to zero, bubble to complete bust? I don't think so. Politicians, unlike stocks, don't go to zero—though Howard Dean did come awfully close in the 2004 Democratic primaries. Obama is still neck-and-neck with McCain. And just as investors slowly drifted back to the survivors of the tech wreck—Yahoo, Amazon, eBay—so might former Obama supporters who moved to "undecided" or to McCain. But just as burned investors wanted to see hard sales and earnings before they jumped back in, potential Obama returnees may want to know in greater detail what Obama is going to do about high gas prices, the housing bust, Afghanistan, and budget reform. I will add, however, that back in the spring, a top GOP political analyst told me that while Hillary Clinton was a candidate who, if nominated, would win or lose by a narrow margin, Obama could win or lose by 10.

Plus, the GOP may be experiencing its own bubble right now in the rising popularity of McCain running mate Sarah Palin. Maybe "Sarah America" is an example of what Mackay meant by "some new folly more captivating than the first." Maybe American politics has become like the economy, one bubble seemingly leading to another. Maybe. But by the time this latest bubble begins to leak, the election may already be over.

2008 presidential election
Obama, Barack

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