In January 1973, undisputed world heavyweight champion Joe Frazier defended his crown against largely untested Olympic gold medalist George Foreman in Kingston, Jamaica. As legend has it, boxing promoter Don King entered the arena on the night of the fight with Frazier’s entourage, glad-handing everyone in sight before taking a seat on the left-hand side of the first ringside row. Foreman awaited Frazier in the ring and the challenger’s people were seated on the right-hand side of the same row as the promoter with the electrified hair. At the time, Foreman was a 3-1 underdog and few in the crowd expected to be in their seats for very long.
Once the fight got underway, it didn’t go well for The Champ. Frazier’s pressing, advancing style was made to order for the glowering, fearsome George (the smiling huckster with the famous grill still lay many years in the future), and Foreman’s blows landed with thudding authority. Frazier hit the canvas six times in the first two rounds, as legendary television announcer Howard Cosell famously exclaimed, “Down goes Frazier! Down goes Frazier! Down goes Frazier!” In King’s retelling, he shifted a few seats to his right every time Frazier was knocked down, and when referee Arthur Mercante mercifully ended the bout, the promoter found himself celebrating with the new champion’s entourage and he exited up the right-hand aisle with them a few moments later, his role as preferred promoter secured yet again. Don King clearly knew how to handle regime uncertainty.
Unfortunately for the rest of us, it’s not such an easy trick to pull off. The phrase “regime uncertainty” was first coined by economist Robert Higgs in 1997 when he argued that the Great Depression was prolonged by government policies that managers of the time viewed as hostile to business. Higgs argued that such policies contributed to an atmosphere of uncertainty regarding property rights and taxation policies, and claimed that this uncertainty severely discouraged investment. Maybe he has a point. A review of President Roosevelt’s anti-business rhetoric bears a striking resemblance to the utterances of our current commander-in-chief, as do the pained responses of each era’s business communities. Current industry leaders have been complaining for months that uncertainty regarding healthcare costs, financial regulation, and economic policy have made them hesitant to deploy their enormous cash reserves. Some of that may be about to change
Many view the upcoming midterm elections as an opportunity to check the Obama administration’s most liberal impulses, and the market has rallied on the possibility that Republicans may gain control of one or both congressional chambers. Traders have snapped up shares in advance of the elections, and the correlation between bullish sentiment and Republican poll numbers indicates that the market is pricing in a Republican-controlled House of Representatives. While such a Republican victory should be good for the market in the medium term, it could be accompanied by a modest sell-off as traders sell on the news, having bought on the rumor. It may take an additional Republican victory in the Senate to ignite an immediate post-election rally. Traders should carefully consider their time horizon before placing their bets.
George Foreman’s time horizon for his initial reign as heavyweight champ was probably shorter than he would have liked. A little more than a year and a half later, in the famous “Rumble in the Jungle” in Zaire, Big George was the victim of a stunning eighth-round knockout at the hands of former World Champion Muhammad Ali. Ali employed a novel tactic, which he later described as the “rope-a-dope,” that saw him covering up and laying back against the ropes during large portions of the fight while Foreman fruitlessly flailed against his arms and body. Once Foreman had worn himself out, Ali exploded off the ropes and sent George to the canvas for a ten count and a new regime in boxing began.
The Republicans have been using Nancy Pelosi and Harry Reid as punching bags to great effect throughout this political season and it doesn’t look like the Democrats are going to be coming off the ropes to score a knockout a week from Tuesday. In fact, given the appeal of the Tea Party movement, voters appear to have decided that incumbents in general are the dopes in this particular bout. The markets seem comforted that the new political regime may consist of a divided government that forces both parties towards the center. If the expected result comes to pass, regime uncertainty may be reduced as radical policy options are taken off the table. Traders appear to be anticipating that the shift towards a more certain future will help the economy get off the ropes and back into fighting trim.
For everyone’s sake, let’s hope that the primary source of uncertainty going forward merely concerns how long it will be until we see ousted incumbents on “Dancing with the Stars.”
Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.