- The "Investor Class" Voters

This post is treading a little close to my professional bailiwick, so forgive me if I seem vague or don't respond to comments. But I wanted to talk about the chart above - the Equity Mutual Fund Flows chart.

This is generally believed to be a good reflection of the behavior of the retail investor. My proprietary data derived from a completely different source agrees with that. And what this chart (which I clipped from this piece at Zerohedge) indicates is that while the market continues to rise, it's doing it without retail capital.

The reason for this is not that the retail investor is prescient about the summer collapse of equities (although I don't specifically rule it out). But if this really were the cliff's edge, you'd expect at least some retail participation. Retail has a long history of buying at the top, selling at the bottom, and only making money in the market because of the risk premium for being long - and their exceptionally long holding period.

Besides, I think if things sell off for any meaningful macro-economic reason then the Fed will certainly bring in more QE to shore up the market. And I think that will continue to define the big moves for a little while longer at least. So this chart doesn't say much about the market's future. But I think it does say something important about American politics.

I know a number of investment professionals who are very worried about this rally because they believe it will allow Obama to eek out reelection. They think a rising market increases the wealth effect, gets people feeling better, and by that, lets the most economically illiterate President since Roosevelt cling white knuckled to his office for 4 more years. But because of what this chart says, I disagree.

I think the investor class believes that Obama's reelection would be highly damaging to the economy, and since the election isn't settled business, it's increasing their skepticism in the rally. This is the main reason why I think they aren't participating at this point, as almost everyone would expect them to.

Also, I think if Obama tries to take credit for the run-up in equity markets to make the most of that 'wealth effect', they either won't believe it or won't care. It's like listening to him talk about an 'all of the above' energy strategy. We know he doesn't really mean it. So even if we level off for the summer months into the autumn and don't have a serious downdraft, it's not going to be a viable selling point for him.

This means that if his reelection prospects start to diminish coming into August and September, we'll begin to see retail participation in the market. They'll treat it as a 'risk on' event, and the assets controlled by retail investors (in aggregate) dwarfs the 'faster money' in the hedge fund and banking world. It won't take much to totally overwhelm the hedge fund cash. At that point, we may see a substantial 'updraft' even if fundamentals don't look better in any way.

And once the election is settled business, as their accountant and investment managers begin to report their relative under performance, we'll see even further 'risk on' behavior going into Q4 2012 and Q1 of 2013.

I still believe Obama can't get reelected. He has no track record to run on, unemployment is still problematically high (and won't improve in time), and his ratings fall dramatically every time he goes on TV. The seas have not been calmed so his base is disillusioned (as was inevitably given his outsized promises to them). And if the retail investor believed in this rally enough for him to use it as a selling point, they'd be a bigger part of it already.

I don't think he can hide from the voters like he did last time - like leftist always have to do. And I think his every step makes him look more divisive, and dangerous.

And because of this chart, I think a great many people agree with me.