Chart of the Day

09.24.12

Why Wall Street Traders Are Bullish on Obama

Wall Street traders are looking forward to bonus season, and predicting an Obama win. Here's why, in one chart.

Wall Street has long been a presumed base for Mitt Romney, the former financier-par-excellence. But now, according to a smart poll from our friends at Business Insider, 65 percent of traders predict that Obama will hold on to the presidency. The reason? Two words: Ben Bernanke.

The Federal Reserve chairman’s blockbuster decision to flood the banking system with new, QE3 money was always going to be popular with the street set. The balance sheet expansion will ostensibly keep interest rates lower for longer, giving investors more leeway, and banks, the most liquid asset of all: straight-up cash. This changes nothing about the economy’s fundamentals. But, as John Maynard Keynes would remind us, a flush of new money can revive the economy’s “animal spirits”—at the very least, it creates a better psychological climate for borrowing money and buying equities.

Now, in the past, this transmission mechanism has been inconsistent. Although the monetary base did expand, the amount of lendable, tradable money in the real economy didn’t go up very much. Banks were just too skittish to loan out their new reserves.

But since the end of 2011 and the beginning of this year, the main measure of money in the real markets—M2, which includes savings and demand deposits, as well as money in market mutual funds—has in fact been growing. And it’s been taking the stock market with it. Here’s the growth in both since the beginning of this year.

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The correlation between money supply and stock performance is controversial. But, at the very least, Bernanke’s decision to embark on another round of money magic is going to lead to a much happier bonus season on Wall Street. And as stocks rise, so do Obama’s chances of victory.