OK … the election predictions are now coming in fast and furious so I’ll bury you with mine.  I’ve re-read my article and it feels like a bit of a rant, but hopefully the logic shines through.

With the Dow Jones Industrial Average nearing a two-year low, I suspect that it will continue to fall, probably to the 10,000 point level.

Here’s why:

First, Barack Obama will win the November election and will be the first man of colour to lead the White House.  I feel a little naive saying this, but I truly believe this will usher in a new era of genuine hope and change in the US.

However, the thing to watch for in the run-up to the election will be the economic sabotage that will occur prior to the election and during the final tally period.

As polls shift, showing Barack as the clear runaway leader, investors will take flight from the US.  It’s natural.  Once they are in power again, Democrats will bring in an era of fiscal responsibility and will bear the burden of the drunken stupidity that’s reigned over the US government for the last 8 years.  Part of this fiscal responsibility will be the imposition of new taxes or levies to keep the government in the black.

In 2009, there will also be cutbacks.  There will have to be.  Ironically, a Democratic government will do what Conservatives are famous for:  slashing government spending.

The dollar will fall because of a net outflow of capital and prices will likely rise.  I see a $150/barrel price for oil by the end of the year.

Assuming we get a serious review of spending, the market impact will be profound.  Because the US economy has become so reliant on government spending, the profitability of entire sectors like defense, oil and technology (those reliant on Disaster Capitalism) will take a hit and the bottom will fall out of the market.  By late 2008, I think the DJIA will be around the 10,000 point level and may even fall beyond that during the early months of January.

The most important part of this prediction is that a lot of the drop will be intentional.  I believe the smart money has already been leaving the market and is sitting on the sidelines.  The current upswing in the US dollar is most likely because of the increasing investment in short-term securities and maybe even a couple of banks.  This is what happens when people park their money, but want it to be in the local currency to dive in on opportunities when they materialize.

This also means that manipulation and speculation will increase as polls swing in Obama’s favour.  Put-to-call ratios will increase, as will the volatility of the whole market.  An economic ‘sword of Damacles’ will be hung over the heads of a frightened American population and they will run to the Republican polls because they will fear for their economic security.

We know this means people will ignore the fact that the Republicans have only bringing on IN security, but ABCNNBCBS will make up something juicy about how inexperienced Obama is.  Ooops.  They already are.

What’s really important is that We ALL need to anticipate this.  We have to know that the markets will get hammered in the coming months and we have to know how to assign blame to the right owners:  the Republicans (and Conservatives in Canada).

If we don’t, they will use fear to win the coming elections.