All bias, no information: on the market’s (over)reaction to the NDP victory.

Here we are in day two of the Glorious New Albertastani revolution. The buildings are still standing, but markets are apparently nervous. Headline after headline notes the fear gripping the petroleum industry about what this “leftist” government will do. One analyst described the situation to Bloomberg using phrases like “completely devastating” and “extremely dangerous.” Executives and analysts dropped the dreaded u-word—uncertainty—yesterday, and oil prices rose slightly even as oil sands producers’ stocks fell somewhat as the market digested the news. Whether they processed it correctly is another matter, of course.

At base, all a market does is aggregate the perceptions of a self-selected set of monied actors, which in turn are based on the information available combined with their own intellectual biases. Right now, it’s collecting almost all bias, and no information. Simply put, markets are aggregating collective misperception at the moment.

Indeed, the market actors—and even more so the market analysts predicting doom—seem to be unduly discounting the information that is available. Rachel Notley and the NDP have pledged to hold off on a royalty review until prices have recovered. They have also committed to an independent review, which is more than the Conservatives managed under Ed Stelmach. If royalty rates do go up—and that’s an open question—they will do so in a manner that ensures Alberta remains comparable with other oil-producing regions with which it competes.

The promised corporate tax increase to 12% is actually lower than the rate was in 2003. It’s on par with Saskatchewan and 1% above BC—in other words, it’s a very competitive, reasonable rate for a left-of-centre government in a business-friendly province. Max Fawcett writes convincingly about the overall reasonableness of the NDP’s approach to business, albeit in that notorious lefty rag Alberta Oil Magazine.

Alberta has elected an eclectic new government to be sure, but the signals it has sent out mark it also as a pragmatic one—they would not have won otherwise, and stand no chance of winning again unless they stick to that pragmatism. Indeed, I have a hunch that Albertans, even some deeply suspicious of the new government, may be pleasantly surprised how nice it is to have a government that knows it has to listen and be responsive to the concerns that people express if it hopes to stay in power.

Basically, the only way this doesn’t work out is if market fears become self-fulfilling, and business goes to war with the new government rather than work with it, as happened in Ontario twenty years ago (h/t to Geoff Solomons for that link). Don Braid writes well about that possibility in the Herald. My hunch is that will not happen in this case however, given how much value it would leave on the table for businesses so heavily invested in the province already. Sunk costs and all that, sure, but there are only so many places with oil in the ground in the world, and very few of them are more hospitable to business—a fact that really won’t change much.

It’s probably true that profitability will decrease marginally under an NDP government. They are raising corporate taxes, after all. It’s also true that a cautious approach is sensible in the face of the unknown.  The key word is marginal, however. If markets continue to price in a significant risk factor going forwards, I have two words: buy now.  Once more information becomes available in the form of concrete actions, the market will eventually correct itself.  The market is not always right, but it usually gets there sooner or later.

photo credit: pump jack southeastern New Mexico via photopin (license)

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