Four years ago this month, the financial world walked to the edge of a cliff just weeks before a presidential election. During September, 2008, Fannie Mae and Freddie Mac were placed into conservatorship and taken over by the U.S. Government. Merrill Lynch was taken over by Bank of America, Washington Mutual by JP Morgan, Wachovia by Citibank and Lehman Brothers declared bankruptcy…right during the heat of a presidential campaign.
Things are much calmer this time around. The banking system is no longer on life support and the financial world has backed away from the abyss. The upcoming election is not about who is going to best lead us out of the economic crisis of four years ago. It is about who is going to lead us out of our current economic malaise.
The outcome of this presidential election seems less predictable than Obama vs. McCain four years ago. In 2008, Obama campaigned on “Hope and Change” and John McCain selected Sarah Palin as a running mate. Turns out some people wanted a little hope, some wanted a little change and there were many who didn’t want Sarah Palin anywhere near a button that could launch a nuclear missile.
During Obama’s term as president, hope was not fulfilled and very little has changed…except that the national debt has exploded. Nevertheless, at this point it appears Obama will likely remain in office for another four years. Neither the Republican nor the Democratic national conventions seemed to move the needle much in either direction…although I personally think Condoleezza Rice knocked the ball out of the park with her speech on foreign affairs. Obama probably had more votes than Romney prior to the conventions and I don’t see how the conventions changed voters’ opinions much.
That leaves the presidential and vice-presidential debates as the only real opportunity for Romney/Ryan to overcome the slight lead that Obama/Biden seem to have at this point. The first presidential debate will be held Wednesday, October 3rd.
In my November, 2008 Investment Commentary, I wrote, “…we are not positioning our portfolios to accommodate the result of the election. The economic issues today (foreclosures, the credit crisis, job cuts, and the volatile securities markets) are much bigger than either of the presidential candidates. The loser might be the winner in this election.”
I don’t know that John McCain would refer to himself as the winner of that election. However, my point was that there was a good chance the economy would not look much better in 2012 than it did in 2008, regardless of who won the election. The severity of this recession was a by-product of excessive leverage (debt), and “de-leveraging” takes a long time. When consumers are paying down debt, they aren’t spending their dollars in ways that will help the economy grow. So it doesn’t surprise me four years later that the unemployment rate remains at an unhealthy level and that growth in the economy is still very, very slow.
What I DIDN’T foresee four years ago was that the national debt, which had doubled from $5 trillion to $10 trillion during Bush’s eight years in office, would balloon to $16 trillion in Obama’s first four years. Conventional wisdom would typically say that if our national debt increased by 60% and unemployment was above 8%, the incumbent president would stand no chance of getting re-elected.
So why is Obama still leading in the polls? Among other things, Mitt Romney is just not running a very effective campaign. He is getting inadequate advice from out-of-touch advisors. Every time I see footage of him, he is talking in that superficially loud “I’m giving a speech” voice. It’s the exact same voice that Obama uses…the same one Obama has used for the past four years. It’s phony when Obama uses it and it’s phony when Romney uses it. You don’t overcome phony speech with phony speech. You overcome it with sincerity. You overcome it by acting like you really care…like you really care about the electorate instead of just caring about getting elected.
Why can’t Obama and Romney just talk to us? They have microphones. It’s not like they need to yell for us to hear them. What is it about standing behind a podium that makes today’s presidential candidates talk in that condescending megaphone voice? Reagan didn’t do that. Clinton didn’t do that. And I think Reagan and Clinton knew something about running for president.
Both Obama and Romney speak in platitudes and try to “out smart-aleck” each other, which is condescending, insulting and offensive to the American people.
When the U.S. Embassy in Libya was attacked and four diplomats were killed, Romney immediately felt the need to criticize Obama. He didn’t NEED to criticize Obama…there were plenty of pundits willing to do that for Romney. And he definitely didn’t need to do anything immediately. If there was a need to criticize Obama over foreign policy, the opportunity to criticize would still be available several days after the attack. He is getting bad advice.
If Romney wants to close the gap, he needs to stop acting like Obama. He needs to find the higher road and try to get on it. I didn’t say the HIGH road…I don’t think either candidate is capable of finding the high road…just the “higher” road. He needs to TALK to America and stop yelling at us. He needs to stop telling us what Obama is doing wrong and just explain how his plan is right. We don’t want him to just TELL us his plan is right…we want him to explain WHY his plan is right.
If Romney doesn’t close the gap and Obama is re-elected, you can expect continued growth of government spending and higher taxes, particularly for couples making over $250,000 per year…you know, those people who are not paying their “fair share.”
Another sign that inflation is not on the imminent horizon: Members of the Machinists Union went back to work at Caterpillar after a 3 ½ month strike, settling for virtually nothing. For Caterpillar and many other manufacturers, the cost of labor is remaining in check. An inflationary environment almost always includes increases in the cost of labor as prices rise and profits increase.
Before the cold war ended, organized labor flexed its muscle over and over, forcing management to make concessions, driving up the cost of labor. Organized labor was almost always successful because corporations were always able to pass the cost increase to the consumers. After two plus decades of having access to cheap foreign labor, U.S. manufacturers have been less vulnerable to the strong-arm tactics of organized labor. With millions of unemployed Americans, unions are finding themselves in the vulnerable position of losing the war every time they attempt to win a battle.
But…another sign that inflation is ultimately inevitable: Ben Bernanke and the Federal Reserve announced they will launch “QE3” (Quantitative Easing 3) in order to stimulate the economy and bring down unemployment. They announced that the Federal Reserve will purchase up to $40 billion of mortgages each month, month after month, until they see job growth and/or signs of inflation. There is no scheduled termination of this strategy.
What does this mean? It means the Fed will print $40 billion in new money each month and then use it to purchase Mortgage-Backed Securities. This should have the effect of driving down mortgage rates and it should continue to help wealthy people (who can refinance at lower interest rates) and do very little for poor people (who have bad credit or don’t have enough equity to re-finance so they are stuck paying higher interest rates). It also hurts the aging Baby Boomer who is retired and can only earn an investment return of 1% – 2% with any kind of safety or guarantee.
Whether QE3 will actually stimulate the economy and create job growth is an unknown. QE2 was much less effective than QE1. It’s likely that QE3 will be even more underwhelming than QE2.
The Fed’s announcement came on the heels of an announcement by Mario Draghi, president of the European Central Bank (ECB). Mr. Draghi announced that the ECB unveiled an aggressive plan to purchase the debt (bonds) of financially troubled European countries. Like QE3, this plan is supposed to stimulate economic growth by reducing borrowing costs. It is also supposed to “contain” the European economic crisis and help the Euro currency survive.
Spanish bonds, which traded at a high yield of 7.56% in late July, traded just below 5% within a week of this announcement. Italian bonds, which traded at a high yield of 6.57% in late July, also traded just below 5% within a week of this announcement. Greece, however, still has to go to the local loan shark to borrow money. Even the backing of the ECB couldn’t bring the interest rate on Greek bonds below 20%.
Stock markets all over the world are excited about all this new cash chasing after the same securities. The S&P 500 advanced 2.25% in August and another 4.31% through the first half of September. It is up 13.5% this year (through August).
I think a modest rally will continue through the end of this month. September 30th marks the end of the calendar quarter and it is not uncommon for incompetent fund managers (frequently a redundant phrase) to purchase stocks that have had impressive rallies so the funds’ investors can see that the fund manager is in all the right stocks.
In light of the recent stock market rally, we are not inclined to increase equity exposure. The Fed has stated that they are committed to keeping interest rates low for the foreseeable future. At Boyer & Corporon Wealth Management, we are not yet in a hurry to shorten the duration of our fixed income portfolios.
This potential election outcome doesn’t portend any immediate stock market rallies or declines so we are not positioning our investments based upon a victory by Obama or Romney.
Lastly, we still have no idea what Facebook is worth…and we are still not buying the stock.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.