Monday, September 6, 2010

Obama's loss is the economy's gain



These two charts are arguably the most important of all the charts I've shown over the years, since they are predicting what could prove to be biggest political realignment of the American electorate in modern times. It's going to begin in just two months, if not sooner, and it could have an extremely positive impact on the outlook for the economy and the equity market.

Barack Obama's Approval Index, according to the daily Rasmussen survey, yesterday reached a new low of -23, while a record 47% now strongly disapprove of what he's doing. Even the Gallup polls show that a clear plurality of people disapprove. Say what you will—he's out of step with the country, he's inexperienced, he's poorly advised, he's a socialist at heart (my view all along)—he's failing on almost all fronts, and the Democrats are going to pay a huge price for this at the polls. If Obama is going to leave a legacy, it will be that he was The One that galvanized the Tea Party movement, and the Tea Party is the change on the margin that is making all the difference. Obama has left absolutely no doubt about what the Democratic Party stands for—bigger, more intrusive government—and the Tea Party's main objective is to reverse that. Already it's very likely that the Democrats will lose the House (Intrade places the odds of a Republican takeover at 70%), while some (e.g., Dick Morris) are making the bold prediction that they will lose the Senate as well.

This means that at the very least Congress will not pass any more big-government programs, particularly an onerous cap-and-trade bill that would punish the U.S. economy by unilaterally raising the cost of energy and divvying up the proceeds of a carbon tax among politically favored groups and industries. It also means that it is very unlikely that the Bush tax cuts will be allowed to expire at the end of this year. It seems clear to me that most or all of the income tax cuts are going to be extended, for at least a year or two; politicians on both sides fo the aisle realize there is huge discontent with the state of the economy, and nobody is even trying to argue that higher taxes are the solution.

The big issues remaining to be resolved are whether the cuts for "the rich" will be extended or not, and whether and by how much the tax on dividends and capital gains will rise. I'm hoping that good sense prevails, and all of the Bush tax cuts are extended. This would reduce the amount of uncertainty out there by a lot, and that is a lot better than the new "stimulus" package consisting of $50 billion in infrastructure projects that Obama is supposed to unveil tomorrow.

The distressing level of unemployment, the relatively tepid recovery to date, and the obvious failure of $1 trillion dollars of "stimulus" spending to make things better add up to very strong arguments against raising any taxes. The Keynesian approach to "jolting" the economy by throwing money at it has failed, as I and many others predicted. Building a new road or resurfacing an old one does very little if anything to create jobs, but it is one way of retaining union jobs.

A far better approach to stimulate the economy would be to permanently increase the incentives to work, save, and invest. That means making permanent the tax cuts on labor and capital, or at the very least no tax hikes, especially on the fraction of the labor force that is the most productive. Government can't spend money as wisely and as efficiently as the private sector, so we need to let the private sector keep more of the money it earns. That's the only way to help the economy grow. A confidence-boosting, low-tax-extending bill would not only guarantee more growth in the future, it would take effect almost immediately. And supply-side logic says that the "cost" of extending the tax cuts would be almost nonexistent: it's better to charge the same tax rate on a bigger tax base than to raise the tax rate on the same tax base. If Congress really wanted to do something intelligent, they would not only extend the Bush tax cuts across the board, but also lower our corporate tax rate, which is the highest in the developed world. But doing something so logical probably requires a new Congress.

My good friend Russell Redenbaugh puts the financial implications of all this in a nutshell: the likelihood of the Republicans gaining control of the House has put a floor under the market, while the odds of the Republicans winning the Senate define the upside. 

27 comments:

Benjamin said...

I guess there is little doubt that the right-wing loathes Obama.

But given what the right-wing accomplished under Bush jr--turning a federal surplus into a huge deficit, taking a healthy economy and ruining it, taking a robust financial system and leaving it in collapse, and did I mention not one but two unfinished, protracted and fantastically expensive wars (total bill $3 trillion), do we really want the right-wing to run the country again? Based on recent performance?

What utopian vision for what nation we will finance next? Can we solve the world's threats by throwing money at them? By endless occupations? Can the world be made safe through endless spending?

Worse, the occupationistas in the Republican Party are howling we might be leaving Iraq too early (although it is Bush jr's timetable). Nine years is too early? Ditto Afghanistan (and Obama seems to think Afghanie is a "smart" war. That could mean we are in for another trillion dollars. To prop us some narco-lords).

I say hold your nose and vote for anybody but a Republican. Ryan Paul is interesting, I give you that. I might vote for him.

John said...

At a minimum the Republicans must retake the House of Representatives for the market to have that (big?) year end rally I have been looking for. I am still skeptical the Senate will switch but even if it does not there might be enough moderate democrats who, facing elections in two years might join the repubs to make a 'working' majority.

Incidently I think California has two of the most interesting races this fall in the Senate and Governor matchups. Stark contrasts for the state's voters.

brodero said...

I have never been a fan of basing
my investing on politics....I made
money under Reagan and Clinton....
I once had a trader say he would
not buy Canadian companies because
Canada was socialist. Politics are very important but don't base your
investing on who is in office...
there plenty of other indicators
to tell you whether you should be
long or short....

skydude said...

This seems like 1994 again. Hopefully the Republicans take control of both houses and put the federal government into a type of stalemate. This would provide the stability the larger economy needs to have long term confidence.

If this stalemate occurs, which I would bet on, Obama will win a second term. The Keynesians will feel vindicated and promote the recovered economy as proof. But as long as the Executive Branch and Congress are at loggerheads, the economy will improve.

Benjamin said...

Scott:

I did a little research on the NYT archives.

By HEDRICK SMITH, Special to the New York Times (The New York Times); Financial Desk
December 13, 1984, Thursday
Late City Final Edition, Section A, Page 1, Column 5, 1503 words
[ DISPLAYING ABSTRACT ]
Treasury Secretary Donald T. Regan charged today that Paul A. Volcker's ''remarkably tight'' management of the money supply was slowing economic growth and hurting the Christmas shopping season. This was the Administration's most extensive and pointed public criticism of the Federal Reserve chairman in months. The Federal Reserve System, the nation's central bank, is an independent agency that is not directly answerable to the President. Mr. Regan, answering reporters' questions, said it was ''possible but not probable'' that the current economic lull would turn into a recession. He forecast slight improvement during the next six months but said it would probably be mid-1985 before the economy returned to the 4 percent growth rate that the Administration is counting on to help reduce Federal budget deficits."

For the record, the annual rate of inflation in 1984 was 4.3 percent--double or triple the rate now.

Now, we are near deflation, but we have to listen to pettifogging by the likes of Richard Fisher, Dallas Fed President, about the perils of inflation.

BTW, I am no leftie. I am just sizing up the political fault lines here. Why are some Fed members sermonizing about inflation now?

John said...

Bro,

I agree with you. Too many investors IMO place too much emphasis on politics. However economic policy is a factor in how optimistic (or lately, pessimistic) investors are. This past summer has not been a good one for equity investors I believe largely because the economy has responded so tepidly to the current government's spending and the success of bearish investors in taking advantage of macro events overseas with visions of more banking meltdowns. Every businessman (or woman..and there are a couple) I know sees this government as hostile to their efforts to build and grow their businesses. Its anecdotal for sure but from the polls I am seeing its not isolated to my experiences. Business will continue to be pessimistic and despondent if this government survives and the market will be suseptible to more bear raids such as we saw this summer. Unless we achieve at least balance between the parties our economy will likely continue to struggle and businesses will remain defensive and pessimistic. Ironicly not good for those who are unemployed.

John said...

Yes, Obama's approval ratings are a disaster, only slightly better than Reagan's at the same point in his administration.

John said...

John,

And Jimmy Carter's.

We will see.

John said...

DJI on 1/20/2008: 7,949.09
DJI on 9/03/2010: 10,447.93
Change in value: +31%
Annual rate of change: +20%

If the Republicans have a big win in November, should we go short?

ronrasch said...

Great data as usual Scott. As I deal with our local water company not responding to and loosing certified letters, I extrapolate the micro to the macro government level. Obamacare, tax policies, intrusive regulations, weak foreign policy are harming our country. Americans now understand these destructive policies and are going to throw out the democrats in November.

John said...

John,

If the House of Reps switches majorities and the repubs get within 3 seats of parity in the senate I believe the market will have a nice yearend rally to perhaps 1200 on the S&P 500.

Shorting the market on a republican resurgence I believe would be....unwise.

JMCO

John said...

"Obama has left absolutely no doubt about what the Democratic Party stands for—bigger, more intrusive government—and the Tea Party's main objective is to reverse that."

You sure about that? The President's proposals to revise NCLB would return more power to the states.

Aren't we losing government jobs and creating private sector jobs?

Would the Republicans have let General Motors die?

Isn't the Tea Party about returning to the orignal intentions of the founders of the Consitution?

Since the Constitution doesn't provide for the federal government to purchase land, like the Louisiana Purchase, should we tell France we want our money back?

Should we sell Alaska back to Russia? Or, just invalidate the purchase?

Didn't the founders exclude women from voting? Didn't the founders tolerate slavery? (Hell, didn't they own slaves?)

I agree the jobs situation is unacceptable. The EMRATIO now is as bad as it was in the Reagan administration.
http://research.stlouisfed.org/fred2/graph/?s[1][id]=EMRATIO

Two months to go. It's going to be interesting. It's going to be a history lesson.

davidl2001 said...

I hope the American people remember this time what a liberal democrat is capable of. I guess Jimmy Carter wasn't enough. Clinton was successful with the surplus he left. With a Republican congress helping.

With Obama wasting his first year in office on healthcare and ignoring the jobless. The stimulus is a failure. We have businesses dropping like flies. It may turn into a depression if our present government helps us anymore.

John said...

Take a look at that EMRATIO graph. Notice the robust job growth in the late 1970s. Also, fiscal hawks should make a saint out of Carter. The Debt to GDP ratio was lowest during his term.

One of my favorite graphs:
http://zfacts.com/p/318.html

Reagan-Bush gave us national credit card prosperity!

Also, I'll take Carter's Egypt-Isreal deal over W's Iraq War any day.

What I didn't like about Carter was airline deregulation.

Frozen in the North said...

Well folks, good luck with that theory. US companies profitability seems to be driven by non-GAAP accounting. Case and point HP!

Big difference between 1984 and 2010, the economy is in very poor shape. Personally, I think that basing your investment decision on which party is in power is sub-optimal, but we each have a different way of investing.

One thing for certain when the Republicans take control of the House they will completely block Obama's legislative agenda, consequences can be good, but they can also be very very bad.

But it's your mess so its also your call.

Don said...

Bro,
Ordinarily I agree with your point regarding the investment merits of political outcomes in the US. However,this administration has put a new dimension into the investment equation, political risk. This fundamental risk factor has been one primarily used by those,myself included, who have been investing for many years in emerging or frontier markets. It is my belief that the term "political risk" certainly applies to the US today.

Benjamin,
Agree with you completely about the Bush administration. I would point out however that I don't believe that Bush or the neo-cons were or are "the right" They actually behaved more like the left until we got to see what the real left would do. I understand your frustration with Republicans over the past 10 years. I actually tore up my membership card years ago. The problem is that many people felt the same way and voted for Obama as an alternative. Socialism is not a good alternative to incompetence.

Benjamin said...

Don-

I voted for Reagan, thought he was a breath of fresh air from Carter. But, man oh man, it has been nothing but deficits and war from Reagan to Bush to Bush jr.

I keep hearing there is a "new" Republican Party.

Seriously Eisenhower and even Nixon make the "new" R-Party look like a confederacy of feckless poltroons.

People forget that Eisenhower got us out of D-Party Truman's Korea, and Nixon got us out of LBJ's Vietnam.

Now, it has switched, the R-Party never sees a war it doesn't like, even at the cost of $1.5 trillion per pop.

I just wish I could vote for a pro-business Democrat, or a pacifist Republican. So far, they are no see 'ums.

Benjamin said...

John-

As a strict constructionist of the US Constitution, I note we must de-fund the Air Force. Funding for a Navy and Army were provided for, but not an Air Force.

bean said...

Congratulations Dad!! Even though your stuff is very technical sometimes (and you know i appreciate the political rather than the economic stuff), I still read it every single morning. I'd like to think it's helping me to acquire a greater understanding of the capital markets.

Here's to continued success for CBP!!
love you.

Chas said...

On March 14, 2008, then Sen. Obama voted in favor of the 2009 budget which authorized $3.1 trillion in federal outlays along with a projected $400 billion deficit. The 51-44 vote that morning was strongly along party lines with only two Republicans saying "Yes."

When the final conference report was presented to the House on June 5, not one Republican voted for it.

Enough already with the blame it on Bush mentality!

Benjamin said...

John-

What is not to like about airline dereg?

Cheap flights have been a boon!

John said...

What's not to like about airline dereg? It's a race to the bottom, that's what. Do you know what pilots get paid these days? Do you know what the pilots on that flight that crashed in Buffalo were making? Sixteen grand. And no sleep.

http://www.nj.com/news/index.ssf/2010/02/pilots_in_continental_plane_cr.html

By the way, "confederacy of feckless poltroons." I like it.

Joe said...

Scott, for the record I enjoy your blog very much, and its economic content is highly informative.

Although this is your blog, and within your right to take it in any political direction you wish; I disagree wholeheartedly with the caustic and miss informed rhetoric coming from the right wing you so clearly support and embrace.

The biggest fraud perpetrated on Americans is the notion that Republicans are the protectors and champions of the US economy.

Question? When was the last time the US had a balanced budget. Answer: under 2 Democratic administrations: Clinton and Kennedy. Question? When has the US stock market performed best? Answer: Under Democratic presidents. Lastly who got the US into this economic mess: Answer: 8 years of Republican rule. By the way, if Obama is so bad for business, why are corporate profits testing pre crisis high?

Public Library said...

I think a big part of what Scott and right-wingers miss is the need to educate people to save and invest, especially at the lower-end of the income scale.

If we do not educate from the bottom-up, we will eventually create a rift large enough to divide the country into haves and have-nots.

We are well on our way to this right-wing utopia. No tea necessary for this gathering.

Public Library said...

Not that I don't think the left-wingers are a complete disaster all their own!

Just so I am bipartisan here!

John said...

Pub,

There doubtless is a huge need for such education. I agree.

Scott Grannis said...

Joe: It's important to remember that only Congress can spend money; presidents cannot. Bush can be faulted for not vetoing congressional spending, but Clinton benefited from having a Republican-controlled Congress that was somewhat frugal.