Voters and political opponents have fleeting memories for some pronouncements, but as George H. W. Bush was so inconveniently reminded, painfully long recollections for others. Take his 1988 Republican Convention campaign promise. “Read my lips: No more taxes.” He broke that pledge, but he had no choice. The problem was that he made it in the first place.

President Bush was, at least to some extent, aware that he risked undermining his capacity to govern when he uttered that infamous phrase. When less than two years later he was obligated by law to cut the government’s burgeoning budget deficit, “41” reversed his pledge and acquiesced to a modest tax hike as part of a $500 billion deficit-reduction package. Had he done otherwise, the budget law would have slashed huge hunks of government spending. When the ballots were counted in 1992, the otherwise popular president went down to defeat—a blindside by a bracing dose of economic reality.

President Trump has, for the most part, made it nearly impossible for his political opponents to blindside him in 2020 with a particular “Read my lips” misstatement. He has tweeted so many falsehoods and fabrications that the effect of any given one is overwhelmed by the sheer weight of the many.

Nonetheless, could the Mueller report ultimately be enough to tip the scales? Possibly, but an inept president has proven himself surprisingly adept at stonewalling an investigation that, based on the strength of the report’s evidence and Robert Mueller’s public statements on May 30, seems pretty indicting to this layman who has read more of the Mueller report than most members of Congress. Under the new normal, confusion reigns. The Democrats are stymied by differences in political calculus and process while virtually all Senate Republicans are cowering, hoping the spotlight that exposes political fear and cowardice never sweeps over into their chamber. Meanwhile, the president rants, “No collusion, no obstruction.”

The Economic Driver of Politics

Often, though, it’s the unexpected that snatches defeat from the jaws of presumed victory. As financial markets have mostly chugged along since 2017, Donald Trump has hitched his re-election train to the presumably strong economy. This fatal attraction could be his downfall. The economy has a way of making, and derailing, political careers.

During a generally stable economic environment, a first-term sitting president can do little to reshape the course of the economy or the financial markets. Its trajectory is established before he takes office.[1]

Conversely, when the economy is moving from recession to recovery—clearly the environment in which President Obama found himself when inaugurated in January 2009—the administration, Fed, Congress, and Treasury Department have almost limitless options in attempting to stop the hemorrhaging in financial markets and arrest the surge in unemployment.

Figure 1: Beginning their tenure with strong economies, the markets have recorded gains for both Presidents.

Of course, once the patient is well enough to be released from triage, the shorter- and longer-term consequences of ad hoc policy initiatives undertaken during conditions of high stress will become known. Such a public reckoning has not yet been completed for the Fed actions since 2009.

Negative knock-on effects aside, policy options are quite limited when the capital markets and the economy have levitated into “late cycle” territory, as we believe they have today. Administrations cannot undo the malinvestments encouraged by loose money and the self-reinforcing optimism of raging bull markets. Tax cuts and political sentiment do count for something, and trade wars have tangible negative effects. But in the end, all are of secondary importance. The broader economy is not being driven by White House policy.

A Long Run

This month marks the 10th year of the expansion, matching the span of March 1991 to March 2001 as the longest ever. Their comparative strength and substance, however, are markedly different. During the 1990s expansion, which began slowly and ended with the Fed hiking rates to quell the bubble, the annual employment growth rate was 2% and real GDP advanced by 3.6% annually. In stark contrast, the recovery that took root during the depths of the Great Recession in June 2009 pales by comparison. Annual employment growth has been a paltry 1.4% and GDP, 2.3%. More troubling, though, is that the comparatively anemic outcome since 2009 was in spite of the most expansionary and longest-duration U.S. central bank policy intervention ever.

The expression, “Business expansions don’t die of old age,” harbors a kernel of truth. As time passes, expansions are inclined to overheat or, tangentially, excesses pop up in the financial system. Those that believe the current cycle has further to run argue that slow recoveries take longer to overheat. We would agree, up to a point. Using the Consumer Price Index (CPI) as the barometer of economic overheating, one might infer that the economy has not yet reached the boiling point. There are other metrics, however, to consider.

Beyond the very real debate as to the utility of the CPI index, ultralow interest rates, like the squeezing of a balloon, pressure certain prices and inflate others. For example, the prices of capital assets, both marketable and nonmarketable, are stretched, while borrowing costs remain suppressed.[2] Because of a Fed policy that has distorted the critical process of price discovery, capital assets and capital markets—broadly defined—have become chronically overvalued. If asset prices should begin to regress toward mean valuations, excesses—like the perilous state of corporate nonfinancial debt—will likely be exposed. Feedback loops between and among the markets and the economy will exacerbate the next contraction.

An Unbalanced Economy and An Unhinged Presidency

Donald Trump, seemingly unaware of these basic economic principles, has been riding the market/economic bandwagon, as it were, mistakenly boasting that he is holding the reins. He effused in a recent grammatically tortured tweet: “The stock market and our country, from an economic standpoint, is doing the best probably it’s ever done. We’re hitting new highs again. We’ve hit new highs, I guess, from the time of the election, close to or over a 100 times since I’m president.” He apparently considers it central to his 2020 re-election bid, recently tweeting that whichever Democrat challenges him next year will have to “run against maybe the best Economy in the history of our Country.” And: “I look forward to facing whoever it may be,” he wrote in April. “May God Rest Their Soul!”

As a man inclined toward hyperbole, the 45th U.S. president may actually be selling the market a bit short, if one includes the six major market indices. As measured from his inauguration on Jan. 20, 2017, those equity benchmarks produced 466 records. However, after one takes a quick glance at the chart above, it becomes clear that Trump touting such milestones is as fatuous as asserting his inaugural crowd was much larger than Obama’s in 2009.

Ironically, Trump himself increasingly is the recovery’s biggest threat. His spontaneous and unpredictable vacillations on trade and tariffs, not to mention harping at the Fed to lower rates, is, if nothing else, breeding uncertainty and indecision among those who allocate capital in business and industry. As for consumers, confidence is still high in general but beginning to wane for durable-goods purchases, such as housing and transportation. Ultimately, however, the die was cast before Trump took office. He may hurry along the process, a distinct problem for his political timeline, but economic choices have already been made and their consequences will not be forever forgone.

Toward that end, a recent survey by The Washington Post and ABC News found that voters—mostly Democrats and Independents, but a decent chunk of Republicans too—don’t think the Trump economy works for everybody. More than 80% of Democrats, 66% of independents, and a not insignificant 33% of Republicans surveyed said those in power are the prime beneficiaries of the Trump economy. I wonder what those numbers will look like if the markets are tanking and the economy is slumping as November 3, 2020, approaches. For a politician who has hung his hat on a rising market and economy, a blindside that few anticipated could be waiting in the shadows like a thief in the night.


[2] An example of suppressed rates would be the U.S. 30-year Treasury bond. The instrument has devolved into a trading instrument. If you planned on holding the bond to maturity, what interest rate would you require? With inflation at 2%, are you willing to hold the bond for 30 years at a 2.5% yield? Downward pressure has distorted the time premium (to say nothing of risk).

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