Does The Election Matter?

What a ridiculous question, right? Of course it matters say the Romney supporters. Getting someone in the White House who understands business will make all the difference. Of course it matters say the Obama supporters. Making the rich pay their fair share will mean a more equal economy and more growth. Of course it matters say the Romney supporters. Lower taxes and less regulation will lead to more growth. Of course it matters say the Obama supporters. Investing in green energy and hiring more teachers will lead us to a 21st century economy. Of course it matters say the politicians. How can you vote for that other party that sells out to special interests?

For investors and the economy, though, does it really matter? The evidence is quite frankly rather thin when it comes to party identification and economic results. We’ve had Democrats who cut taxes (Kennedy) and Republicans who raised them (Bush 1). We’ve had Republicans who imposed wage and price controls (Nixon) and Democrats who started a wave of deregulation (Carter). We’ve had Democrats who championed a strong dollar (Clinton) and Republicans who rooted for a weak one (Bush 2). We’ve had Republicans who raised government spending and intervention (Hoover) and Democrats who declared the era of big government over (Clinton, again). Investors who let their partisan political feelings dicate their investment strategy are likely to be disappointed.

Good and bad economic policy is about the only thing that is bipartisan in DC. The Great Inflation of the 60s and 70s occurred under 4 administrations (LBJ, Nixon, Ford & Carter) that were exactly split between the two parties. The so called Great Moderation (which was actually nothing of the sort) lasted through three Presidents (Reagan, Bush 1 & Clinton) that covered 5 terms, 3 Republican and 2 Democrat. The Great Comeuppance has lasted 3 terms (Bush 2 & Obama) – so far – and both political parties.

The same is true for markets. The secular bull market in stocks from the 50s to mid 60s covered administrations from both parties. The secular bear market of the mid 60s to the early 80s (and all the cyclical moves in between) coincided with the Great Inflation (not coincidentally by the way) and the bull market of the 80s and 90s happened during the Great Moderation (also not coincidentally). The secular bear market of the 00s has – so far – lasted through an inept Republican and an equally inept Democrat (sorry to folks in both parties but I call them as I see them). Bonds became certificates of confiscation under both parties during the inflationary 70s and the greatest bull market in history (arguably I suppose) over a period that covers now 30 years and 5 Presidents. Investing based on who occupies the Oval Office is a loser’s game. Which party controls Congress is equally unimportant. Ike worked with a Democratic Congress but Kennedy had a friendly Congressional majority. Nixon screwed things up with both Houses controlled by the opposition. Carter managed to foul things up with a Democratic Senate and House.

I don’t mean to imply that fiscal and regulatory policy doesn’t matter. The policies produced by the next President in concert with the next Congress will have an impact. But fiscal policy does not happen in a vacuum so how the next administration addresses the fiscal cliff will also affect monetary policy.  And if monetary policy is conducted poorly it can easily offset good fiscal and regulatory policies. The damage done by Greenspan and Bernanke during the last decade – assisted ably by some very bad Treasury Secretaries – is reflected in the value of the dollar. No matter how beneficial the Bush tax cuts might have been, the policies that undermined the dollar still produced a housing bubble and a financial crisis. No matter how beneficial the Tax Reform Act of 1986 might have been, the weak dollar policies of Reagan’s second term still produced the crash of 87 and the S&L crisis.

Economic performance and therefore market performance is a product of good fiscal and monetary policy. We can’t get one without the other and through the years we’ve had plenty of times when we had one or the other and sometimes neither under all kinds of political regimes. No matter who wins the Presidency Tuesday and which party controls Congress we face a set of economic circumstances that requires better policies from all involved. Fiscal policy in its current form is not sustainable and therefore neither is monetary policy. Both will have to change pretty dramatically over the next four years no matter which party controls our political institutions.

Investors should concentrate on policy, not politics. We don’t know who will win Tuesday and we don’t know how the markets will react. Wall Street may favor Romney but that is no guarantee that markets will rise on Wednesday if he wins. In fact, we believe it might actually produce a negative reaction due to increased uncertainty surrounding monetary policy. Markets may not like President Obama’s proposals for addressing the fiscal cliff but what he  proposes and what gets through Congress may be very different things and produce very different results. Investors should make decisions based on what actually happens not the fairy tales of campaign promises.

If you haven’t voted already by all means do so Tuesday. There are many reasons for voting beyond economics and good reasons to favor either political party. But don’t make investment decisions based on whether your party wins or loses. Make investment decisions based on the policies that are actually enacted. Good policy is good policy no matter which party proposes it. Bad policy produces bad results no matter who signs the bill. The next few years promise to be volatile enough with all the challenges facing the economy. Don’t make it more so by over reacting to the results of an election. History says it doesn’t matter much anyway.

 

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@alhambrapartners.com or  786-249-3773.

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5 Responses to Does The Election Matter?
  1. One of you best posts in a while. Although I really don’t think Clinton or Bush 2 had any control over the strength of the dollar. Monetary policy belongs as far away from politics as is feasibly practical. Congress did such a great job with the 19th century coinage acts. Right?! If I were president, I would champion a “fair value” dollar. Inflexible exchange rates lead to all sorts of unsustainable imbalances which never end well. The Fed’s ultra accommodative monetary policy has not weakened the dollar because markets still remain very risk averse. The Fed thinks it can pull back the punch bowl when things pick up again. I think that it can to some extent; selling securities is not uncharted territory for central banks. However, there will definitely be some pain when the easing ends. Hopefully, the “pain” will come in the form of 3.5 percent growth instead of 5 percent growth. On whole, the evidence is rather strong that the easing programs at least stopped the free fall. Would things have balanced out in the long run anyway? Probably. But after all, in the long run, we’re all dead.

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  2. Joseph Y. Calhoun
    November 5, 2012 at 1:57 pm

    Presidents set the tone for the dollar and usually get what they want from the dollar.

    What is a fair value dollar? Who decides what is fair? How is it measured? Personally, I think gold is the best answer though certainly not perfect. Fixed exchange rates, as we found out with Bretton Woods, do not deal well with imbalances which is why the IMF and World Bank were set up to deal with them. We’re also getting a bird’s eye view of a balance of payments problem in Europe right now. These problems cannot be solved painlessly but I guess we can choose the form of pain. The rebalancing in Europe is creating severe hardship and unemployment but I think the countries involved will be better off in the long run for having gone through it. It could also be solved through devaluation but that just changes the form of the pain. It still means high unemployment for a period of time with the added distortion of high inflation. Which is better? I think the former since it results in a cleaner solution with fewer distortions, but I can see the argument for the latter as well.

    I have zero expectation that the Fed can “remove the punchbowl” in a timely manner. The Fed’s balance sheet expansion is permanent in my opinion and I think we all know what the end result will be.

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  3. Nice post, sort of a twist on the ‘Good company does not always equal good investment, it depends on how much you paid for it’ argument. I also fully endorse the line “Investors should make decisions based on what actually happens not the fairy tales of campaign promises.” and think it should be printed on t-shirts and given away with every 401k!

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