Presidents, Policies and the Stock Market
come next January 20th
History shows that Federal Reserve policy doesn't have nearly as much impact on inflation and interest rates as many believe. Not to say I'm underestimating how the FED's policies push and pull assets between bubbles and crashes, just to say that the FED doesn't exist in a bubble.
Former FED Chairman, Paul Volcker, jacked up interest rates in the early 1980's to kill inflation that was hammering the global economy for a decade. He is known as the man who broke the back of inflation, causing a nasty recession in the process. But does he really deserve credit for that? Not knocking the man! He went with the best information and experience of the era.
But something else happened in the early '80's; the broad adoption of the personal computer in the workplace. This ushered in an era of incredible productivity growth, which continued with networked computers in the '90's; aka the internet. Advances in cloud computing and broadband continue today, but faster than ever. The pandemic pulled the work from home/stay at home eventuality to the masses, much sooner than expected. Technological advances of each of these era's are what reigned in inflation, not FED policy.
The last decade, policy makers at the FED have been trying to push inflation higher by printing more and more Dollars and tamping down interest rates to zero bound. It's not working. Not even a pre-pandemic unemployment rate of 3.5% could goose inflation a little higher. Too much of everything both man made and mined is the result of unlimited, cheap financing and technology. Zombie companies survive on life support forever. Every electric car and truck manufacturer can raise Billions. Asset prices know no limit. Volcker could have just left rates untouched by human hands and inflation would have come down anyway, just because of advances in technology. The pain he inflicted on corporate America by jacking up interest rates only hastened the move to become computerized.
Today's FED chairman, Jerome Powell, has thrown more printed money at today's low inflation than all of his predecessors, combined. This week, Powell reintroduced the Federal Reserve as the "every man's" FED; holding rates at zero bound until the low wage sectors of the economy see wages increase. But this will only serve to reinforce asset price inflation, which is counter to shrinking the wealth gap in our country, which Powell has spoken about many times.
Unfortunately, the FED's tools have become too dull to work. And they are no match against today's technological advances; haven't been for decades. If we actually do get a surge in inflation anytime soon, it'll be in spite of the FED, not because of it.
Dusting off an old anecdote I wrote just after President Obama won the 2008 Presidential election.
Anecdote: Presidential cycles and economic cycles aren’t always congruent and are often only correlated – meaning we can’t always easily assign cause and effect to Executive Branch policies and economic conditions.
But it would seem that investors have done well to invest for the long term when new Presidents are elected during recessions. This has to do with the Fed and Treasury actions that took place during the time of the outgoing Administrations. Presidents who seem to have presided over economically good times were Presidents Reagan (following Carter/troubled economy) and Clinton (following H.W. Bush/spent most of his term in office during a recession and real estate bubble burst).
Presidents who seem to have presided over economically tough times were Presidents H.W. Bush (following Reagan/strong economy), W. Bush (following Clinton/strong economy).
How about the incoming President Elect Obama? With massive economic stimulus, a weak economy, a stock market down by almost 50% from peak levels, one can make the very simple case that this is a good time for him to become President. The heavy lifting of Fed and Treasury policy has already been initiated. Since history is a repeating mechanism, one could argue that history is squarely on the side of investors. In fact, today’s environment is so strikingly similar to that of 1992, from cabinet posts to a severe real estate glut; one can argue that history is not in the making to the extent that we may think. It is actually just repeating itself. To go from correlation to actual cause and effect, the negative economic statistics (rising unemployment, declining earnings, and even bank failures) at the ends of the Presidency’s during recessions, as it turns out, are lagging indicators. This may bode well for investors, both blue and red.
Now, let's get to Clips of the Week! I host a live stream every Monday through Thursday, at 4:30 PM ET. The name of the show is BE THE BOSS OF YOUR MONEY. It's a show about personal finance, investing tips, business, and perspectives about relevant content and culture.Below are a few clips that we took out of the live episodes that encapsulate the main topic or lesson.
I hope you enjoy them. If you do, please subscribe to my YouTube channel while your watching them. You could catch my show on LinkedIn, Facebook, and YouTube, links below. You could also watch the replays on my social media profiles too.
Here goes: