Investing and Politics

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Capitol-Markets.jpgIf folks stowed their money away in fixed rate investments during the latter part of the Bush economy, and then reallocated that money into stock investments for the Obama economy, those folks have to be pleased at having saved as much as a 50% loss at the end of the Bush economy, and approaching as much as a 50% gain during this Obama economy, starting in March of this year.

Of course, President's don't control the stock markets. Myriad factors, most knowable, some not, play roles in the direction of market investments. The trick is to acknowledge and accept the trends without prejudice, political or otherwise. As far back as 2006 and 2007, there were clear indications the Bush economy was going to implode.

Back in June of 2006, I wrote an article at WatchBlog recommending 401K owners heed the collapse warnings of the Bush Administration's economy due to a housing meltdown. Because I followed my own advice, transferring portions of 401K money out of stocks and into fixed funds on market highs, by 2007, all our 401K funds were allocated to fixed rate investments. The inevitable market collapse was visible in 2006, thanks to the keen eye of trend watchers like Jon Markham.

In March of 2007, I wrote another WatchBlog article:

Personal Debt for Americans is record breaking. The national debt continues to set new records now approaching 9 trillion dollars, and the trade deficit is set to hit another mind boggling deficit of 3/4 of a trillion dollars this year alone. America is experiencing a negative savings rate, which means we are spending more than we are taking in. In a nutshell, America is drowning in debt, and collector's are beginning to demand payback or, higher interest on the higher risk loans.

Indeed, Bank of America and Chase are killing consumers this year with interest rate hikes on consumer borrowing as high as 29%. And that is on credit card holders with excellent credit payment histories. In this same March, 2007 article, I wrote: "The squeeze is on. The economy is about to show larger drops in GDP growth fueled by the loss of home construction and associated jobs." Those who heeded these words, got their investments out of stocks when the Dow was still above 12,000.

The crash came in late 2008. Early in 2009 I wrote another article at WatchBlog recommending 401K investors buy back into stocks on the dips. If readers followed this recommendation, their 401K's are now up between 20 and 30% this year depending on their mix and aggressive timing in buying stocks after the market lows in March. The point here is not that I was right. The point is, the signposts are there to be heeded, and if heeded, one can invest wisely in political trends. It was clear in February of this year, that the stimulus bill, banking and auto sector protective measures undertaken by the Obama administration and Congress, and the drastic cost cutting measures underway by corporations, were going to result in corporate earnings that beat, the then gloomy projections going forward, when potential meltdown was still in investor's minds. And, that was a signpost that the stock markets were going to rebound with intensity this year.

Taking money out of play from the Bush economy, and putting it back in play for the Obama economy, has proven to be an enormously profitable strategy to date. Avoiding the 40 to 50% losses before the crash, and reaping the 20 to 30% gains since March of this year, have yielded investors who heeded the signposts a net 60 to 80% gain in their stock index investments over those who let their Bush economy investments ride, and sold on Obama's election. Perhaps this why conservative political investors are so cranky these days, having missed the greatest investment earnings opportunity in a lifetime from 2006 through 2009.

So, what are the political investment signposts today? Unlike 2007, 2008, and early 2009, the signposts going forward in the short term, through 2010, are illegible. Everything is in flux awaiting outcomes of some key political events. Those who look at the end of this year as an opportunity to begin hedging their investments, taking some major earnings off the table, and adopting a wait and see position, will likely be proven very wise.

2010 will unfold many political outcomes. Health care reform will be resolved one way or another. The bulk of the stimulus spending will have been doled out by Summer of 2010, which leaves open the enormous question of whether or not job recovery can be sustained with the lapse of government stimulus spending (Recovery and Reinvestment Act) next Fall and Winter. And of course, the November mid-term elections will in no small part be determined by whether the health care reform bill passed and whether job recovery is clearly underway, or not.

And therein lies the market's direction based on political trends in 2010. The markets are very likely to move sideways in a trading range throughout most of 2010, until it becomes clear the outcome of health care reform and job recovery, and to a lesser extent, the Nov. elections, which will be largely determined by health care reform and job recovery.

Regardless of health care reform and job recovery however, Democrats will very likely lose their majority in either the House or Senate. The reason for this is simple: the unmistakable anti-incumbent movement underway, which will not be slowed by health care reform passage or even a robust job recovery in 2010. The independent voters now determine federal election outcomes, and they have adopted an anti-incumbent attitude not seen in many years. And there are millions more of them today.

Independents diverge on most political issues into Left, Moderate, and Right encampments. But, they share some common traits. These traits are

  • loss of faith in federal government management
  • gross distrust of politicians, including a growing distrust of their own representatives
  • and an absolute abhorrence of our 12 trillion dollar national debt and the unsustainable $trillion plus annual deficits now keeping the American economy afloat in the short term.

This glue that binds independent voters nearly guarantees that Democrats will lose seats next November. As Chris Cillizza wrote in his Wa. Post article this week:

While it's likely that any sustained sentiment of this sort [anti-incumbent] will hurt Democrats more than Republicans, this sort of political environment is decidedly unpredictable and could lead to surprising defeats for presumed safe incumbents -- of both parties -- next November.

So, what does that mean for investors in 2011 and beyond? Frankly, it should strike paralyzing fear into every investor regarding their long term investing prospects in U.S. equity markets. A politically divided Congress in 2011 and beyond will produce the same results a politically divided Congress produced in 2007 and 2008, which was deemed the "Do Nothing" Congress. Grid lock and absence of forward momentum on any substantive challenges facing the nation will be the result.

What does get passed by Congress with neither Republicans nor Democrats having a majority in both houses of Congress, will be so compromised and watered down, as to be rendered largely ineffective in addressing the challenges to our nation's future, and they are many. Here is an abbreviated list of challenges to be addressed in 2011 and beyond:

  • Trade deficits, especially with China
  • energy independence
  • federal deficits, need to surgically increase taxes and cut federal spending
  • rising crime rates and tax dodging behavior, especially in a growing underground economy
  • Afghanistan goals vs. Afghanistan costs
  • global spread of al-Queda and terrorism
  • border security and low wage worker demand
  • rising interest rates and cost of servicing our national debt
  • foreign students flooding our universities replacing American students
  • rising economic and production competitiveness by Brazil, Russia, India, and China drawing increasing corporations out of America along with manufacturing and innovation jobs
  • falling real mean wages of the working middle class in the face of inflationary pressures
  • bankrupt State and local governments
  • and last, but not least, an increasing domination by extremists, on both the Left and Right, over American political issues supported and enhanced by media profits.

Failure to address these challenges in bold and effective ways, will dramatically increase the costs of America's future at a time when America's economic resources will be severely stressed, if not diminishing. A politically divided federal government, unable to achieve consensus on bold and effective solutions, creates a very negative climate for long term investors in American equity corporations, and a riskier investment environment for government and corporate bond investors. The net effect of this trend will be increasing volumes of American dollars flowing away from U.S. borders, invested in foreign market exchanges, and eventually as investment risks rise ever higher, in foreign government / corporate bonds and fixed rate investments.

'Reap ye earnings whilst ye may', and prepare to be educated in foreign exchange markets where future investment profits lie, as long as America remains a politically divided and uncompromising nation.

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This page contains a single entry by David R. Remer published on November 18, 2009 10:59 AM.

Term Limits: The GOP's Fake Gesture is Resurrected was the previous entry in this blog.

Senate Vote Moves Health Care Reform to Debate. is the next entry in this blog.

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