Trump vs. Clinton – Which Party Is Better for the Economy?

Trump vs. Clinton – Which Party Is Better for the Economy?

Donald Trump has been campaigning on how poorly America’s economy is doing. Yet, the headlines don’t seem to align with that position. Today we learned that U.S. household net worth climbed by over $1trillion in the second quarter. Rising stock values and rising real estate values made up most of the gain. And owners’ equity in their homes grew to 57.1%, highest in over a decade. Simultaneously this week we learned that middle-class earnings rose for the first time since the Great Recession, and the poverty rate fell by 1.2 percentage points.

Gallup reminded us this month that the percentage of Americans who perceive they are “thriving” has increased consistently the last 8 years, from 48.9% to 55.4%. And Pew informed us that across the globe, respect for Americans has risen the last 8 years, doubling in many countries such as Britain, Germany and France – and reaching as high as 84% favorability in Isreal.

successful-presidencyMeanwhile Oxford Economics projected that a Republican/Trump Presidency would knock $1trillion out of America’s economy, and lower the GDP by 5%, mostly due to trade and tax policies. These would be far-reaching globally, likely not only creating a deep recession in America, but quite possibly the first global recession. But a Clinton Presidency should maintain a 1.5%-2.3% annual GDP growth rate.

I thought it would be a good idea to revisit the author of “Bulls, Bears and the Ballot Box,” Bob Deitrick. Bob contributed to my 2012 article on Democrats actually being better for the economy than Republicans, despite popular wisdom to the contrary.

AH – Bob, there are a lot of people saying that the Obama Presidency was bad for the economy. Is that true?

Deitrick – To the contrary Adam, the Obama Presidency has economically been one of the best in modern history. Let’s start by comparing stock market performance, an indicator of investor sentiment about the economy using average annual compounded growth rates:
DJIA S&P 500 NASDAQ
Obama 11.1% 13.2% 17.7%
Bush -3.1% -5.6% -7.1%
Clinton 16.0% 15.1% 18.8%
Bush 4.8% 5.3% 7.5%
Reagan 11.0% 10.0% 8.8%

As you can see, Democrats have significantly outperformed Republicans. If you had $10,000 in an IRA, during the 16 years of Democratic administrations it would have grown to $72,539. During the 16 years of Republican administrations it would have grown to only $14,986. That is almost a 5x better performance by Democrats.

Obama’s administration has recovered all losses from the Bush crash, and gained more. Looking back further, we can see this is a common pattern. All 6 of the major market crashes happened under Republicans – Hoover (1), Nixon (2), Reagan (1) and Bush (2). The worst crash ever was the 58% decline which happened in 17 months of 2007-2009, during the Bush administration. But we’ve had one of the longest bull market runs in Presidential history under Obama. Consistency, stability and predictability have been recent Democratic administration hallmarks, keeping investors enthusiastic.

AH – But what about corporate profits?

Deitrick – During the 8 years of Reagan’s administration, the best for a Republican, corporate profits grew 26.82%. During the last 8 years corporate profits grew 55.79%. It’s hard to see how Mr. Trump identifies poor business conditions in America during Obama’s administration.

AH – What about jobs?

Deitrick – Since the recession ended in September, 2010 America has created 14,226,00 new jobs. All in, including the last 2 years of the Great Recession, Obama had a net increase in jobs of 10,545,000. Compare this to the 8 years of George W. Bush, who created 1,348,000 jobs and you can see which set of policies performed best.

AH – What about the wonkish stuff, like debt creation? Many people are very upset at the large amount of debt added the last 8 years.

Deitrick – All debt has to be compared to the size of the base. Take for example a mortgage. Is a $1million mortgage big? To many it seems huge. But if that mortgage is on a $5million house, it is only 20% of the asset, so not that large. Likewise, if the homeowner makes $500,000 a year it is far less of an issue (2x income) than if the homeowner made $50,000/year (20x income.)

The Reagan administration really started the big debt run-up. During his administration national debt tripled – increased 300%. This was an astounding increase in debt. And the economy was much smaller then than today, so the debt as a percent of GDP doubled – from 31.1% to 62.2%%. This was the greatest peacetime debt increase in American history.

During the Obama administration total debt outstanding increased by 63.5% – which is just 20% of the debt growth created during the Reagan administration. As a percent of GDP the debt has grown by 28% – just about a quarter of the 100% increase during Reagan’s era. Today we have an $18.5trillion economy, 4 to 6 times larger than the $3-$5trillion economy of the 1980s. Thus, the debt number may appear large, but it is nothing at all as important, or an economic drag, as the debt added by Republican Reagan.

Digging into the details of the Obama debt increase (for the wonks,) out of a total of $8.5trillion added 70% was created by 2 policies implemented by Republican Bush. Ongoing costs of the Afghanistan war has accumulated to $3.6trillion, and $2.9trillion came from the Bush tax cuts which continued into 2003. Had these 2 Republican originated policies not added drastically to the country’s operating costs, debt increases would have been paltry compared to the size of the GDP. So it hasn’t been Democratic policies, like ACA (Affordable Care Act), or even the American Reinvestment and Recovery Act which has led to home values returning to pre-crisis levels, that created recent debt, but leftover activities tied to Republican Bush’s foray into Afghanistan and Republican policies of cutting taxes (mostly for the wealthy.)

Since Reagan left office the U.S. economy has grown by $13.5trillion. 2/3 of that (67%) happened during Clinton and Obama (Democrats) with only 1/3 happening during Bush and Bush (Republicans.)

AH – What about public sentiment? Listening to candidate Trump one would think Americans are extremely unhappy with President Obama.

Deitrick – The U.S. Conference Board’s Consumer Confidence Index was at a record high 118.9 when Democrat Clinton left office. Eight years later, ending Republican Bush’s administration, that index was at a record low 26.8. Today that index is at 101.1. Perhaps candidate Trump should be reminded of Senator Daniel Patrick Moynihan’s famous quote “everyone is entitled to his own opinion, but not to his own facts.”

Candidate Trump’s rhetoric makes it sound like Americans live in a crime-filled world – all due to Democrats. But FBI data shows that violent crime has decreased steadily since 1990 – from 750 incidents per 100,000 people to about 390 today. Despite the rhetoric, Americans are much safer today than in the past. Interestingly, however, violent crime declined 10.2% in the second Bush’s 8 year term. But during the Clinton years violent crime dropped 34%, and during the Obama administration violent crime has dropped 17.8%. Democratic policies of adding federal money to states and local communities has definitely made a difference in crime.

Despite the blistering negativity toward ACA, 20million Americans are insured today that weren’t insured previously. That’s almost 6.25% of the population now with health care coverage – a cost that was previously born by taxpayers at hospital emergency rooms.

AH – Final thoughts?

Deitrick – We predicted that the Obama administration would be a great boon for Americans, and it has. Unfortunately there are a lot of people who obtain media coverage due to antics, loud voices, and access obtained via wealth that have spewed false information. When one looks at the facts, and not just opinions, it is clear that like all administrations the last 90 years Democrats have continued to be far better economic stewards than Republicans.

It is important people know the facts. For example, it would have kept an investor in this great bull market – rather than selling early on misplaced fear. It would have helped people to understand that real estate would regain its lost value. And understand that the added debt is not a great economic burden, especially at the lowest interest rates in American history.

[Author’s note: Bob Deitrick is CEO of Polaris Financial Partners, a private investment firm in suburban Columbus, Ohio. His firm uses economic and political tracking as part of its analysis to determine the best investments for his customers – and is proud to say they have remained long in the stock market throughout the Obama administration gains. For more on their analysis and forecasts contact PolarsFinancial.net]

A Christmas Carole 2015 – The Ebenezer 1% and Cratchit Middle Class

A Christmas Carole 2015 – The Ebenezer 1% and Cratchit Middle Class

America’s middle class has been decimated. Ever since Ronald Reagan rewrote the tax code, dramatically lowering marginal rates on wealthy people and slashing capital gains taxes, America’s wealthy have been amassing even greater wealth, while the middle class has gone backward and the poor have remained poor. Losing 30% of their wealth, and for many most of their home equity, has left what were once middle class families actually closer to definitions of working poor than a 1950s-1960s middle class.

When Charles Dickens wrote “A Christmas Carole” he brought to life for readers the striking difference between those who “have” from those who “have not” in early England. If you had money England was a great place to be. If you relied on your labors then you were struggling to make ends meet, and regularly disappointing yourself and your family.

For a great many American’s that is the situation in 2015 USA.

At the book’s outset, Mr. Ebenezer Scrooge felt that his wealth was all due to his own great skill. He gave himself 100% of the credit for amassing a fortune, and he felt that it was wrong of laborers, such as his bookkeeper Mr. Cratchit, to expect to pay when seeking a day off for Christmas.

Unfortunately, this sounds far too often like the wealthy and 1%ers. They feel as if their wealth is 100% due to their great intelligence, skill, hard work or conniving. And they don’t think they owe anyone anything as they work to keep unions at bay as they campaign to derail all employee bargaining. Nor do they think they should pay taxes on their wealth as many actively seek to destroy the role of government.

Meanwhile, there are employers today who have taken a page right out of Mr. Scrooge’s book of worklife desolation. Ever since President Reagan fired the Air Traffic Controllers Union employee rights have been on the downhill.  Employers increasingly do not allow employees to have any say in their work hours or workplace conditions – such as Marissa Mayer eliminating work from home at Yahoo, yet expecting 3 year commitments from all managers.

Scrooge and CratchitJust as Mr. Scrooge refused to put more coal in the office stove as Mr. Cratchit’s fingers froze, employers like WalMart rigidly control the workplace environment – right down to the temperature in every single building and office – in order to save cost regardless of employee satisfaction. Workplace comfort has little voice when implementing the CEOs latest cost-saving regimen.

Just as Mr. Scrooge objected to giving the 25th December as a paid holiday (picking his pocket once a year was his viewpoint,) many employers keep cutting sick leave and holidays – or, worse, they allow days off but expect employees to respond to texts, voice mails, emails and social media 24x7x365.  “Take all the holiday you want, just respond within minutes to the company’s every need, regardless of day or time.”

Increasingly, those who “go to work” have less and less voice about their work. How many of you readers will check your work voice mail and/or email on Christmas Day? Is this not the modern equivalent of your employer, like Scrooge, treating you like a filcher if you don’t work on the 25th December? But, do you dare leave the smartphone, tablet or laptop alone on this day? Do you risk falling behind on your job, or angering your boss on the 26th if something happened and you failed to respond?

Like many with struggling economic uncertainty, Bob Cratchit had a very ill son. But Mr. Scrooge could not be bothered by such concerns. Mr. Scrooge had a business to run, and if an employee’s family was suffering then it was up to social services to take care of such things. If those social services weren’t up to standards, well it simply was not his problem. He wasn’t the government – although he did object to any and all taxes. And he had no value for the government offering decent prisons, or medical care to everyone.

Today, employers right and left have dropped employee health insurance, recommending employees go on the exchanges; even though these same employers do not offer any incremental income to cover the cost of exchange-based employee insurance. And many employers are cutting employee hours to make sure they are not able to demand health care coverage. And the majority of employers, and employer associations such as the Chamber of Commerce, want to eliminate the Affordable Care Act entirely, leaving their employees with no health care at all – as was the case for many prior to ACA passage.

Even worse, there are employers (especially in retail, fast food and other minimum wage environments) with employees earning so little pay that as employers they recommend their employees file for government based Medicaid in order to receive the bottom basics of healthcare.  Employees are a necessity, but not if they are sick or if the employer has to help their families maintain good health.

But things changed for Mr. Scrooge, and we can hope they do for a lot more of America’s employers and wealthy elite.

Mr. Scrooge’s former partner, Mr. Jakob Marley, visits Mr. Scrooge in a dream and reminds him that, in fact, there was a lot more to his life, and wealth creation, than just Ebenezer’s toils. Those around him helped him become successful, and others in his life were actually very important to his happiness. He reminds Mr Scrooge that as he isolated himself in the search for ever greater wealth he gained money, but lost a lot of happiness.

Today we have some business leaders taking the cue from Mr. Marley, and speaking out to the Scrooges. In particular, we can be thankful for folks like Warren Buffet who consistently points out the great luck he had to be born with certain skills at this specific point in time. Mr. Buffett regularly credits his wealth creation with the luck to receive a good education, learning from academics such as Ben Graham, and having a great network of colleagues to help him invest.

Further, amplifying his role as a modern day Jacob Marley, Mr. Buffett recognizes the vast difference between his situation and those around him. He has pointed out that his secretary pays a higher percent of her income in taxes than himself, and he points out this is a remarkably unfair situation. Additionally, he makes it clear that for many wealth is a gift of birth – and “winning the ovarian lottery” does not make that wealthy person smarter, harder working or more valuable to society. Rather, just lucky.

What we need is for more wealthy Americans to have a vision of Christmas future – as it appeared to Mr. Scrooge. He saw how wealth inequality would worsen young Tiny Tim’s health, leaving him crippled and dying. He saw his employee Mr. Cratchet struggle and become ill. These visions scared him. Scared him so much, he offered a bounty upon his community, sharing his wealth.

Mr. Scrooge realized that great wealth, preserved just for him, was without merit. He was doomed to a future of being rich, but without friends, without a great world of colleagues and without the sharing of riches among everyone in order that all in society could be healthy and grow. Many would suffer, and die, if society overall did not take actions to share success.

These days we do have a few of these visionary 1%ers, such as Bill Gates, Warren Buffett and recently Mark Zuckerberg, who are either currently, or in the future, planning to disseminate their vast wealth for the good of mankind.

Yet, middle class Americans have been watching their dreams evaporate. Over the last 50 years America has changed, and they have been left behind. Hard work, well…….. it just doesn’t give people what it once did. Policy changes that favored the wealthy with Ayn Rand style tax programs have made the rich ever richer, supported the legal rights of big corporations and left the middle class with a lot less money and power. Incomes that did not come close to matching inflation, and home values that too often are more anchors than balloons have beset 2015’s strivers.

It will take more than philanthropic foundations and a few standout generous donors to rebuild America’s middle class. It will take policies that provide more (more safety nets, more health care, more education, more pension protection, more job protections and more political power) for those in the middle, and give them economic advantages today offered only wealthier Americans.

Let us hope that in 2016 we see a re-awakening of the need to undertake such rebuilding by policymakers, corporate leaders and the 1%. Let us hope this Christmas for a stronger, more robust, healthier and disparate, shared economy “for each and every one.”

Hobby Lobby – Win the Battle, Risk Losing the War

Hobby Lobby – Win the Battle, Risk Losing the War

Yesterday the U.S. Supreme Court ruled in favor of Hobby Lobby and against the U.S. government in a case revolving around health care for employees.  I’m a business person, not a lawyer, so to me it was key to understand from a business viewpoint exactly what Hobby Lobby “won.”

It appears Hobby Lobby’s leaders “won” the right to refuse to provide certain kinds of health care to their employees as had been mandated by the Affordable Care Act.  The justification primarily being that such health care (all associated with female birth control) violated religious beliefs of the company owners.

As a business person I wondered what the outcome would be if the next case is brought to the court by a business owner who happens to be a Christian Scientist.  Would this next company be allowed to eliminate offering vaccines – or maybe health care altogether – because the owners don’t believe in modern medical treatments?

This may sound extreme, and missing the point revolving around the controversy over birth control.  But not really.  Because the point of business is to legally create solutions for customer needs at a profit.  Doing this requires doing a lot of things right in order to attract and retain the right employees, the right suppliers and  customers by making all of them extremely happy.  I don’t recall Adam Smith, Milton Friedman, Peter Drucker, Edward Demming, John Galbraith or any other historically noted business writer saying the point of business to set the moral compass of its customers, suppliers or employees.

I’m not sure where enforcing the historical religious beliefs of founders or owners plays a role in business.  At all.  Even if they have the legal right to do so, is it smart business leadership?

Hobby Lobby Store

Hobby Lobby Store

Hobby Lobby competes in the extraordinarily tough retail market.  The ground is littered with failures, and formerly great companies which are struggling such as Sears, KMart, JCPenney, Best Buy, etc.  And recently the industry has been rocked with security breaches, reducing customer faith in stalwarts like Target.  And profits are being challenged across all brick-and-mortar traditional retailers by on-line companies led by Amazon, who have much lower cost structures.

All the trends in retail bode poorly for Hobby Lobby.  Hobby Lobby does almost no business on-line, and even closes its stores on Sunday. Given consumer desires to have what they want, when they want it, unfettered by time or location, a traditional retailer like Hobby Lobby already has its hands full just figuring out how to keep competitors at bay.  Customers don’t need much encouragement to skip any particular store in search of easily available products and instant price information across retailers.

Social trends are also very clear in the USA.  The great majority of Americans support health care for everyone.  Including offering birth control, and all other forms of women’s health needs. This has nothing to do with the Affordable Care Act.  Health care, and women’s rights to manage their individual reproductiveness, is something that is clearly a majority viewpoint – and most people think it should be covered by health insurance.

So, given the customer options available, is it smart for any retailer to brag that they are unwilling to offer employees health care?  Although not tied to any specific social issues, Wal-Mart has long dealt with customer and employee defections due to policies which reduce employee benefits, such as health care.  Is this an issue which is likely to help Hobby Lobby grow?

Is it smart, as Hobby Lobby competes for merchandise from suppliers, negotiates on leases with landlords, seeks new store permits from local governments, recruits employees as buyers, merchandisers, store managers and clerks, and seeks customers who can shop on-line or at competitors to brandish the sword of intolerance on a specific issue which upsets the company owner?  And one where this owner is on the opposite side of public opinion?

Long ago a group of retired U.S. military Generals told me that in Vietnam America won every battle, but lost the war.  Through overwhelming firepower and manpower, there was no way we would not win any combat mission.  But that missed the point.  As a result of focusing on the combat, America’s leaders missed the opportunity win “the hearts and minds” of most Vietnamese.  In the end America left Vietnam in a rushed abandonment of Saigon, and the North Vietnamese took over all of South Vietnam.  Although we did what leaders believed was “right,” and fought each battle to a win, in the end America lost the objective of maintaining a free, independent and democratic Vietnam.

The leaders of Hobby Lobby won this battle.  But is this good for the customers, suppliers, communities where stores are located, and employees of Hobby Lobby?  Will these constituents continue to support Hobby Lobby, or will they possibly choose alternatives?  If in its actions, including legal arguing at the Supreme Court, Hobby Lobby may have preserved what its leaders think is an important legal precedent.  But, have their strengthened their business competitiveness so they will be a long-term success?

Perhaps Hobby Lobby might want to listen to the CEO of Chick-fil-A, which suffered a serious media firestorm when it became public their owners donated money to anti-gay organizations.  CEO Cathy decided it was best to “just shut up and go sell chicken.”  Business is tough enough, loaded with plenty of battles, without looking for fights that are against trends.

 

Obamacare – America’s Greatest Legislation Since the Civil Rights Act?

Obamacare – America’s Greatest Legislation Since the Civil Rights Act?

Obamacare is the moniker for the Affordable Care Act.  Unfortunately, a lot of people thought the last thing Obamacare would do was make health care more affordable.  Yet, early signs are pointing in the direction of a long-term change in America’s cost of providing health services.

The November, 2013 White House report on “Trends in Health Care Cost Growth” provides a plethora of data supporting declining health care costs.  Growth in health care cost per capita at 1% in 2011 was the lowest since record keeping began in the 1960s.  Health care inflation now seems to be about the same as general inflation, after 5 decades of consistently outpacing other price increases.  And Congressional Budget Office (CBO) projections of Medicare/Medicaid cost as a percent of Gross Domestic Product (GDP) have declined substantially since 2010.

Of course, one could easily accuse the White House of being self-serving with this report.  But at a February National Association of Corporate Directors Chicago Conference on health care,

all agreed that, indeed, the world has changed as a result of Obamacare.  And one short-term outcome is American health care trending toward greater affordability.

How Obamacare accomplished this, however, is not at all obvious.

Abdication: that is the word which best desribed patient health care choices for the last several decades.  Patients simply did whatever they were told to do.  If a test was administered, or a procedure recommended, or a referral to a specialist given, or a drug prescribed patients simply did what they were told – “as long as the insurance paid.”

The process of health care implementation, how patients were treated, was specified by medical professionals in conjunction with insurance companies and Medicare.   Patients had little – or nothing – to do with the decision making process.  The service was either offered, and largely free, or it wasn’t offered.

In effect, Americans abdicated health care decision-making to others.  The decisions about what would be treated, when and how was almost wholly made without patient involvement.  And what would be charged, as well as who would pay, was also made by someone other than the patient.  The patient had no involvement in determining if there was any sort of cost/benefit analysis, or the comparing of different care options.

Insurance companies dickered with providers over pricing.  Then employers dickered with insurance companies over what would be covered in a plan, what the price would be and what percentage was paid by the insurance company and what would be paid by patients.  When a patient needed treatment either the employer’s insurance company paid, after a negotiation on price with the provider, or the insurance company did not.  And patients largely consumed whatever care was offered under their plan.

Or, if it was Medicare the same process applied, just substitute for “employer” the words “a government agency.”

Americans had abdicated the decision-making process for health care to a cumbersome process that involved medical professionals, insurance companies and employers.  While patients may have acted like health care was free, everyone knew it was not free.  But the process of deciding what would be done, pricing and measuring benefits had been abdicated by patients to this process years ago.

Obamacare moves Americans from a world of abdication to a world of accountability.  Everyone now has to be insured, so the decision about what coverage each person has, at what level and cost, is now in the hands of the patient.  Rather than a single employer option, patients have a veritable smorgasboard of coverage options from which they can select.  And this begins the process of making each person accountable for their health care cost.

When people receive treatment, by and large more is now being paid by the patient.  And once people had to start paying, they had to be accountable for the cost (higher deductibles and co-pays had already started this process before Obamacare.)  When people became accountable for the cost, a lot more questions started to be asked about the price and the benefit.  Instead of consuming everything that was available, because there was no cost implication, patient accountability for some of the cost has now forced people to ask questions before committing to treatments.

Higher accountability now has consumers (patients) asking for more choices.  And more choices pushes providers to realize that price and delivery make a difference to the patient – who is now a decision-making buyer.

In economic lingo, accountability is changing the health care demand and supply curves.  Previously there was no elasticity of demand.  Patients had no incentives to reduce demand, as health care was perceived as free.  Providers had no incentive to alter supply, because the more they supplied the more they were paid.  Both supply and demand went straight up, because there was no pricing element to stand in the way of both increasing geometrically.

But now patients are making decisions which alter demand. Increasingly they determine what procedures to have, based on price and expected outcomes. And supply is now altered based upon provider and price.  Patients can shop amongst hospitals and outpatient facilities to determine the cost of minor surgery, for example, and decide which solution they prefer.  More services, at different locations and different price points alter the supply curve, and make an impact on the demand curve.  We now have elasticity in both demand and supply.

A patient with a mild heart arythmia can decide if they really need an in-house EKG with a cardiologist review, or substitute an EKG detected from a smartphone diagnosed by an EKG tech remotely.  With both services offered at very different price points (and a host of options in the middle,) it is possible for the patient to change their demand for something like an EKG – and on to total cost of cardiac care.  They may buy more of some care, such as services they find less costly, or providers that are less pricey, and less of another service which is more costly due to the service, the provider or a combination of the two.

And thus accountability starts us down the road to greater affordability.

In distribution terms, the old system was a “wholesale system” which had very expensive suppliers with pricing which was opaque – and often very bizarre.  Pricing was impossible to understand.  Middlemen in insurance companies hired by employers tried to determine what services should be given to patients, and at what prices for the employers (not the patient) to pay.  This wholesale distribution method of health care drove prices up.  Neither those creating demand (patients) or those offering the supply (medical providers) had any incentive to use less health care or lower the price.  And often it left both the patient and the supplier extremely unhappy with how they were treated by arbitrary middle men more interested in groups than individuals.

But the new system is a retail system.  Because the patient no longer abdicates decision making to middle-men, and instead is accountable for the health care they receive and the price they pay. It is creating a far more rational pricing system, and generating new curves that are starting to balance both supply and demand; while simultaneously encouraging the implementation of new options that provide the ability to enhance the service and/or outcome at lower price points.

Obamacare is just beginning its implementation.  “The devil is in the details,” and as we saw with the government web site for exchanges there have been many, many glitches.  As with anything so encompassing and complex, there are lots of SNAFUs. The market is still far from transparent, and patients are far from educated, much less fully informed, decision makers. There is a lot of confusion amongst providers, suppliers and patients.  Regulations are unclear, and not always handled consistently or judiciously.

But, America has made one heck of a start toward containing something which has overhung economic growth since the 1970s.  The health care cost trend is toward greater price visibility, smarter consumers, more options and lower health care costs both short- and long-term.

In the 1960s Congress, and the nation, was deeply divided over passing the Civil Rights Act.  Its impact would be significant on both the way of life for many people, and the economy.  How it would shape America was unclear, and many opposed its passage.  Called for by President Kennedy, President Johnson worked hard – and with lots of strong-arming – to obtain its passage after Kennedy’s death.

After a lot of haggling, some Congressional trickery, filibustering and a lot of legal challenges, the Civil Rights Act was passed in 1964 and it ushered in a new wave of economic growth as it freed resources to add to the American economy instead of being held back.  It was a game changer for the nation, and 40 years later, it’s hard to imagine an America without the gains made by the Civil Rights Act.

Looking 40 years forward, Obamacare – the ACA – may well be legislation that is seen as an economic game changer.  Although its passage was bruising to many in the nation, it changed health care from a system of patient abdication to one of patient accountability, and thereby directed health care toward greater affordability for the country and its citizens.

 

 

President Obama’s Miracle Market – How Wall Street Was So Wrong in 2013

President Obama’s Miracle Market – How Wall Street Was So Wrong in 2013

The S&P 500 had a great 2013.  Up 29.7% – its best performance since 1997.  The Dow Jones Industrial Average (DJIA) ended the year up 26.5% – its best performance since 1995.  And this happened as economic growth lowered the unemployment rate to 6.7% in December – the lowest rate in 5 years.  And overall real estate had double-digit price gains, lowering significantly the number of underwater mortgages.

But if we go back to the beginning of 2013, most Wall Street forecasters were predicting a very different outcome.  Long suffering bear Harry Dent predicted a stock crash in 2013 that would last through 2014, and ongoing cratering in real estate values.  And bear Gina Martin Adams of Wells Fargo Securities predicted a market decline in 2013, a forecast she clung to and fully supported, despite a rising market, when predicting an imminent crash in September. Morgan Stanley’s Adam Parker also predicted a flat market, as did UBS analyst Jonathan Golub.

How could professionals who are paid so much money, have so many resources and the backing of such outstanding large and qualified institutions be so wrong?

An over-reliance on quantitative analysis, combined with using the wrong assumptions.

The conventional approach to Wall Street forecasting is to use computers to amass enormously complex spreadsheets combining reams of numbers.  Computer models are built with thousands of inputs, and tens of millions of data points. Eventually the analysts start to believe that the sheer size of the models gives them validity.  In the analytical equivalent of “mine is bigger than yours” the forecasters rely on their model’s complexity and sheer size to self-validate their output and forecasts.

In the end these analysts come up with specific forecast numbers for interest rates, earnings, momentum indicators and multiples (price/earnings being key.)  Their faith that the economy and market can be reduced to numbers on spreadsheets leads them to similar faith in their forecasts.

But, numbers are often the route to failure.  In the late 1990s a team of Wall Street traders and Nobel economists became convinced their ability to model the economy and markets gave them a distinct investing advantage.  They raised $1billion and formed Long Term Capital (LTC) to invest using their complex models.  Things worked well for 3 years, and faith in their models grew as they kept investing greater amounts.

But then in 1998 downdrafts in Asian and Russian markets led to a domino impact which cost Long Term Capital $4.6B in losses in just 4 months.  LTC lost every dime it ever raised, or made.  But worse, the losses were so staggering that LTC’s failure threatened the viability of America’s financial system.  The banks, and economy, were saved only after the Federal Reserve led a bailout financed by 14 of the leading financial institutions of the time.

Incorrect assumptions played a major part in how Wall Street missed the market prediction for 2013.  All models are based on assumptions.  And, as Peter Drucker famously said, “if you get the assumptions wrong everything you do thereafter will be wrong as well” — regardless how complex and vast the models.

Conventional wisdom held that conservative economic policies underpin market growth, and the more liberal Democratic fiscal policies combined with a liberal federal reserve monetary program would bode poorly for investors and the economy in 2013.  These deeply held assumptions were, of course, reinforced by a slew of conservative commentators that supported the notion that America was on the brink of runaway inflation and economic collapse.  The BIAS (Beliefs, Interpretations, Assumptions and Strategies) of the forecasters found reinforcement almost daily from the rhetoric on CNBC, Bloomberg, Fox News and other programs widely watched by business people from Wall Street to Main Street.

Interestingly, when Obama was re-elected in 2012 a not-so-well-known investment firm in Columbus, OH – far from Wall Street – took an alternative look at the data when forecasting 2013.  Polaris Financial Partners took a deep dive into the history of how markets perform when led by traditional conservative vs. liberal policies and reached the startling conclusion that Obama’s programs, including the Affordable Care Act, would actually spur investment, market growth, jobs and real estate!  They had forecast a double digit increase in all major averages for 2012 and extended that same double digit forecast into 2013 – far more optimistic than anyone on Wall Street.

CEO Bob Deitrick and partner Steven Morgan concluded that the millenium’s first decade had been lost. Despite Republican leadership, the eqity markets were, at best, sideways.  There were fewer people actually working in 2008 than in 2000; a net decrease in jobs.  After a near-collapse in the banking system, due to deregulated computer-model based trading in complex derivatives, real estate and equity prices had collapsed.

“Fourteen years of stock market gains were wiped out in 17 months from October, 2007 to March, 2009” lamented Deitrick.

Polaris Partners concluded the situation was eerily similar to the 1920s at the end of Hoover’s administration.  A situation which was eventually resolved via Keynesian policies of increased fiscal spending while interest rates were low, and federal reserve intervention to both expand the money supply and increase the velocity of money under Republican Fed chief Marriner Eccles and Democratic President Franklin Roosevelt.

While most people conventionally think that tax cuts led to economic growth during the Reagan administration, Polaris Financial turned that assumption upside down and put the biggest positive economic impact on the roll-back of tax cuts a year after being pushed by Reagan and passing Congress.  Their analysis of the 1980 recovery focused on higher defense and infrastructure  spending (fiscal policy,) a massive increase in debt (the largest peacetime debt increase ever) coupled with a more balanced tax code post-TEFRA.

Thus, eschewing complex econometric models, elaborately detailed spreadsheets of earnings and rolling momentum indicators, Polaris Financial focused instead on identifying the assumptions they believeed would most likely drive the economy and markets in 2013.  They focused on the continuation of Chairman Bernanke’s easy monetary policy, and long-term fiscal policies designed to funnel money into investments which would incent job creation and GDP growth leading to an improvement in house values, and consumer spending, while keeping interest rates at historically low levels.  All of which would bode extremely well for thriving equity markets.

The vitriol has been high amongst those who support, and those who oppose, the economic policies of Obama’s administration since 2008. But vitriol does not support, nor replace, good forecasting.  Too often forecasters predict what they want to happen, what they hope will happen, based upon their view of history, their traing and background, and their embedded assumptions.  They believe in the certainty of long-held assumptions, and forecast from that base.

But as Polaris Financial pointed out, in beating every major Wall Street firm over the last 2 years, good forecasting relies on looking carefully at historical outcomes, and understanding the context in which those results happened. Rather than relying on an interpretation of the outcome,they looked instead at the facts and the situation; the actions and the outcomes in its context.  In an economy, everything is relative to the context.  There are no absolute programs that are universally the right thing to do.  Every policy action, and every monetary action, is dependent upon initial conditions as well as the action itself.

Too few forecasters take into account both the context as well as the action.  And far too few do enough analysis of assumptions, preferring instead to rely on reams of numerical analysis which may, or may not, relate to the current situation.  And are often linked to assumptions underlying the model’s construction – assumptions which could be out of date or simply wrong.

The folks at Polaris Financial Partners remain optimistic about the economy and markets for the next two years.  They point out that unemployment has dropped faster under Obama, and from a much higher level, than during the Reagan administration.  They see the Affordable Care Act opening more flexibility for health care, creating a rise in entrepreneurship and innovation (especially biotechnology) that will spur economic growth.  Deitrick and Morgan see tax programs, and rising minimum wage trends, working toward better income balancing, and greater monetary velocity aiding GDP growth.  Their projection is for improving real estate values, jobs growth, and minimal inflation leading to higher indexes – such as 20,000 on the DJIA and 2150 on the S&P.

Bob Deitrick co-authored, with Lew Goldfarb, “Bulls, Bears and the Ballot Box” in 2012 analyzing Presidential economic policies, Federal Reserve policies and stock market performance.