Obama’s Trifecta – Democrats Continue Economically Trouncing Republicans

Obama’s Trifecta – Democrats Continue Economically Trouncing Republicans

This week marks the 6th anniversary of the stock market’s bull run, with the S&P up 206%.  Only 3 other times since WWII have equities had such a prolonged, sustained growth series.  Simultaneously, last week saw yet another month with over 200,000 non-farm jobs created, making the current rate of jobs growth the best in 15 years.  And, in a move that has taken some by surprise, the U.S. dollar is hitting highs against foreign currencies that have not been seen in over 12 years.

It is a rare economic trifecta, and demonstrates America is doing better than all other developed countries.

It seemed an appropriate time to re-interview Bob Deitrick, Managing Director of Polaris Financial Partners, and author of “Bulls, Bears and the Ballot Box” to obtain his take on the economy.  Mr. Deitrick’s book reviewed America’s economic performance under each President since the creation of the Federal Reserve, and in direct opposition to conventional wisdom concluded presidents from the Democratic party were better economic stewards than Republican presidents.  When published in 2012 Mr. Deitrick predicted that the economy would continue to do well under President Obama, and so far he’s been proven correct.

SP500 - March to March

AH: Since we discussed “Obama’s Miracle Market” in January, 2014 stocks have continued to rise.  Has this bull run surprised you, and do you think it will continue?

Bob Deitrick: No it has not surprised us.  Looking across  history since Hoover, Democrats in the White House have generally presided over good stock market gains.  Since Clinton was elected, Democratic administrations have done remarkably well, with both Clinton and Obama outperforming the best Republican presidents which were Eisenhower and Reagan.

Looking at the S&P 500, Clinton and Obama have performed about the same with about a 17% annual rate of return through the first 62 months of office.  Which is 70% better than the approximate 10% return of Republicans.

Avg Annual Compound Return on Equities

It is worth noting that when we take a broader gauge of equities (which we used in the book,) including the more volatile NASDAQ index and the highly selective Dow Jones Industrial Average, then the market’s performance during the Obama administration is unchallenged.  The last 6 years generated compound annual returns of 22.5% (including dividend reinvestment) which is the best improvement in equities of all time.

It is also worth noting that the collapse of equities has happened 3 times since 1900, and all under Republican administrations – Hoover, Nixon/Ford, Bush 43.  Even Carter had a rising equities market, and the Clinton + Obama years were unparalleled.

We agree with many other analysts that this bull market is not complete.  We think the stock markets are only at the half way point in a secular bull cycle which will last, in total, 8 to 12 years.

AH: It was 6 months ago when you pointed out that President Obama outperformed President Reagan on jobs growth.  At that time there were many, many naysayers.  Yet, August’s numbers were later revised upward to over 200,000 and every month since has continued with strong jobs growth – some nearly 300,000.  Are you surprised by the strength in jobs creation, and do you think it will stall?

Bob Deitrick: Both Reagan and Obama inherited a bad jobs marketplace.  Both of them saw unemployment spike into double digits early in their presidencies.  And both created jobs programs that brought down the percentage of people unemployed.  Obama had a lesser spike than Reagan, and during the last 5 years unemployment rate fell faster than it did under Reagan.

Unemployment RateBoth Democrats, Obama and Clinton, had big decreases in unemployment due to their policies.  From peak to trough in this current administration unemployment has fallen by 5.5 percentage points, a decline of 81%.  Clinton oversaw unemployment decline of 3.1 percentage points, or 73%.  Both Democrats followed Bush Republican presidencies which had seen unemployment increase!  During Bush 41 unemployment rose by 2 percentage points (5.4% to 7.3%,) and during Bush 43 unemployment nearly doubled from 4.2% to 8.3%.  Not even the Carter presidency had unemployment increases anywhere close to the 12 years of Bush presidency.

It is also worth noting that when comparing Obama and Reagan, Reagan undertook the largest increase in non-wartime deficit spending ever.  He essentially used a form of “New Deal” debt spending on infrastructure and defense to stimulate jobs production.  President Obama has been able to reduce the size of the annual deficit every year since taking office, in reality shrinking the amount of money spent by the government while simultaneously creating these new jobs.  The only other president to accomplish this feat was Clinton, who actually balanced the budget during his presidency.

We believe the economy is very strong, and along with other analysts think the jobs recovery will remain intact.  With less war spending, lower oil prices, more people covered by insurance, and higher minimum wages consumers will continue to spend and the economy will grow.  New technology products will bring more people into the workforce, and manufacturing will continue its renaissance.  We expect that unemployment will continue falling toward 4.4% by summer of 2016, returning the economy to non-wartime full employment.

AH: For years many talk show hosts and guests have been declaring that the Fed was flooding the markets with cash and setting the stage for rampant inflation which would ruin the dollar and the U.S. economy.  But in the last few months the dollar has rallied to rates we haven’t seen since the 1990s.  Did this surprise you, and do you think the dollar will remain strong?

Bob Deitrick: We were not surprised.  Ben Bernanke ranks right up there with the first ever Federal Reserve Chairman Marriner Eccles at knowing what to do to keep the American economy from collapsing in the wake of the country’s second depression.  Only by re-inflating the economy with more cash, and keeping interest rates low, did America avoid a horrible repeat of the 1930s.

Dollar

As a result of Democratic policies America re-invested in growth, which allowed companies to invest in plant and equipment and create new jobs, while lowering the deficit.  This happened simultaneously with opposite policies being implemented in Europe and Japan (so called “austerity”) which has caused their economies to weaken.  And slowed demand from Europe has reduced growth rates in China and India, all leading global investors to return to the U.S. dollar as a safe haven.  It is because of our economic strength that the dollar is returning to rates we have not seen since the Clinton presidency.

US Dollar Value

Many people recall the huge increase in the dollar’s value toward the middle of the Reagan presidency.  However, as the U.S. deficits, and total debt, skyrocketed the dollar plummeted.  By the time Reagan left office the dollar was worth almost the same as when he entered office.

And the combination of lower taxes plus costs for waging war in the middle east sent the U.S. debt exploding again under Bush 43.  What had been a balanced budget under Clinton, which had pushed the dollar almost back to post-war highs, was destroyed causing the dollar to plummet 25%.

The dollar is now up 21% against a basket of world currencies.  Given ongoing European weakness and the never-ending fight over austerity we see no reason to think the Euro will make a comeback any time soon. Rather, we predict the strong U.S. economy, especially with oil prices likely to remain low (and priced in dollars,) the U.S. dollar will continue to rally.  It could well go back to Clinton-era highs and possibly approach the values during Reagan’s presidency.  Should this happen it would be a record improvement in the dollar by any modern administration.

AH: Any concluding comments?

Bob Deitrick: I have voted for both Republicans and Democrats, and think of myself as a centrist.  Most people, by definition, are centrists.  I long believed that the GOP was the party which was best for the economy.  But I could tell something wasn’t adding up during the Bush 43 presidency, so I chose to research the performance of both parties.

The GOP has created an illusion that it is a better economic steward by promoting itself as the party with the better business acumen, frequently touting elected officials from business schools and with MBAs rather than law degrees.  The GOP, and the media leaders who identify with the GOP, tell Americans every chance they can that Republicans are the party of financial acuity and have the policies to create economic prowess.  Yet we found through our research that these claims were little more than myth.  In the modern era, post Great Depression and with a strong Federal Reserve in place, Democratic administrations have been far better stewards of the economy and caretakers of the government’s wallet.

We have coached investors to be in this equity market, and remain long, since early in the Obama administration.  We have continued to remain long, and coach investors that in our opinion this remains the best course.  We see the economy growing due to a balanced approach to jobs creation, spending and taxation. Were there less partisanship, such as occurred during the Reagan era when the Democrat party controlled the Congress while Republicans controlled the administration, it might be possible for the economy to grow even more quickly.

Economically, is Obama America’s Greatest Modern President?

With the stock market hitting new highs, some people have
already forgotten about the Great Recession.  If you recall 2009, things looked pretty bleak
economically.  But the outlook has changed dramatically in just 4 years.  And it has been a boon for investors, as even the safest indices have yielded a 250% return (>25% annualized compound return:)

Growth of $1,000 ChartSource: Bulls, Bears and the Ballot Box at Facebook.com

Meanwhile, trends have reversed direction with unemployment falling, and consumer confidence rising:

Confidence-Unemployment Chart

Source: Bulls, Bears and the Ballot Box at Facebook.com

Since this coincides with President Obama’s first term, I asked the authors of “Bulls, Bears and the Ballot Box,” (available on Amazon.com) which I reviewed in my October 11, 2012 column, to capture their opinions on how much Americans should attribute the equity
upturn, and improved economic prospects, to the President as we enter his second term.

Interview with Bob
Deitrick
, co-Author "Bulls, Bears and the Ballot Box" (BBBB):

Q– Bob, how much credit should Americans give President
Obama for today’s improved equity values?

BBBB – Our research reviewed American economic performance
since President Roosevelt installed the first Federal Reserve Board
Chairman
– Republican Marriner Eccles.  We observed that even
though there are multiple impacts on the economy, it was clear that policy
decisions within each administration, from FDR forward, made a clear difference on performance. And
relatively quickly. 

Presidents universally take credit when the economy does
well (such as Reagan,) and choose to blame other factors when the economy does
poorly (such as Carter.)  But there
was a clear pattern, and link, between policy and financial market performance. 

Although we hear almost no one in the Obama administration
taking credit for record index highs, they should.   Because the President deserves
significant credit for how well this economy has done during his leadership. 

The auto rescue plan has worked.  American car manufacturers are still dominant and employing millions directly and in supplier companies.  Wall Street reform
has been painful but it has re-instated faith amongst investors. 
The markets are far more predictable than they were four years ago, as VIX numbers demonstrate greater faith and less risk. 

Even for small investors, such as thoughs limited to their 401(k) or IRA investments, the average annual compound
return on stocks under President Obama has been more than
24% since the lows of March, 2009. 
This is a better result than either Clinton, Reagan or FDR who were the
prior winners in our book. 

Q– Bob, what policies do you think were most important
toward achieving today’s new highs?

BBBB – Firstly, let’s review just how bad things were in
2009.  In 2000 America was completing the longest
bull market in history. But by
the end of President Bush's tenure the country had witnessed 2 stock market crashes, and the DJIA had fallen 58%.  This was the second worst market decline in history (exceeded
only by the Great Depression,) and hence the term “Great Recession” was born.

In 2000, at the end of Clinton’s administration, the
Consumer Confidence Index was at a record high 140. 
By January, 2009 this index had fallen to an historic low of 25.3.  Comparatively, when Reagan took office
at the end of the economically weak Carter years the Confidence Index
was still at 74.4!  Today this
measure of how people feel about the country is still nowhere near 2000 levels,
but it is almost 3 times better than 4 years ago.

Significantly, in 2000 America had a budget surplus.  By 2009 surpluses were long gone and the
country was racking up historic deficits as taxes were cut while simultaneously
outlays for defense skyrocketed to cover costs of wars in Iraq and
Afghanistan.  Additionally, banks
were on the edge of failing due to unregulated real estate speculation and massive derivative losses.

Today the Congressional Budget Office is reporting a $200B decrease in the deficit almost entirely due to increased revenue from a growing economy and higher taxes on the wealthiest Americans.  The deficit is now only 4% of the GDP, down from over 10% at the end of Bush's administration – and projections are for it to be only 2% by 2015 (before Obama leaves office.)  America's "debt problem" seems largely solved, and almost all due to growth rather than austerity.

We can largely thank a fairer tax code, improved regulation and consistent SEC enforcement.  Also, major strides in health care reform – something no other President has accomplished – has given American's more faith in their future, and an increased willingness to invest.  

Q– To which President would you compare Obama’s economic
performance?

BBBB– By all measures, President Obama has outperformed
every modern President. 

The easiest comparison would be to President Reagan, who’s
economic performance was superb.  Even though Obama's performance is better.

Reagan had the enormous benefit of two major factors:

  1. a significantly better economy than Obama inherited, even if afflicted by inflation
  2. and his two terms coincided with the highest performing
    demographic years of the Baby Boomer generation.

Today's demographics have shifted dramatically.  The country is much older, with fewer
young people supporting a much larger near-retirement age group.  This inherent demographic fact makes
creating economic growth monumentally harder than it was 30 years ago.

Few people think of Reagan as a stimulus addict.  Yet, his administration’s military
build-up added $1trillion of stimulus to the national debt ($2.3trillion adjusted for
inflation) – the opposite of what is happening during the Obama years.  Many like to think
that it was tax cutting which grew the economy, but undoubtedly we now know
that this dramatic defense and infrastructure (highways, etc.) stimulus had more to do with igniting economic growth.  Reagan's spending looked far more like FDR than Herbert Hoover!

Ronald  Reagan tripled the national debt during his tenure, creating what today's Congressional austerity advocates might have called "a legacy of unpayable debt for our grandchildren.” But, as we saw, later growth (during Clinton) resolved that debt and created a budget surplus by 2000.

Q– Bob, President’s Obama detractors liken the Affordable
Care Act (i.e. Obamacare) to an Armageddon on business, sure to kill economic
growth and plunge the country back into recession.  Do you agree?

BBBB– To the contrary, ACA levels the playing field and will
be good for economic growth.  Where
previously only large corporations could afford employee health care plans, in
the future far more employees will have far more equitable coverage.  Further, today employees frequently are unable to leave a
company to start a new business because they would lose health care, which in
the future will not be true.

One leading indicator of the benefits of ACA might be the performance of healthcare and biotech stocks, which are up 20-30% and leaders in the current market rally.

Q– What policies would you recommend the Obama
administration follow in order to promote economic growth, more jobs and
greater returns for investors during the second term?

BBBB-  Obama needs to make the cornerstone of his second term creating new job growth.  That was the primary platform of his candidacy, and it is a platform long successful for the Democratic party.  If President Obama can do this and  govern effectively, this could be his real legacy.

 

 

Beyond the Debate – Common Economic Misconceptions vs. Reality

There was a time, before primaries, when each party's platform was really important.  Voters didn't pick a candidate, the party did.  Then voters read what policies the party planned to implement should it control the executive branch, and possibly a legislative majority. It was the policies that drew the most attention – not the candidates. 

Digging deeper than shortened debate-level headlines, there is a considerable difference in the recommended economic policies of the two dominant parties.  The common viewpoint is that Republicans are good for business, which is good for the economy.  Republican policies – and the more Adam Smith, invisible hand, limited regulation, lassaiz faire the better – are expected to create a robust, healthy, growing economy.  Meanwhile, the common view of Democrat policies is that they too heavily favor regulation and higher taxes which are economy killers.

Right?

Well, for those who feel this way it may be time to review the last 80 years of economic history, as Bob Deitrick and Lew Godlfarb have done in a great, easy to read book titled "Bulls, Bears and the Ballot Box" (available at Amazon.com) Their heavily researched, and footnoted, text brings forth some serious inconsistency between the common viewpoint of America's dominant parties, and the reality of how America has performed since the start of the Great Depression

Gary Hart recently wrote in The Huffington Post,

"Reason and facts are sacrificed to opinion and myth. Demonstrable
falsehoods are circulated and recycled as fact. Narrow minded opinion
refuses to be subjected to thought and analysis. Too many now subject
events to a prefabricated set of interpretations, usually provided by a
biased media source. The myth is more comfortable than the often
difficult search for truth."

Senator Daniel Patrick Moynihan is attributed with saying "everyone is
entitled to his own opinion, but not his own facts.
"  So even though we
may hold very strong opinions about parties and politics, it is
worthwhile to look at facts.  This book's authors are to be commended for spending several years, and many thousands of student research assistant man-days, sorting out economic performance from the common viewpoint – and the broad theories upon which much policy has been based.  Their compendium of economic facts is the most illuminating document on economic performance during different administrations, and policies, than anything previously published.

Startling Results


CH2_FHP
Chart reproduced by permission of authors

The authors looked at a range of economic metrics including inflation, unemployment, growth in corporate profits, performance of the stock market, change in household income, growth in the economy, months in recession and others.  To their surprise (I had the opportunity to interview Mr. Goldfarb) they discovered that laissez faire policies had far less benefits than expected, and in fact produced almost universal negative economic outcomes for the nation!

From this book loaded with statistical fact tidbits and comparative charts, here are just a few that caused me to realize that my long-term love affair with Milton Friedman's theories and recommended policies in "Free to Choose" were grounded in a theory I long admired, but that simply have proven to be myths when applied!

  • Personal disposable income has grown nearly 6 times more under Democratic presidents
  • Gross Domestic Product (GDP) has grown 7 times more under Democratic presidents
  • Corporate profits have grown over 16% more per year under Democratic presidents (they actually declined under Republicans by an average of 4.53%/year)
  • Average annual compound return on the stock market has been 18 times greater under Democratic presidents (If you invested $100k for 40 years of Republican administrations you had $126k at the end, if you invested $100k for 40 years of Democrat administrations you had $3.9M at the end)
  • Republican presidents added 2.5 times more to the national debt than Democratic presidents
  • The two times the economy steered into the ditch (Great Depression and Great Recession) were during Republican, laissez faire administrations

The "how and why" of these results is explained in the book.  Not the least of which revolves around the velocity of money and how that changes as wealth moves between different economic classes. 

The book is great at looking at today's economic myths, and using long forgotten facts to set the record straight.  For example, in explaining President Reagan's great economic recovery of the 1980s it is often attributed to the stimulative impact of major tax cuts.  But in reality the 1981 tax cuts backfired, leading to massive deficits and a weaker economy with a double dip recession as unemployment soared.  So in 1982 Reagan signed (TEFRA) the largest peacetime tax increase in our nation's history.  In his tenure Reagan signed 9 tax bills – 7 of which raised taxes!

The authors do not come down on the side of any specific economic policies.  Rather, they make a strong case that a prosperous economy occurs when a president is adaptable to the needs of the country at that time.  Adjusting to the results, rather than staunchly sticking to economic theory.  And that economic policy does not stand alone, but must be integrated into the needs of society.  As Dwight Eisenhower said in a New Yorker interview

"I despise people who go to the gutter on either the right or the left and hurl rocks at those in the center."

The book covers only Presidents Hoover through W. Bush.  But as we near this election I asked Mr. Goldfarb his view on the incumbent Democrat's first 4 years.  His response:

  • "Obama at this time would rank on par with Reagan
  • Corporate profits have risen under Obama more than any other president
  • The stock market has soared 14.72%/year under Obama, second only to Clinton — which should be a big deal since 2/3 of people (not just the upper class) have a 401K or similar investment vehicle dependent upon corporate profits and stock market performance"

As to the challenging Republican party's platform, Mr. Goldfarb commented:

  • "The platform is the inverse of what has actually worked to stimulate economic growth
  • The recommended platform tax policy is bad for velocity, and will stagnate the economy
  • Repealing the Affordable Care Act (Obamacare) will have a negative economic impact because it will force non-wealthy individuals to spend a higher percentage of income on health care rather than expansionary products and services
  • Economic disaster happens in America when wealth is concentrated at the top, and we are at an all time high for wealth concentration.  There is nothing in the platform which addresses this issue."

There are a lot of reasons to select the party for which you wish to vote.  There is more to America than the economy.  But, if you think like the Democrats did in 1992 and "it's about the economy" then you owe it to yourself to read this book.  It may challenge your conventional wisdom as it presents – like Joe Friday said – "just the facts."