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]

What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

Most leaders think of themselves as decision makers.  Many people remember in 2006 when President George Bush, defending Donald Rumsfeld as his Defense Secretary said “I am the Decider.  I decide what’s best.”  It earned him the nickname “Decider-in-Chief.” Most CEOs echo this sentiment, Most leaders like to define themselves by the decisions they make.

But whether a decision is good, or not, has a lot of interpretations.  Often the immediate aftermath of a decision may look great.  It might appear as if that decision was obvious.  And often decisions make a lot of people happy.  As we are entering the most intense part of the U.S. Presidential election, both candidates are eager to tell you what decisions they have made – and what decisions they will make if elected.  And most people will look no further than the immediate expected impact of those decisions.

However, the quality of most decisions is not based on the immediate, or obvious, first implications.  Rather, the quality of decisions is discovered over time, as we see the consequences – intended an unintended.  Because quite often, what looked good at first can turn out to be very, very bad.

NBA-All-Star-ExitThe people of North Carolina passed a law to control the use of public bathrooms.  Most people of the state thought this was a good idea, including the Governor.  But some didn’t like the law, and many spoke up.   Last week the NBA decided that it would cancel its All Star game scheduled in Charlotte due to discrimination issues caused by this law.  This change will cost Charlotte about $100M.

That action by the NBA is what’s called unintended consequences.  Lawmakers didn’t really consider that the NBA might decide to take its business elsewhere due to this state legislation.  It’s what some people call “oops.  I didn’t think about that when I made my decision.”

Robert Reich, Secretary of Labor for President Clinton, was a staunch supporter of unions.  In his book “Locked in the Cabinet” he tells the story of visiting an auto plant in Oklahoma supporting the union and workers rights.  He thought his support would incent the company’s leaders to negotiate more favorably with the union.  Instead, the company closed the plant.  Laid-off everyone.  Oops.  The unintended consequences of what he thought was an obvious move of support led to the worst possible outcome for the workers.

President Obama worked the Congress hard to create the Affordable Care Act, or Obamacare, for everyone in America.  One intention was to make sure employers covered all their workers, so the law required that if an employer had health care for any workers he had to offer that health care to all employees who work over 30 hours per week.  So almost all employers of part time workers suddenly said that none could work more than 30 hours.  Those that worked 32 (4 days/week) or 36 suddenly had their hours cut.  Now those lower-income people not only had no health care, but less money in their pay envelopes.  Oops.  Unintended consequence.

President Reagan and his wife launched the “War on Drugs.”  How could that be a bad thing?  Illegal drugs are dangerous, as is the supply chain.  But now, some 30 years later, the Federal Bureau of Prisons reports that almost half (46.3% or over 85,000) inmates are there on drug charges.  The USA now spends $51B annually on this drug war, which is about 20% more than is spent on the real war being waged with Afghanistan, Iraq and ISIS.  There are now over 1.5M arrests each year, with 83% of those merely for possession.  Oops.  Unintended consequences.  It seemed like such a good idea at the time.

This is why it is so important leaders take their time to make thoughtful decisions, often with the input of many other people.  Because the quality of a decision is not measured by how one views it immediately.  Rather, the value is decided over time as the opportunity arises to observe the unintended consequences, and their impact.  The best decisions are those in which the future consequences are identified, discussed and made part of the planning – so they aren’t unintended and the “decider” isn’t running around saying “oops.”

As you listen to the politicians this cycle, keep in mind what would be the unintended consequences of implementing what they say:

  • What would be the social impact, and transfer of wealth, from suddenly forgiving all student loans?
  • What would be the consequences on trade, and jobs, of not supporting historical government trade agreements?
  • What would be the consequences on national security of not supporting historically allied governments?
  • What would be the long-term consequence not allowing visitors based on race, religion or sexual orientation?
  • What would be the consequence of not repaying the government’s bonds?
  • What would be the long-term impact on economic growth of higher regulations on banks – that already have seen dramatic increases in regulation slowing the recovery?
  • What would be the long-term consequences on food production, housing and lifestyles of failing to address global warming?

Business leaders should follow the same practice.  Every time a decision is necessary, is the best effort made to obtain all the information you could on the topic?  Do you obtain input from your detractors, as well as admirers?  Do you think through not only what is popular, but what will happen months into the future?  Do you consider the potential reaction by your customers?  Employees?  Suppliers?  Competitors?

There are very few “perfect decisions.” All decisions have consequences.  Often, there is a trade-off between the good outcomes, and the bad outcomes.  But the key is to know them all, and balance the interests and outcomes.  Consider the consequences, good and bad, and plan for them.  Only by doing that can you avoid later saying “oops.”

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.

Obama Outperforms Reagan on Jobs, Growth and Investing

Obama Outperforms Reagan on Jobs, Growth and Investing

The Bureau of Labor Statistics (BLS) just issued America’s latest jobs report covering August.  And it’s a disappointment.  The economy created an additional 142,000 jobs last month. After 6 consecutive months over 200,000, most pundits expected the string to continue, including ADP which just yesterday said 204,000 jobs were created in August. So, despite the lower than expected August jobs number, America will create about 2.5 million new jobs in 2014.

One month variation does not change a trend

Even thought the plus-200k monthly string was broken (unless revised upward at a future date,) unemployment did continue to decline and is now reported at only 6.1%.  Jobless claims were just over 300k; lowest since 2007.  And that is great news.

Back in May, 2013 (15 months ago) the Dow was out of its recession doldrums and hitting new highs. I asked readers if Obama could, economically, be the best modern President?  Through discussion of that question, the #1 issue raised by readers was whether the stock market was a good economic barometer for judging “best.”  Many complained that the measure they were watching was jobs – and that too many people were still looking for work.

To put this week’s jobs report in economic perspective I reached out to Bob Deitrick, CEO of Polaris Financial Partners and author of “Bulls, Bears and the Ballot Box” (which I profiled in October, 2012 just before the election) for some explanation.  Since then Polaris’ investor newsletters have consistently been the best predictor of economic performance. Better than all the major investment houses.

This is the best private sector jobs creation performance in American history

Unemployment Reagan v Obama Bob Deitrick – “President Reagan has long been considered the best modern economic President.  So we compared his performance dealing with the oil-induced recession of the 1980s with that of President Obama and his performance during this ‘Great Recession.’

As this unemployment chart shows, President Obama’s job creation kept unemployment from peaking at as high a level as President Reagan, and promoted people into the workforce faster than President Reagan.

President Obama has achieved a 6.1% unemployment rate in his 6th year, fully one year faster than President Reagan did.  At this point in his presidency, President Reagan was still struggling with 7.1% unemployment, and he did not reach into the mid-low 6% range for another full year.  So, despite today’s number, the Obama administration has still done considerably better at job creating and reducing unemployment than did the Reagan administration.

We forecast unemployment will fall to around 5.4% by summer, 2015.  A rate President Reagan was unable to achieve during his two terms.”

What about the Labor Participation Rate?

Much has been made about the poor results of the labor participation rate, which has shown more stubborn recalcitrance as this rate remains higher even as jobs have grown.

Source: Polaris Financial Partners Using BLS Data

Source: Polaris Financial Partners Using BLS Data

Bob Deitrick: “The labor participation rate adds in jobless part time workers and those in marginal work situations with those seeking full time work.  This is not a “hidden” unemployment.  It is a measure tracked since 1900 and called ‘U6.’ today by the BLS.

As this chart shows, the difference between reported unemployment and all unemployment – including those on the fringe of the workforce – has remained pretty constant since 1994.

Source: BLS Databases, Tables and Calculators by Subject - Labor Participation

Source: BLS Databases, Tables and Calculators by Subject – Labor Participation

Labor participation is affected much less by short-term job creation, and much more by long-term demographic trends. As this chart from the BLS shows, as the Baby Boomers entered the workforce and societal acceptance of women working changed labor participation grew.

Now that ‘Boomers’ are retiring we are seeing the percentage of those seeking employment decline.  This has nothing to do with job availability, and everything to do with a highly predictable aging demographic.

What’s now clear is that the Obama administration policies have outperformed the Reagan administration policies for job creation and unemployment reduction.  Even though Reagan had the benefit of a growing Boomer class to ignite economic growth, while Obama has been forced to deal with a retiring workforce developing special needs. During the 8 years preceding Obama there was a net reduction in jobs in America.  We now are rapidly moving toward higher, sustainable jobs growth.”

Economic growth, including manufacturing, is driving jobs

When President Obama took office America was gripped in an offshoring boom, started years earlier, pushing jobs to the developed world.  Manufacturing was declining, and plants were closing across the nation.

This week the Institute for Supply Management (ISM) released its manufacturing report, and it surprised nearly everyone.  The latest Purchasing Managers Index (PMI) scored 59, 2 points higher than July and about that much higher than prognosticators expected.  This represents 63 straight months of economic expansion, and 25 consecutive months of manufacturing expansion.

New orders were up 3.3 points to 66.7, with 15 consecutive months of improvement and reaching the highest level since April, 2004 – 5 years prior to Obama becoming President.  Not surprisingly, this economic growth provided for 14 consecutive months of improvement in the employment index.  Meaning that the “grass roots” economy made its turn for the better just as the DJIA was reaching those highs back in 2013 – demonstrating that index is still the leading indicator for jobs that it has famously always been.

As the last 15 months have proven, jobs and economy are improving, and investors are benefiting

The stock market has converted the long-term growth in jobs and GDP into additional gains for investors.  Recently the S&P has crested 2,000 – reaching new all time highs.  Gains made by investors earlier in the Obama administration have further grown, helping businesses  raise capital and improving the nest eggs of almost all Americans.  And laying the foundation for recent, and prolonged job growth.

Source: Polaris Financial Partners

Source: Polaris Financial Partners

Bob Deitrick: While most Americans think they are not involved with the stock market, truthfully they are.  Via their 401K, pension plan and employer savings accounts 2/3 of Americans have a clear vested interest in stock performance.

As this chart shows, over the first 67 months of their presidencies there is a clear “winner” from an investor’s viewpoint. A dollar invested when Reagan assumed the presidency would have yielded a staggering 190% return.  Such returns were unheard of prior to his leadership.

However, it is undeniable that President Obama has surpassed the previous president.  Investors have gained a remarkable 220% gain over the last 5.5 years!  This level of investor growth is unprecedented by any administration, and has proven quite beneficial for everyone.

In 2009, with pension funds underfunded and most private retirement accounts savaged by the financial meltdown and Wall Street losses, Boomers and Seniors were resigned to never retiring.  The nest egg appeared gone, leaving the ‘chickens’ to keep working.  But now that the coffers have been reloaded increasingly people age 55 – 70 are happily discovering they can quit their old jobs and spend time with family, relax, enjoy hobbies or start new at-home businesses from their laptops or tablets.  It is due to a skyrocketing stock market that people can now pursue these dreams and reduce the labor participation rates for ‘better pastures.”

Where myth meets reality

There is another election in just 8 weeks.  Statistics will be bandied about.  Monthly data points will be hotly contested.  There will be a lot of rhetoric by candidates on all sides.  But, understanding the prevailing trends is critical.  Recognizing that first the economy, then the stock market and now jobs are all trending upward is important – even as all 3 measures will have short-term disappointments.

Although economic performance has long been a trademark issue for Republican candidates, there was once a Democratic candidate that won the presidency by focusing on the economy and jobs (Clinton,) and his popularity has never been higher! President Obama’s popularity is not high, and seems to fall daily.  This seems incongruous with his incredible performance on the economy and jobs, which has outperformed his party predecessor – and every other modern President.

There are a lot of reasons voters elect a candidate.  Jobs and the economy are just one category of factors.  But, for those who place a high priority on jobs, economic performance and the markets the data clearly demonstrates which presidential administration has performed best.  And shows a very clear trend one can expect to continue into 2015.

Economically, President Obama’s administration has outperformed President Reagan’s in all commonly watched categories.  Simultaneously the current administration has reduced the debt, which skyrocketed under Reagan.  Additionally, Obama has reduced federal employment, which grew under Reagan (especially when including military personnel,) and truly delivered a “smaller government.”  Additionally, the current administration has kept inflation low, even during extreme international upheaval, failure of foreign economies (Greece) and a dramatic slowdown in the European economy.

 

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.