The Politics of the Economy – After the Election

by Victor Sperandeo with the Curmudgeon

Introduction:

There were two elections in the last several weeks.

In the closest election in nearly 30 years, Brazil re-elected Dilma Rousseff President on October 26th. The New American Magazine noted: "However, faced with a fast-expanding public uprising, the re-elected ruler tried to sound a more moderate and conciliatory tone as her radical leftist “Workers’ Party” — a close ally of the Castro regime ruling Cuba — solidifies its powerful grip over the embattled Brazilian people."

So Brazil stays very far to the left even though their economy is hurting badly.

In the U.S., "the political right" spoke loudly and in all directions of government as the Senate, House of Representatives, Governors, and State Legislatures won huge majorities. A Democrat Senator Joe Manchin (D-WV) summed up the slew of Democratic losses Tuesday night perfectly: "This is a real ass-whoopin," he told the Washington Post on Wednesday, November 5th.

Analysis:

The conclusion is different than the reason for the Republicans victory. It was a vote against President Obama and Senate Majority leader Harry Reed, rather than a vote FOR the Republicans. Regardless, the Republicans are now in control of new legislation for the Federal government with their majority in both the House and Senate.

The result will likely be a great deal more fiscal "offerings" or bills which attempt to create economic growth. Hopefully, lower taxes and less regulations too. However, little will pass unless Congress can override Obama's veto.

The importance of these elections are 'the trends" of the way in which the electorate sees the best way forward and for the country to live a freer and better life. The people of the U.S. didn't like the direction of their country and want to change it dramatically. The people of Brazil did not, even though the country's economic numbers were not good.

Will our election help the U.S.? Yes, but I don't think much will change economically speaking. In my view, from President Obama's actions and his experience before becoming President, he will not care much about the performance of the economy -- only changing it. That's according to his agenda of what the U.S. social system should be.

The NY Times reported on Sunday November 9th that Obama blames himself for the Democratic drubbing in this week's elections:

"President Obama said that he and his White House team had not succeeded in effectively selling the benefits of his policies to the American people, calling it a “failure of politics” that he must change in the final two years of his presidency."

Obama is without question the most leftist President in 70 years. So I don't think much will be accomplished fiscally as he is not as open minded and center-left as Bill Clinton was during his two term Presidency.

Without an effective fiscal policy, the Fed still holds all the cards. However, the Fed may not be as accommodating with a Republican Congress. Perhaps, I am too cynical, but Ms. Yellen will not be reappointed if a Republican President gets elected in 2016, as her term is over in 2018. Most of the FOMC are appointed by Democrats (and Bush appointed Ben Bernanke -- what was he?).

It has been shown that people vote for the "other guy" if things are going poorly -- as we just witnessed. If the economy is doing poorly, it will likely be blamed on the Congress (certainly by the bulk of the press/media) and we will have two new contenders for President in 2016.

Indeed, the stacked deck is now being introduced by the Fed. From a Nov 8-9th WSJ article "Fed to Investors: Brace for Volatility:

"In a speech to central bankers Friday in Paris, Fed Chairwoman Janet Yellen said rate increases, when they materialize in advanced economies, “could lead to some heightened financial volatility.” New York Fed President William Dudley, at the same conference, issued a more detailed alert.

“This shift in policy will undoubtedly be accompanied by some degree of market turbulence,” he said of future rate increases in the U.S. “Moreover, it could create significant challenges for those emerging market economies that have been the beneficiaries of large capital inflows in recent years.”"

That is the clearest warning I've seen in six years of potentially higher rates and the end of the Fed Put. This is not Greenspan double speak…it is very clear. Could this be a bell ringing? Could this be the FAT lady (singing) talking -- no pun intended to Ms. Yellen's appearance.

Most pundits believe the Fed will raise rates about mid-year 2015. In my view, the stock market could decline much earlier, as the speeches the Fed is now making are telling "investors" to temper their bullishness now -- eight months ahead of a possible rate rise.

The reason the market does well under Democrats is because they usually raise taxes on "the people" and that gives the Fed the right to use its power of money printing (i.e. QE) and lowering rates to keep the economy above water. When Republicans win, they try to achieve growth by lowering taxes and regulations. The Fed does the opposite as it tries to slow the growth with higher interest rates.

The Fed has proven that money rules and they can control the economy for years, beyond most fiscal policy mistakes. A November 7th FT editorial “A world still reeling from mistakes on fiscal policy" (on-line subscription required) amplifies that point. From the first paragraph:

"Ordinarily, the role of tax and spending in smoothing economic cycles is to stand back and let monetary policy do the job. Central banks, whose instruments are more finely tuned than those of finance ministries, are traditionally the ones to steer the economy."

That's moving away from capitalism. The editorial concludes: "Governments need to grasp the fact that fiscal policies matter for growth and inflation in the short as well as the long run."

The U.S. government has done a fabulous job of manipulating everything and getting away with it. A little known and esoteric booklet written for inner circle "card mechanics" (or cheats) called "Lessons in Dishonesty" by Laurie Ireland (1963) exposes most all you need to know of this art. It’s well worth the price charged.

News flash --The price of gold rallied Friday: +$27.1 and then another +9.0 to $1178.7 after the Comex closed. This was due to the report by Reuters that Russia is moving tanks into Ukraine. The U.K. Guardian echoed that report:

A column of 32 tanks, 16 howitzer artillery systems and trucks carrying ammunition and fighters has crossed into eastern Ukraine from Russia, the Kiev military said on Friday.

“The deployment continues of military equipment and Russian mercenaries to the frontlines,” spokesman Andriy Lysenko said in a televised briefing referring to Thursday’s cross-border incursion.

If confirmed, this will really be a potential major problem for the markets (and more). If nothing happens further then there's no problem, but it is extremely dangerous if true.

With the Russian Ruble at new lows (-38.6%) to the dollar from the end of June, Putin is being painted into a corner and has been rather patient about US sanctions. To the biggest nuclear power in the world this is not a suggested strategy from Sun Tze (The Art of War). As John Dryden said, "Beware the fury of a patient man."

Addendum: Historical Quotes on the Dangers of the Fed

Charles A. Lindbergh Sr. (the father of the first man to fly across the Atlantic), who was in Congress at the signing of the Federal Reserve Act of 1913, said:

"This [Federal Reserve Act] establishes the most gigantic trust on earth. When President Woodrow Wilson signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill."

"To cause high prices, all the Federal Reserve Board will do will be to lower the rediscount rate...producing an expansion of credit and a rising stock market; then when ... business men are adjusted to these conditions, it can check...prosperity in mid-career by arbitrarily raising the rate of interest. It can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by a greater rate variation and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed.'

"The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money. They know in advance when to create panics to their advantage, they also know when to stop panic. Inflation and deflation work equally well for them when they control finance."

From Congressman Louis T.McFadden (R-PA) from 1915-1935 who said in 1932:

"We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it."

Writer Richard C. Cook maintains that McFadden was assassinated:

"McFadden may have paid with his life for his outspokenness. After he lost his congressional seat in 1934, he remained in the public eye as a vigorous opponent of the financial system; that is, until his sudden death on October 3, 1936, of a “dose” of “intestinal flu” after attending a banquet in New York City...Evidently the third time the assassins succeeded, and the most articulate critic of the Federal Reserve and the financiers’ control of the nation was dead.”

In 1923, President Woodrow Wilson (the man who signed the Federal Reserve Act) said:

"A great industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world -- no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men."

Till next time......

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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