As investors take a look at the state of the world and inventory a list of the problems that challenge the global economy, perhaps one that is not being considered revolves around political leadership – or lack thereof. In France, President Nicolas Sarkozy is embroiled in a political scandal involving the heiress to the L'Oreal fortune. Italian Prime Mininster Silvio Berlusconi continues to fiddle while Rome burns (figuratively speaking). His critics charge that he is more preoccupied with his own personal scandals than dealing with the needs of the country.
In the United Kingdom, Prime Minster David Cameron is trying to ensure that he is sufficiently distanced from the News Corp. phone hacking scandal.
For Japan, a revolving door of Prime Ministers continues to usher out one Prime Minister after another. To be exact, Japan just brought in its eighth Prime Minister since 2000. In India, anger over corruption is beginning to taint its well respected Prime Minister Manmohan Singh.
For the United States, there is little in the way of scandal that is raising voter frustration. Rather it is the inability of the various branches of government to work together to try to make things better. The issue is a breakdown of the functioning of government. This is apparent as the political leadership continues to prove itself unable to rise above partisanship in order to “do what needs to be done”. The “to do” list for the US starts with reigning in the federal budget deficit and begin to formulate a coherent policy to bring down the national debt.
Even the Federal Reserve, recognizing that it is about out of bullets, has implored the White House and Congress to come up with fiscal policy initiatives to stimulate the economy and reduce spending. It should be noted that up until now, the Federal Reserve has always been above partisan politics. But the political environment is so poisonous, that even the Fed is a political target. Perhaps this is the most dangerous outcome of the current political environment because an independent Fed is a necessity.
At the time of this writing, the world is waiting to hear from President Obama in just a few hours as to the details of his jobs plan. The good thing for the President is that the public’s expectations are likely to be low. So if the bar is set low, perhaps some optimism amongst consumers will help the national mood.
Many of the President’s supporters are starting to grumble about whether or not Hillary Clinton would have handled the economy better. Throw in massive voter frustration against both aisles of Congress and things do not look great for Barack Obama as voters may adopt a “throw the bums out” mentality. The top of the list is often the occupant of the White House.
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This brings us to the chart included which shows real corporate profit growth and presidential re-election outcomes over the last century. Corporate profits are a barometer for the state of the economy. If corporate profits are falling, then things on Main Street to Wall Street are not usually going well. For most of 2010, corporate profits rose and the stock market continued its ascent from 2009 but the benefits on Main Street were not being seen to the same extent. But now, the stock market is showing anxiety to match that of the average voter.
As a result, weak or negative real corporate earnings growth in the last two years leading to a re-election bid has corresponded with a changing of the guard in the White House. The only exception to this has been Theodore Roosevelt in the 1904 election.
With unemployment remaining stubbornly elevated and voter patience long worn out, voters across the world are hungry for some bold political action. It seems in the US, the next Presidential election will determine which direction the country will take to try to sort out its economic mess. The funny thing is that I thought that’s what the 2008 election was all about.
Barack Obama has been quoted as saying he would rather be a good one-term president than a mediocre two-term one. If things do not turn around fast for the economy, he runs the risk of being neither.
Pacifica Partners – Capital Management Navigating a Sea of Opportunity
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