The Looming Election Letdown

The Kelly Letter Excerpt
The following is from this year’s Note 40 of The Kelly Letter, which went out to subscribers last Sunday morning.

The letdown once the next White-House name is known may be acute. We’ll get either “Four more years of the guy who hasn’t done a thing for the economy” or “Four years of the guy who has yet to advance a new idea.” Neither is particularly rousing.

Yes, I’m aware that Paul Ryan is now part of the Mitt Romney ticket and that Ryan is known for being a fiscal conservative and will supposedly right the listing US financial ship, but it’s bollix and baloney. This is relevant to investors because part of every long-term financial forecast involves risk of sovereign trouble for reasons obvious to anybody who’s followed the eurozone crisis. When large financial entities extending tentacles into every corner of the market go belly up, the market tanks. There’s no financial entity larger than the US government, so any whisper of trouble or progress around its sovereign health affects markets. This is why we need to understand the prospect of the Ryan Budget fixing America’s debt trajectory.

It won’t. This conclusion is neither conservative nor liberal, but mathematical. We must give him credit for attempting to restrain Medicare’s growth rate in the face of fierce political opposition, but beyond that attempt his bigger budgetary efforts are ineffectual. Despite NPR referring to Ryan as a fiscal conservative and the New York Times saying he’s “intent on erasing deficits,” he does not pass any financial pro’s test for fiscal conservatism.

A true fiscal conservative insists on paying for government operations, not borrowing to fund them. The Ryan Budget does not meet this basic requirement. Its initial version didn’t achieve a balanced budget until the 2060s and added another $60T to the national debt — I’m not kidding. The revised and current version is better but still not fiscally conservative. It balances the budget in the 2030s and adds another $14T in debt, including another $6T in the decade immediately ahead. The dangers come quickly but the benefits so slowly that by the time we get anywhere near them the budget that initially sent us on the path toward them will have been long forgotten in the frenzy to keep from going bust.

I assume we’ll hear much more about the GOP ticket representing adults retaking Washington to fix America’s finances. The left and right bases are already fixed in place, and the entire election is being fought for a tiny slice of the middle that will swing one side or the other just over the 50 pct line. If the “fiscal conservative” angle is part of what achieves a GOP victory in November, it will not take long for another wave of disappointment to set in among the thinking class when the debt keeps ticking higher toward the sovereign bond red zone. Should President Obama remain in office and the atrocious debt trajectory remain firmly in place, the current blue funk will continue unabated.

Thus, you can see why we need to expect a letdown regardless of which side prevails in the slugfest ahead. This is par for the course in modern times. Genuine leadership is hard to come by. Explanations for this sad fact are wide ranging, but the most convincing is that the political machine has seized up in the sands of special-interest influence. Even a president named Washington, Lincoln, or Roosevelt would find himself hard pressed to make a difference in the ossified and wholly-owned chambers of Washington. We should assume that under President Next the reckless spending and borrowing will continue the same as under President Now.


Also in the letter:

Economic hardship has appeared in fertility rates. The US total fertility rate (TFR, a measure of the average number of children a woman is expected to bear) is down to 1.9, below the replacement rate of 2.1.

The price of oil rose 4 pct last week to $96 per barrel, and is up 14 pct from $84 in mid June. Against a weak economic backdrop, we’re changing our focus from looking to go long oil to looking to go short.

Thoughts on Amazon (AMZN), Facebook (FB), Portugal Telecom (PT), and Student Transportation (STB).

And more! Sign up to read the rest of this letter and all back letters, and receive future letters starting this Sunday.

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10 Comments

  1. Posted August 22, 2012 at 11:37 pm | Permalink

    Care to square your statement “Should President Obama remain in office and the atrocious debt trajectory remain firmly in place, the current blue funk will continue unabated” – which I assume refers to the market – with the chart from Money magazine, March 2012 issue – page 20 “Inauguration Implications” – showing that historically the average S&P return drops 6.5% for the first year in office if a Republican succeeds a Democrat – but rises an average of 9.1% if a Democrat is reelected President? Do you think it’s going to be different this time?

    • Posted August 30, 2012 at 3:28 pm | Permalink

      It’s true, Lyn, that Democrats have been better for stocks, but I was referring to the blue funk of gloomy economic data, including consumer confidence, doubt about the future, and so on, which I follow each Sunday in the letter.

  2. G. Shaylor
    Posted August 23, 2012 at 1:25 am | Permalink

    For those who would like to get a handle on all elections and the electorate, I highly recommend Cheryl Mendelson’s book The Good Life: The Moral Individual in an Antimoral World.

    It is not a long work, but it articulates the sense of morality I have long found inexpressible. And since Mendelson locates her morality at the heart of the American democracy, culture, and identity, her book could not be more timely.

    • Posted August 30, 2012 at 3:34 pm | Permalink

      I hadn’t heard of this book before. Here’s its description:

      The Good Life is a deeply reasoned, readable, and exciting polemic about the hijacking of the idea of morality by the political right and about the distortions of it in American culture—in business, social life, law, science, and academia. Cheryl Mendelson puts her finger on a current that runs through American life today, one of pervasive, often covert hostility to the moral, that leads to unhappiness in personal lives as well as to the policies favoring cruelty and greed that afflict our times. She writes from a perspective that favors both liberal political ideals—such as civil rights, sexual equality, gay rights, labor unions, and effective regulation of business and finance—and staunch personal decency, precisely because all these serve the real purposes of morality. The Good Life portrays morality as it really is: a source of clarity and satisfaction in emotional life, equity and justice in public life, and integrity and strength in both. Inspiring, temperate, and insightful, The Good Life offers a moving account of morality and a warm appreciation of the people who still understand what it is about.

  3. Randy Cox, Ph.D.
    Posted August 23, 2012 at 2:25 am | Permalink

    Four more years of O will ruin this economy/country!

    You seem to think there is not much difference between a Romney/Ryan administration and a Marxist guy who is deliberately trying to make this country into a third world, Somalia/Greece-like place.

    If that is your position, there is something very wrong with your thinking.

    With Romney/Ryan you get two guys who want to save the country/economy/pension funds/Social Security/Medicare. etc. by gradually reducing the deficit, gradually reducing spending, eliminating crony capitalism (Solindra, et al.) and growing the economy with good economic policy…not more Socialism/Marxism.

    There is a very clear choice here. There is a huge difference between the two parties in terms of the future direction of the country.

    You need to stop trying to be politically correct and just call the O administration exactly what it is.

  4. Henry Pope
    Posted August 23, 2012 at 2:35 am | Permalink

    Hi Jason,

    You’ve chosen to live in Japan. Does your chosen country have a more fiscally responsible, entrepreneurial friendly, yet socially responsible government? Does it promote new ideas and businesses in order to grow its economy, have a fair tax system that is fair to its industries and to ordinary citizens, have a universal healthcare system and offer a secure care system for its elderly, and so on.

    We in the US need to pay for what we want and what we get (SS, Medicare, civic and social services, EDUCATION! etc.), which is probably all of the above, more or less. This may make us financially not as well off but will make us immeasurably happier and increase our well being. We’ve been hoodwinked by our big industries/businesses into thinking flash makes us happy — cf the craze for Apple products. Ah well . . .

    Seriously, has Japan solved any of our (US) fiscal problems or does it just have its own set of different ones? We do need more comparative studies of economies to get ourselves out of the mess we’re in. Hopefully we won’t spread our own failing ideologies, e.g., the get-rich ideology presented in rainbow colors to our ordinary naive citizenry by the relentless greed of our largest companies and financial institutions.

    We just need to fixate on what creates well being.

  5. Bob O'Neal
    Posted August 23, 2012 at 4:46 am | Permalink

    Jason,

    Our country is heading in the wrong direction. I believe our society in general needs to be resurrected to basic Godly principals it was established on. We’ve drifted and it won’t fix itself. We need leaders who believe in the things that made and make this country great and inspire the people to move forward in that direction.

    Sure, America isn’t perfect, but neither is Japan or any other country! In my opinion, Mitt and Paul come much closer to who I think we’re all about than does our current president, who seems only to want to restructure America into the kind of countries America has been bailing out financially and who our military has been protecting from the bad guys for the past 70-80 years! My vote is for Mitt and Paul!

  6. Jesse
    Posted August 24, 2012 at 10:20 am | Permalink

    I don’t know where you get your information from, but Obama is the smallest government spender since Eisenhower. That’s a fact. Also, it’s hard to accomplish anything when the Republicans would rather divide and conquer than bring together. Let me guess, your answer is deregulation. Reaganomics don’t work. Maybe you should stick to the socks campaign.

  7. John S. Long Jr.
    Posted August 26, 2012 at 11:33 pm | Permalink

    Jason,

    If you truly want to get up to speed on what is going on, may I suggest you read Crisis By Design by John Truman Wolfe?

    JL

    • Posted August 31, 2012 at 12:05 am | Permalink

      Another book I hadn’t heard of before now. Here’s its description:

      There’s been a coup d’état. It was not a mob of AK-47 wielding militia overthrowing a dictator in a third-world country. This one was different. On April 2, 2009 at a meeting of the G-20 in London, the fiscal autonomy of the United States (and other nations) was quietly turned over to a little known bank with a troubling Nazi past. The story of this coup sounds like something out of a Ludlum novel, but this is real and John Truman Wolfe has documented one of the most enormous power grabs in history, the establishment of what international bankers call a GMA, a Global Monetary Authority. How it was done, who did it, and why, is the subject of Crisis by Design, a no-holds-barred expose of a takeover of the planet’s central banks. Wolfe not only exposes the dark side of this operation, he tells you how you can protect yourself as well as what public policy actions need to occur to take back control of our national economic life. Wolfe does not spew economic psychobabble. Instead, he writes in a smooth and easy-to-understand style. And the message is clear: an international financial coup has occurred. We must protect ourselves as well as our national sovereignty.

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