May you live in interesting times is a time honored call. And nothing has been more interesting than the last year of a two-term President. Remember the last two financial busts? They both happened in the last year of a two-term President – Tech-Telecom bust in 2000 & Housing-Financial bust in 2008.
American Presidents are winning warriors. They have to first win the primary process of their own party and then win over the champion of the opposing party in a nationwide fight. This is unlike any other electoral system in the world. And they don’t get to rest after winning the White House. Within a few months of a first term win, planning begins for the re-election campaign. No one who is ok with losing ever becomes President. The intense desire to win the reelection is why every new President remains alert & engaged in the first term.
But once the incumbent President wins the re-election, that is the end of the road for the winning warrior. The fires that used to burn within in the first term begin to die out and so does the engagement of the sitting two term President. This disengagement turns into a series of punts in the final year, a classic running out of the clock.
Why is this important? Because this is the main reason why major crisis tend to erupt in the final year of a two-term President. Just think back to 2008 and the eruption of the financial crisis. That didn’t come out of the blue. So many warned about a major conflagration in the fourth quarter of 2007. The wildfire began in real earnest in the spring of 2008. But no one paid much attention, no one in the political arena.
Had a even a smaller but similar conflagration begun in 2003-2004 a few months before his re-election campaign, President Bush and his entire administration would have devoted their full resources to fix it and then run the election on his competence. But the crisis began erupting in early 2008, the year President Bush was going to leave office. So the conflagration spread until it destroyed so much of the economy.
This 2008 crisis was a replica of what happened in 2000. The technology-telecom bust of 2000-2002 began in real earnest in April 2000 but no one in the Clinton Administration paid any attention. The tumultuous second term of President Clinton was about to end and no one had any bandwidth for a problem that really would descend on the next President.
This is relevant today because another two-term President is about to leave office next year. And President Obama looks much like Presidents Bush & Clinton looked at the beginning of 2008 & 2000 – disengaged and mainly interested in punting away his remaining months in office. And the economy is showing signs it showed in early 2008 & 2000. Actually, it may be showing worse signs. At least the global economy was strong in 2008. Today, the entire global economy is slowing and the probability of a recession is relatively high.
But we are on our own in 2016 without any hope of Presidential action. After all, the eighth year of a President is spent extolling the successes of the past seven years and not warning about the pitfalls ahead. To talk about the bubble that had been building in high yield bonds, to talk about the slowing rate of growth would be terribly damaging to the Democratic nominee in the upcoming election. And the Federal Reserve is now on the wrong side as well, on the side of raising rates. It all sounds so 2000 & 2008, doesn’t it?
Fortunately, the US economy is not leading the slowdown. Europe remains slow & sluggish. China remains the main worry. A deeper than expected slowdown in China could be the main catalyst for a global recession. The other big worry is increasing sovereign defaults in emerging markets. A robust US economy would be able to shrug off this contagion from overseas. But the US economic cycle may be due for its own slowdown after a 7-year recovery.
Yet you don’t see any sign of alertness in the Obama Administration. They seem so disengaged. Well, they are because that entire body is focused on what they will do in 2017. Whatever attention they can muster is all on the geopolitical mess – ISIS in the Middle East, US-Russia relations, refugee crisis & surging nationalism in Europe.
In short, 2016 looks like a very interesting year indeed. If you enjoy interesting times, you may be in for a treat. If you don’t, then watch the markets for signs of trouble. Presidents & policymakers may disengage, financial markets never do.
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