Which way will the Cookie Crumble?

Improving the odds on a successful bid for re-election in 2004

February 26, 2001

I would imagine that deep in the mind of any new president taking the oath of office for the first time stirs the thought, "Will I stand here again four years from now? Now that I have won the keys to the Oval Office, will I really do well enough over the time of my Administration to be handed the keys again when the votes are cast next time?"

Even if they are manually counted?

There are so many stumbling blocks that lie ahead over the years of a new Administration that seldom can a new President be absolutely sure what could or could not determine the key factors to manage very carefully. However, on any ranking list of factors to watch closely, the economy and the markets would appear quite close to the top.

If not in spots numbers 1 and 2.

For president GW Bush the answer to the main stumbling block is even more clear-cut that for perhaps any president in the past. Now that the longest bull market in history is showing signs of unraveling – with Nasdaq on Wednesday already down 55% off its high to hit a near two year low and the Dow threatening to follow suit – one can state with very high confidence that Bush's re-election hopes will be heavily influenced by what the equity markets do over the next 3-4 years.

So much so, perhaps, that no other factors, no good performance in other dimensions of government, would be able to off-set what the voters will read at the bottom of their monthly or quarterly statements from their broker or their mutual funds by the time they have to make sure that this time around the chads are not merely pregnant or prettily dimpled, but properly punched out!.

In the light of this simple fact, it is easy to speculate about the chances that Bush will be re-elected in 2004 – one only has to develop certain Scenarios on what could possibly happen to Wall Street over the next few years and then assign probabilities.

Scenario 1.

Greenspan weaves his magic. He pumps the liquidity until representatives from the banks queue up at the front door to make loans against any kind of collateral and post boxes bulge with free credit cards with multi-thousand dollar limits. He lowers interest rates until even the Japanese begin to contemplate a Dollar Carry! They even exhaust the ESF to keep the dollar strong, so that foreign funds keep on flowing into the US to balance the trade deficit.

Wall Street dips into Q2 on lower earnings and then stabilises. This is seen as the bottom of the correction and, as the economy begins to pick up and real estate prices resume their upwards trend, investor confidence begins to bloom and by early 2002 the spending spree is back on track.

By 2004 the Dow is above 20 000 points, the Nasdaq is above 12 000 and the number of millionaires in the US is triple what it was at the height of the first Dot.Com boom.

The 2004 election is an absolute shoe-in for the Republicans; they increase the already comfortable majorities in both houses that they will have won in the elections of 2002 by a substantial margin. And the Democrats are in total disarray.

Now doesn't that sounds really nice?

And actually so easy, if only domestic and foreign markets play along with this and the dollar can be held near current levels so that funds do not flow out from the US in bulk.

Long live Goldilocks and the three bears go very hungry!!

Scenario 2:

The almost 50% of US households that are heavily invested in equities, personally and through mutual funds, and which have used the "wealth effect" to gear up on additional investments and to fund consumer spending – "Capital gains were so much higher than interest rates, dummy, that it is foolish to sell and spend!" – begin to feel the pinch.

Those that refinanced their homes at the time Greenspan unexpectedly cut rates early in January, in order to free funds that were used to 'average down' on their investments on Nasdaq – hoping that by doing so they could get out sooner at the break even level, or perhaps just suffering a bearable loss – are looking desperately for means to finance their mortgage and loan payments so that they do not end up on the street. And the reference is not to Wall Street.

Now nobody is any longer in the mood to trade in the year-old SUV on a new one, even if the purchase is financed at 0% and after the price has been reduced by 10%. Bargain basement sales on home entertainment systems and the latest in multi-media technologies attract little interest. Hotels and condominiums in Florida are mostly standing empty and reservations for the high season – when winter bites deeply into the northern states and despite advertisements from some Florida hotels that say, "Come South and stay two weeks in balmy Florida for less than the cost of the oil to heat your home over that period!!" – are the lowest in many years.

While Wal-Mart did well when it drew away the clientele from the up-market stores, it started to lose customers to the cut-rate chains as consumers try all they can to squeeze the most out of every dollar when they shop for essentials like food and clothes.

Company earnings take a beating and the sudden jumps in PE ratios that result attract attention from commentators as if these corporations had suddenly developed a bad case of BSE. And investors react in much the same way. Unfortunately, the write down of the wealth effect that results, places even greater pressure on many already beleaguered and already debt weary consumers and they become determined to spend even less.

The soft landing turns harder, and harder again, despite all the "pushing on strings" that is going on left, right and center. And then the landing wheels come completely off in a full blown depression – with a full scale choir in Japan going, "Ah so. So sorry. So sorry!", because they know exactly what is happening. And, of course, how it will end.

Or rather, not reach an end as soon as many people expect. And hope.

Given this, what are the chances now of a Bush re-election campaign gaining momentum and finally achieving success? Who will donate any campaign funds when the odds are actually quite good that the proverbial snowball will survive longer than Bush's hopes of being re-elected?

First Conclusion

What are the probabilities associated with these two Scenarios? Anybody for 50-50?? If so, you are not perhaps in the market for a cupboard full of stock certificates of Amazon, Yahoo and e-Bay?? Oh, e-Bay no longer exists. Make that Cisco and MSFT instead. No takers?

Even if you are pessimistic enough to say, "40-60" or even "30-70" giving much reduced odds that the first Scenario might come through, that is even if the Fed really gets going, I would still like to interest you in the cupboard full of certificates. I will even do so at a good discount to the ruling price, provided you take the whole lot.

Perhaps the question should not be which Scenario comes true, but how long before the Depression really begins to byte? Any betting odds on 6 months? 12? A year and a half?

This dim view of what lies ahead brings us to the second part of this essay. Assume you happen to occupy the Oval Office. What are the strategies you can consider? The chances of hauling the economy back into health are beginning to appear very slim. Would you be willing to take the chance of getting it right? And then waving the White House goodbye when – not if – you fail?

Probably not, particularly if you can find a solution that will give you a much better chance at being re-elected, whatever happens.

Obviously, with bright and bushy tailed advisors to think up ideas, you would have many to choose from, but since this essay does not originate in that office, we will be more frugal with the alternatives. Yet we will see that it is possible to do something that could vastly improve the odds of beating Al Gore again next time round – and beat him well enough that manual recounts are not even mentioned.

Alternative 1

Work closely with the Fed and the media to get consumer spending going again. Go on television and tell the people the US is at war and that it is time to make the ultimate sacrifice – raise all mortgages to 125% of the value of the home. Tell them to go out and spend! For America. Buy new furnishings for the whole home, splurge on another SUV and also a new car for Sis. Add another patio and a guest cottage for the old folks when they retire. Do what is needed for your country. It needs you.

Re-instate FDR's Fireside Chats, using multimedia TV instead of the radio, and inform viewers in graphic, irresistible detail of all the new fashions at the GAP, the new models at the auto dealer, the great deals at Aspen and in Fort Lauderdale, the latest at Cartiers.

Unfortunately, even with such an effort it is somewhat doubtful whether the big 'D' can be staved off for longer that a year or so. After all, even at next to 0% interest one can make only so much debt – household and corporate and federal – before the foreigners, those pesky people who make a nuisance of themselves and begin to interfere just when they are not needed, decide to come and take all their money home where they can watch over it personally.

And so that's it, then. "Goodbye re-election"!! Because who will carry the can for what happens to the economy?

You know who. The incumbent.

But, wait, what is this about trying hard to rescue the economy and merely delaying the collapse and the 'D' word by perhaps as much as a year? And end up carrying the can?

After all, is it really fair that Bush should suffer defeat in 2004 when it really had been the profligate Democrats who had run up the debt bubble and did all the other nasty things – by hindsight – that now threatens the plan for 2004?

It is all their fault and we should expose them for what they have done! To the economy and to American households. That would cook their books!! And save the re-election.

Alternative 2

Therein lies the root of the solution. Expose what the previous Administration had done to the economy and the US consumer, through ill-considered policies and questionable tactics. But how to do this and be believed? Really believed, gut-deep, so that the feeling of revulsion will last until 2004.

Fireside chats and TV commercials won't do it.

Ah, I see. Hope that the markets collapse soon enough so that that we can cast the blame squarely on those people who had recently vacated the White House – while the images of them doing so are still in the voters' and consumers' short term memories. While pardon scandals still fill the headlines and before these are replaced by scenes from the latest "Survivor" drama.

A collapse soon enough could be sold to the public quite easily as the result of complete mismanagement by the previous Administration – or even a planned attempt to engineer a bubble in order to go down in history as the most successful Administration ever.

With no regard of the consequences to the US citizen.

Unfortunately, this must happen soon. If it takes too long for the markets to fall steeply, then whatever later does go wrong with the markets and the economy will be closely associated with the new inhabitants of the White House.

With inevitable consequences for 2004.

So it will have to be soon. By mid March?? End of March at the latest? Before the '100 days' are up?? But, what if the markets do not collapse before then?

Well, there is always the ranch in Texas. Should be in a fine state by 2005.

And, if just waiting around to see what happens to Wall Street is not seen as an option, then perhaps one could use some nudge-nudge, wink-wink to bring it home to investors that Wall Street is really not the healthiest place to be. That could get things moving!

Of course, one cannot jump up and down shouting, "Sell! Sell before it is too late!!" Or even making a refrain of, "The coming recession/depression/chaos is all the fault of the Democrats!". That would really defeat the purpose of the whole exercise, since the finger of blame for whatever then happens will point bluntly straight at 1600 Penn Avenue.

And goodbye re-election.

Can it be done?

So it will have to be done very carefully, with 100% deniability.

One could consider hinting, say during a press interview, in a very broad, academic and most innocuous manner, that as a general rule the state of a nation's economy should determine what happens to its currency. Perhaps, if one of the reporters present is a clever one – which could be arranged, if someone would see to it – he would read between the lines and, after inspecting the phrases closely, conclude that there is just a chance the strong dollar policy of recent years is no longer as high on the agenda.

Naw. That will not work. Nobody will believe that.

The story won't be picked up and then it will have no effect. There are at the moment just too many new officials here in the States saying all manner of things in the form of snappy one-liners that quote easily and serve to fill the pages and keep the heads talking.

Oh?? Do it in Europe? You think just best before the G10 meeting, when all the important financial reporters are there with much blank print space and air time in the US already reserved for their reports?

OK. Go ahead. Put it on the agenda for tomorrow's meeting. Lets see how it bounces.

Anything else?

Any more bright ideas, young man?

Well, this one would have to go into the ThinkTank to be brooded over. The question of collateral damage to the Administration and its platforms should be carefully evaluated to determine the cost-benefit of going this route.

Assume one does the following: get the BLS statistics on prices and re-calculate the monthly CPI from 1992 without using all the fancy hedonic adjustments. It is almost sure that the new figures for the month on month CPI would be substantially higher than those reported during the previous Administration.

These revised figures are then given wide publicity and steps areimmediately taken to adjust Social Security payments to reflect the true overall increase in the cost of living from 1992 to today as shown by the revised figures.

At the same time every opportunity is taken to apologise to the retiree community for the fact that the adjustments could not be made retro-actively, and that they can thank the previous Administration for the cumulative loss of income they had suffered over the past 8 years. Inform them that they were the victims of a Democrat inspired, deliberate scam to fiddle the CPI so that Social Security pay-outs would be kept to a minimum in order to build up to the first budget surplus in 15 years, a fact that would ensure the incumbents a prominent and laudable place in the history books.

Despite what it would do to people who had no other means than their SS cheques and were thus forced to reduce their already meager standard of living while prices rose and rose and rose while their monthly pay-outs from Social Security remained static. All this just to put a good spin on the efforts of the Administration.

Expose the scam and tell all pensioners at every opportunity to next time read between the lips when Democrat politicians tell them that they care for the plight of the aged and the infirm. Tell them what to expect when a politician preaches to them that a Democrat Administration will see to it that they get a square deal from the Federal Government.

Repeat the message often enough and blatantly enough and by 2004 there might not even be anybody of consequence among the Democrats who is willing to take to a platform in opposition to the bid for re-election. And pretty few campaign contributions.

Especially not in Florida, where a majority of the retired voters this time will make pretty sure the right chads are punched out cleanly; not double punched and no pregnancies or dimples.

And, of course, precious few votes for the Democratic candidate.

Would the above message be true? Who knows? Who cares?

What counts is that the world is as it is reported. And what the history books will say. Or something like that, as Marshall McLuhan is reported to have said.

And then that becomes the way the cookie crumbles. Favourably.

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.

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