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The Election   by Morris Segall

When we wrote our comment on the U.S. election in June 9th, we compared the race between Barack Obama and John McCain to the election of 1976 between Jimmy Carter and Gerald Ford. We noticed the parallels between the stagflationary economy this past summer with that of the economy in the middle 1970's and the backgrounds of the two presidential candidates. We noted that the race would be close, contrary to most of the conventional expert opinions, UNLESS the economy got worse over the summer and into the fall before the election. Under those circumstances, we felt the momentum would shift to Senator Obama and he would pull away to a convincing victory. Through August, the presidential race was a dead heat as the Russian invasion of Georgia took center stage in news headlines. However, by the middle of September when the credit markets and the banking industry froze and major financial firms were failing, the economy which has always been in our opinion the dominant issue deciding this election became the issue of the day and as the credit market dissolution worsened in October, Senator McCain's fate was sealed. In fact, as conditions worsened in October the tone of the election passed from a comparison with the weak conditions and political issues of 1976 to the epic and cataclysmic conditions of the 1932 election of Franklin Roosevelt. We stated as much in a press release on November 5th in which we called the electoral landslide of Barack Obama as absolutely Rooseveltian. In addition, the chronic economic deterioration also abetted our forecasted increase in Democratic majorities in the new Congress. The Democrats now have 55 members of the Senate, up from 50 going into the election, and 256 members of the House of Representatives, an increase of 20 seats, and comprise over half of the House of Representatives.

We have stated for over two years in our "Sea Change" and Trend Advisor commentaries how important this election was going to be and how it would revolve around middle class socio-economic issues. However, as economic conditions dramatically worsened over the summer and fall, the negative impact on corporate profits, employment and financial viability of consumers and financial intermediaries, moved the election to a referendum on recent trends in American capitalism and globalization and a lack of confidence by American voters in their future and that of their economy. It is the most pessimistic sentiment exhibited by the American electorate since the Great Depression. The candidacy of Barack Obama reflected the desperation for dramatic and complete change from the status quo in Washington and relief from the abuses and failures of the Financial System that has wrecked the lives of so many consumers and families. To that extent, the Obama candidacy represented the same plaintive plea for change and hope for economic rescue that Americans assigned to the candidacy of Franklin Roosevelt in 1932. Witness the huge crowds attending Obama rallies, numbers not seen in decades, certainly not in recent postwar election cycles. In addition, note the large financial assistance supplied by huge numbers of supporters. For the first time since the John F. Kennedy candidacy, a Democrat had more than twice as much money to spend as the Republican standard bearer. Lastly, the passion and commitment of Obama supporters transcended age, gender and economic class.

The sweeping Democratic victory in this election is both opportunity and disappointment. With the repudiation of the Republican Party and its policies, the economy and foreign policy now belongs to the Democratic Party. Voter expectations are high, probably too high for fast solutions to the destructive effects of the global recession and the political and financial erosion of the wars in Iraq and Afghanistan and an unsuccessful foreign policy. The Democratic leadership including Barack Obama and the leaders in the House and Senate recognize this and the relatively short window they have to work in to pacify a desperate electorate. To be sure, there are no easy fixes to the Global Financial Crisis but there will be no shortage of pronouncements and recommendations in an effort to turn the economic tide. Right now the Democrats need to sustain voter confidence in them and their ability to turn "things around".
The danger is that in their zeal to correct the current economic crisis, the Democrats foment programs that have short term palliatives but longer term adverse impacts. This is particularly the case of excessive "bailouts" of sectors of the U. S. economy while drastically eroding longer term U.S. financial strength and flexibility.

Having said this, we perceive a shift in American voter perceptions of the values of historical American capitalism. Since the turn of this century as Americans have aged, middle class Americans have seen their investment portfolios destroyed in two recessions and since 2006 have seen their principal wealth asset, their house, decline in value by a third or lost altogether in the worst real estate decline in twenty years. Thus, in less than 10 years, middle and lower income Americans have seen their wealth, life style and future decline to an extent not seen since the Great Depression of the 1930's. As a result of the repetitiveness of adverse economic trends since the heady days of the Regan economic expansion in the 1980's, more Americans are now receptive to fundamental changes in the classic American model of unregulated markets and non-intrusive central government. We believe the new Democratic government will "tap" into this voter discontent and inaugurate new stronger Federal government oversight and regulation, certainly of financial markets and institutions, but also inserting itself as public protector in transportation, energy, healthcare, real estate development, consumption and tax reform. We expect the new Administration and Congress to attempt to raise taxes on high income earners and rescind tax breaks to wealthy individuals and successful corporations. By the way, in the November 13th edition of the Wall St. Journal an article appeared outlining the impact of tax breaks to corporations. According to the Wall St. Journal article many American corporations paid taxes at a rate of approximately 25% in the year 2005, the latest period for which data is available. This is far lower than the statutory tax rate of 35%. As one who spent the early part of his career as a financial analyst, I can tell you this is not news. For decades, American multinational corporations have been paying far less than the 35% statutory tax rate and at 25% is one of the lowest tax rates in the world. It might be remembered that John McCain made it a plank of his economic program to lower the statutory tax rate for corporations from 35% to 25% arguing American corporations were overtaxed relative to their foreign competitors. It appears that is not the case. This will not be lost on the Democrats in Congress looking to level the playing field in regards to the tax code which many Americans view as unfair.

Ten years ago, such an agenda would have been viewed as naked socialism and repudiated by mainstream American voters. Today, aging and moderate income Americans are ready to accept more government involvement, regulation and even nationalization of key industries and sectors of the American economy that affects mainstream America. To that end, we expect a national, universal healthcare program including prescription drug relief and preventive medical practice. In fact we expect an activist Democratic Party to be more proactive in many of the issues we outlined in our "Long Term Outlook" written on October 8, 2006. It is our belief that an aging population requires more government assistance and services as they get older and living on fixed or retirement income. In addition, many Americans who believed in the free enterprise system believe that system has been corrupted by unscrupulous players on Wall St., in Washington DC and in corporate executive suites. Franklin Roosevelt's agenda in fighting the Great Depression was called the "New Deal". Harry Truman's program in combating post war recession was called the "Fair Deal ". We believe Americans are looking for an "Equal Deal" from the new government to confirm the promise of opportunity and improved standards of living for themselves and their children. Therefore we believe we are experiencing a "sea change" in American political views and stances. One that is moving to the left. We will be watching to see how the "economic populism" agenda of the Democratic Party is enacted and supported.

Morris Segall
SPG Trend Advisors
http://www.spgtrend.com

About the Author

Morris Segall, President of SPG Trend Advisors, is an author, financial industry expert and investment adviser with more than 25 years of experience dedicated to capital markets strategy, global economic trends and institutional wealth management for entities with more than $1 billion in assets.

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