Looming Pre-Election Disaster

In his seventh, and final, State of the Union address this January, President Obama, clearly looking to bolster his legacy as the president who vanquished the Great Recession, boldly asserted that “Anyone claiming that America’s economy is in decline is peddling fiction.”  Unfortunately for the President, more and more Americans seem to believe (with an adequate basis for proof) that the fiction is emanating from the White House.

It’s hard to imagine how anyone can really assert with a straight face that the economy is currently “strong.” The most recent Gross Domestic Product (GDP), from 4^th Quarter 2015, shows us barely inching along at a 1% annualized growth rate (Bureau of Economic Analysis, 2/26/16). Given that moderate growth used to be measured in the 3%-4% range, and that recent declines in the trade balance could further subtract from both 4^th (2015) and 1^st quarter GDP, we could be forgiven for raising an eyebrow or two in reaction to Obama’s boast.

point neared a high of $1,280 per ounce (gold was up 3% for the week). The strong jobs report should have convinced investors that the Fed would raise rates, which would hurt gold. But that didn’t happen. The markets have started to figure out that the jobs numbers are meaningless and that soon they will roll over to mirror all the bad data emanating from other sources.

I don’t expect that the President will ever officially acknowledge that the economy has weakened, let alone relapsed into recession. He has walked out too far on his rhetorical branch to walk it back. As a lame duck, he really has no incentive to do so. Such admissions would also undercut the campaign of Hillary Clinton, who is running as the logical successor to carry his torch.

But Janet Yellen is in a very difficult spot. If she continues to ignore the growing signs of recession, she runs the risk of letting one develop prior to the election. This would favor the Republican challenger, whether that is Donald Trump or Ted Cruz, neither of whom would be inclined to reappoint her as Fed Chairwoman if elected. Allowing the Greenspan bubble to bust on Bush’s watch sealed John McCain’s fate, allowing Obama to ride a wave of voter outrage into the White House in 2008. Yellen does not want Trump to catch a similar wave in 2016.

As a result, I expect the Fed to soften its rhetoric in the very near future. They will promise that the punch bowl is going to remain on the table for the foreseeable future. This means that market movements that have defined 2016 thus far may accelerate in the months ahead, and may provide relief for investors in commodities and foreign currencies who have had the patience to wait out the nonsense.

The post Looming Pre-Election Disaster appeared first on LewRockwell.