Sunday, February 19, 2012

2012 Political Outlook

The stock market does not exist in isolation.  It is a function of economics, politics, and general world events.  It pays to keep track of developments in those areas if you are making decisions about the market and its direction.

At this stage, in February 2012, it does not appear that the Republicans are going to be able to mount a serious challenge to President Obama's re-election campaign.  Mitt Romney just has too many issues and is failing at the most fundamental task of a politician, to appear genuine.  He is just about the least genuine candidate imaginable.  There are certain things you just do not do in politics, and one of them is to allow an image to be crafted of you that paints you as above everyone else.  That is so deadly in politics that you just have to have some other awesome quality about you to overcome it.  Usually, politicians with that potential rap (FDR, Ted Kennedy, John Kerry) work tirelessly to ramp up their liberal credentials so that their aristocratic attributes are shrugged off as mere quirks.  But when you are a Republican, all the old stereotypes get dredged up and the late night comedians have a field day.  I'm afraid that is what is happening to Mitt Romney.  He actually might make a pretty decent President, with all of his executive experience in and out of government, but the first requisite of governing is getting elected.  I think he has serious issues there, and even if he is the candidate, he has damaged himself so much with off--handed statements such as that he "doesn't really care about the poor" that he is just playing into Obama's hands.

Rick Santorum appears to be the only viable alternative.  The Republican primary season has seen a succession of surges and quick drops.  That is a bad sign.  Santorum is the latest and, by all accounts, the most serious and longest-lasting rival to Romney. The fact that he couldn't even get re-elected as Senator in his state of Pennsylvania does not bode well for him if he should manage to snatch the nomination away from Romney.  He is a backbencher who fate is throwing into the mix because it is such a weak field.  I don't see how he could win a general election unless the economy rolls over in the mean time.

What that leaves us with is another four years of President Obama.  I don't see that as terribly negative.  He is a good politician, though he has the same fault of George W. Bush in seeming to let economic issues take a back seat to his emphasis on terrorism.  Now, terrorism and the wars in Iraq and Afghanistan are supremely important, and the Iranian issue just keeps getting worse and worse.  But all too often, he leaves matters up to Congress in such a way that nothing gets done.  I don't fault the man for having difficulties controlling Congress - that seems to be the case with just about every President - but, on balance, I see his re-election as good for foreign policy and a negative for the economy.  A win by his Republican opponent would be the opposite.  The polls will be important to the market this year, the more Obama looks like a lock, the worse the market will react.  I think part of the early strength in 2012 is the emphasis in the media on the Republican primary season.  The Republicans are getting their message out right now, without too much direct opposition.  Once Obama starts campaigning in earnest, it could be a completely different story.

The saving grace of this year's elections would be an increased Republican grasp on Congress.  While some losses in the House wouldn't surprise me, neither would Republican gains in the Senate.  On balance, that would strengthen the opposition's hand to Obama.  In our divided government, that would probably be a better result than Democratic gains which would result in more dithering, as opposed to at least a vocal Republican opposition that submits serious plans and has some responsibility to make things happen and get things done.  All too often, the politicians worry too much about winning the next election and not so much about solving problems.  With Obama a lame duck and Republicans in the ascendancy, and especially since there is no clear Democratic successor to Obama (I doubt Biden runs, or if he does, that he gets nominated, he has been way too low-profile as VP) there could be some tough decisions made to get the deficits under control.

And that is the real drag on the economy.  Working on getting the US budget balanced should be the number one emphasis of politicians.  Wrangling over who gets credit for that only makes things worse.  With Obama caring less and less about hot-button policy issues after his re-election, and the Republicans hopefully bearing down in an improving economy, there could be some good developments down the road despite what the markets may think in the short term.

As a result of all this, I am looking for market weakness toward mid-year as Obama shows his electoral strength, continuing into the fall.  But, as always, we play it as it comes.

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