2012: The Presidents And The Bull/Bear Turns

Complaining about our presidents in the US of A is maybe second only to baseball as our national pass-time. So allow me to indulge in a rant. I want to take a somewhat spiteful look at the financial market history of our presidents since John Kennedy - an era that I think of as a Comedy of Errors, one of the Bard's great plays. But it isn't so funny. Then we will look at our upcoming election next year in the light of all this.

John Kennedy gave us a free market administration, low taxes and business friendly. He felt that the tax and regulation burden on business was an economy killer. His policies extended the great bull market from the late 1940s to 1966, the post depression recovery. Perhaps his most famous wisdom was "Ask not what your country can do for you. Ask what you can do for your country". This saying has a lot of significance in our present heated debate over what our government should be doing for our mess as opposed to getting over-taxing, over-regulation, and gimmicky, short-term government fixes out of the way so individual businesses can do their thing for our country. It would be a good Tea Party slogan if it were not already taken.

Unfortunately, Kennedy's VP didn't have his partner's key wisdom very near to his heart. Lyndon Johnson was probably best known for his Great Society programs, which were an over-done version of some of Kennedy's initiatives to help the poor. Under Johnson, they became big government helping hands in a War On Poverty, as if it were government's job to regulate economic status of individuals. Some of these things survive to this day, like Medicare, and are favorably viewed. But many were bureaucratic boondoggles - and all began to be a tax problem. By the time LBJ left office in 1968, the great secular bear market of 1966-1982 had begun. You can't blame that whole bear market on one president, but an age of asking what your country can do for you had begun.

Then came Nixon. A normal paper/hard asset cycle turn had begun away from paper investment and to hard assets (commodities). The turn away from the 20 year stock bull market to the 16 year commodity bull market that began in 1966 was perhaps triggered, or at least abetted, by the bad business policy that came after John Kennedy. Economy friendly government seems to have died with JFK's murder in 1963. The commodity bull market had inflation running at around 4% in Nixon's time. His reaction? - wage and price controls. Was he a student of the Soviet Union? This socialist intervention was a dismal failure. It was a government engineered fix to a government engineered problem. Sound familiar? The economy truly went into the ravine under his socialist guidance. And he took us off the gold standard in 1971 for good measure. This was to facilitate the government's "helping" hands and loosen up its wrist for the dollar's printing press to follow. By the time Nixon left office in 1974, the S&P 500 had lost about 50%. He was bounced out of office for lying before he could do any more damage.

Then came Ford and Carter in what I consider an ironic twist in our comedy of errors. Ford served just a partial term. But because of the Arab oil embargo of 1973 and the rude shock it gave to America about its dependence on foreign oil, Nixon and Gerald Ford tried to get some meaningful domestic energy measures enacted. Ford wanted some 20 CTL (coal-to-liquids) plants built in America as a first measure to fuel our cars from our bountiful supply of coal. He was clean coal before clean coal was cool. He was the first president to take on Peak Oil, but he made no headway in Congress - all the plants were voted down. I'm not sure how much he understood about Peak Oil, little was understood back then. Nixon, Ford, and Carter may have just wanted freedom from Arab strife, but they all were both very serious about starting the long process of oil independence for America. Carter, called the energy situation "the moral equivalent to war" and even had solar panels put on the White House!

Sadly, Carter was a damper on the economy. His forte was, and is to this day, international peace negotiation. He put together the Camp David Accords easing Mid-East problems for quite awhile. But on the economy, he seemed to want to continue the post Kennedy legacy of bigger government, bigger taxes, and more departments (he added two right off the bat) and was the first bail-out president when he bailed out Chrysler in 1979. Before Obama-care, there was "Carter-care", a government-run health-care system that went nowhere in Congress. He created the massive Superfund to clean up chemicals in the ground wherever they could be found. If there was a problem with the economy, government could fix it.

Then came the Reagan Revolution. And it was just that - a very fundamental change in government, the first real change since Kennedy died. Whereas LBJ declared war on poverty, Reagan declared war on big government. Many presidents worth of government helping hands had the Reagan campaign's "misery index" at such an unbearable high that he was swept into office in one of the most one-sided elections in history. Reagan declared war on big government and was the first real business friendly president in 20 years. And the markets picked up on it, sending us roaring into a secular bull market in stocks and paper assets in general in 1982 finally ending the dismal flat Dow which had remained locked at 1000 and below since 1966, falling far behind a painfully high inflation rate.

But here's the ironic twist part. There is perhaps one big global problem that is as threatening to the world economy as it is immune to free market solution, and that is Peak Oil. I won't go into all the physics, you can see my other posts on that, but suffice it to say that successful politicians seem to have a stupid gene that blocks the understanding of Peak Oil. The crux of the problem is that the move away from the high net energy of hydrocarbon fuels to the problematic net energy of non-hydrocarbon fuels is going to take more time than the adjustment mechanism time frame of the free markets. Here is one of the very few cases where we are in dire need of a government that understands the approaching storm and is willing to override the free markets and get us ready. That's what Nixon, Ford, and Carter, the presidents forming the bulk the economic "misery parade" of the 1966 to 1982 bear, actually started to do. But Reagan, in all his economic genius and popularity, trashed all their initiatives in this direction. How ironic. It would be funny if we were reading it in a play instead of having to live through it. Reagan felt that if energy shortage was a problem, the markets would figure it out.

Well, that's true, but they will figure it out too late in the case of oil. He reversed Ford and Carter's energy measures and had the solar panels ripped off of the White House. The Middle East settled down, thanks in some measure to Carter, the Saudi fields came online, the price of oil got very cheap, and we all went back to sleep over the supply of oil. This was right about when starting a serious switchover could have had us all free of the problem by now instead of paying $100 plus for each barrel of oil and facing a 20 year solution that we now don't have time for.

About the only person that understood Peak Oil in Carter's day was M.K. Hubbert. He was the only one correctly predicting oil supply in the oil industry. If this were not a comedy of errors, Hubbert would have been cast as Reagan's chief energy adviser, and we would have not 20, but 120 or 400 CTL plants humming by now giving us gasoline from our own coal. Natural gas would be switched from electricity generation to cars and trucks, sugar ethanol (not the worthless corn variety) would be a major import, more nuclear plants and wind farms would be working for electricity - something like the Pickens Plan of today, only already giving us $2.00 a gallon fill-ups paid to American business, not to OPEC. Now there's an economic stimulus for you with no printed money and lots of good paying US jobs.

The Reagan-Bush chain of presidencies, when you think about it, was 5 terms covering 3 men and 20 years. They all pretty much sought to continue the Reagan Revolution. The Clinton terms in the middle wound up being free market and business friendly, not to mention budget balancing. Clinton, either by the mandate of the mid-term elections or by a change of philosophy, or both, put together a pretty fair economic team.

But in the biggest error of the entire comedy, we had growing alongside the epic economic expansion the greatest mountain of debt of all time. All 4 men occupying the White House from 1981 to 2008 turned a blind eye to this fifth column as "market stuff" that they didn't need to worry about - like Peak Oil. And in 2008, the Reagan Revolution was drowned in a tide of falling debt dominoes and $100 oil. And it didn't matter that we had a business friendly president. A new tyrant had taken over the bull/bear cycle and the 1982-2000 secular bull was killed not by over-interventionist presidential policy, but by the two things the government should have been all over and wasn't- the financial weapons of mass destruction and Peak Oil. The Great Recession that essentially continues into the 2012 election was the result.

Now we have Obama. We have clearly gone back to the post-Kennedy and pre-Reagan world. A secular bear market in stocks and all paper assets began in 2001 along with a new bull market in commodities. We now have the "lost decade" of no gain in the Dow like the flat 1966 to 1982 era. Obama is responding to these problems with the socialism of Nixon, the Peak Oil stupidity of Reagan, and the government helping hands of LBJ and Carter. His energy "policy" is to ban all hydrocarbons immediately - anything with high enough net energy to get us safely to a post carbon world. He is the embodiment of all the preceding error in our chain of fools all rolled up into one.

I don't vote in elections anymore. As you might guess, I am neither a registered Democrat or Republican. They both make me sick. The last man I supported and voted for was Ross Perot in 1992, the independent lunatic that put all the charts up explaining why the country was going to be bankrupt in 20 years. Let's see - next year is 2012. Perot ran in 1992. Subtracting the former from the latter gives 20 years, and the big election issue we have already boiling is all about how the country is bankrupt. We were right! Unelectable, but right.

I'll end my rant here and now consider the market significance of all this. A conventional wisdom is forming that has a Kennedy/Reagan president winning in 2012, either the Republican nominee or perhaps a Democratic nominee other than Obama. This is seen as resulting in the kind of stock market boom we saw beginning in 1982. A lot of people are pinning their economic and bull market hopes on another Reagan Revolution. But consider that the start of our present bear market, whether you say that was 2001 or 2007, was in a Reagan/Bush chain. The point to consider is this: the era of the power of the president over our financial cycles has ended. Getting it back may involve more radical upheaval than a US president can muster. We would have to have a Reagan Revolution in every major country in the world, but even that would not solve the massive delevering cycle and global debt resolution problems we now must endure. This problem did not exist in 1982.

According to our Treasury Secretary Tim Gheitner, a market destroying debt problem doesn't exist now. In his recent interview with Jim Cramer, he was asked if a 2008 catastrophe could happen in Europe. He said "not a chance". A couple days later in his meetings with European officials, he said they have "catastrophic risk". Now let me get this straight - there is no chance of this catastrophic risk. Uh, Tim, the word "risk" means that there is a "chance". This is from the same man that said a few months back that there is "no chance" of an S&P downgrade of US debt.

We are at the top of the mountain of debt and the Peak Oil curve. Our economic growth must have an expanding energy supply, and economic growth is the only way our elected leaders have for dealing with debt. It's been a mind numbing mantra for decades (perhaps more from the Republican side) - more debt, more growth - and we can grow our way out of anything. Being stuck at the top of both the debt mountain and the Peak Oil roller coaster rides is not a comfortable feeling. No amount of sound fiscal or monetary policy can drive an expansion if an affordable, expanding energy supply isn't there to fuel it. We've never been here before, and the old presidential cycle turns may not apply anymore.

If you are thinking about getting more aggressive as we get a clearer picture of the next president over the next few months, I would advise caution. The present strategy of cash-flow rich, high dividend payers, gold, and defensive soap and cereal holdings may be better. Some of my favorite high yielders are Kinder Morgan KMP at 7%, Telular WRLS at 7%, Collectors Universe CLCT at 9%, and Terra Nitrogen TNH at 16% (when I bought it). A big rally will probably occur if a business savvy candidate appears to be headed into office. But this may be a huge rally you will want to fade. Actual structural economic revolution will be much harder to come by this time around. Not impossible, but way more difficult.