James Pethokoukis

Politics and policy from inside Washington

The midterms and the markets, take two

Sep 21, 2010 16:31 UTC

A bit more from Ed Yardeni on one of my favorite topics:

Yesterday, I reviewed the outstanding performance of the market three months after midterm elections. I also noted that the third years of the presidential cycle tend to be very bullish. The fourth year of presidential terms, along with first and second years, tend to be much less consistently bullish than third years.

Yesterday, I asked Joe, “How well does the S&P 500 perform from the midterm elections to the end of the third year of the President’s term?” The results are spectacular. Since 1962, there have been 12 such 14-month periods, and their average increase was 20.9%! Not one of them was down. Indeed, there are only two gains that are not in the double digits: 0.4% during 1986-1987 and 6.2% during 2006-2007. …  I suppose it could be different this time. Gridlock might block appropriate policy responses to revive economic growth, if necessary. Gridlock might mean that the Bush tax cuts won’t be extended for another year to avoid depressing a depressing recovery. Gridlock could stymie any agreement on measures necessary to narrow the federal deficit. Then again, a sweeping ouster of incumbents on November 2 might be a good start toward bringing back some fiscal discipline in Washington by newly elected legislators, who really want to do what’s good for the country rather than for themselves.

Me:  Gridlock is better than another wave of tax hikes and regulation — but not as good as spending cuts and pro-growth policies like cutting taxes on companies and capital.

The oh-so-slow recovery

Sep 21, 2010 16:25 UTC

A great chart from David Rosenberg of Gluskin Sheff showing just weak this recovery has been:


Obama on CNBC

Sep 20, 2010 19:26 UTC

The president participated in a town hall meeting earlier today on CNBC. A few thoughts on the event:

1. He noticeably dodged a question about whether, in the name of fiscal prudence, all the Bush tax cuts should eventually be left to expire. That is the position of his former budget chief, Peter Orszag, as well as that of many deficit hawks. It does seem strange for him to say America cannot afford the upper-income tax cuts, but also support the lower-income tax cuts which cost far more, according to the Congressional Budget Office.

2. He seems to think the Tea Party crowd is a “Party of No” manifestation with no real agenda other than to complain about his policies. But that is not how I read them at all. For instance, many activists are big fans of the Fair Tax and  Paul Ryan’s budget-cutting Roadmap for America’s Future.

3. The POTUS said tax rates were as low as they were under Ronald Reagan. When Reagan left office, the top marginal rate on ordinary income was 28 percent. Today it is 35 percent, and Obama wants it to go to 40 percent. More evidence the White House thinks America undertaxed.

4. More evidence the economic New Normal may create a political New Normal. The first question was telling. It was from an Obama supporter who was very frustrated by the pace of the recovery:

I’m one of your middle class Americans. And quite frankly I’m exhausted. I’m exhausted of defending you, defending your administration, defending the mantle of change I voted for, and deeply disappointed with where we are right now.

Obama stuck to his guns, arguing the measures he had undertaken since taking office in January 2009 were slowly pulling the country back to health:

My goal here is not to try to convince you that everything’s where it needs to be — it’s not. That’s why I ran for president. But what I am saying is … that we’re moving in the right direction.

5. Overall, the crowd seemed anti-bank, anti-China, pro-Obama.

6. Certainly the big quote of the day was when he said his economic team had done an “outstanding job.”


James, I enjoy your commentary on CNBC. That “Town Hall Meeting” was a sham. 1) The audience was packed with progressive democrats as evidence by the overwhelming applause after the President’s comment about how”assuming Sen. Boehner would be Speaker of the house was premature”. 2) Scaramucci obviously made some deal with the administration to be publically but gently chided by the POTUS in return for a shameless, “rubbing me on the back with a soul brother handshake photo-op” after the meeting. Can you say Shiela Jackson Scarramucci? I mean, seriously. And 3) why can’t the administration start these things on time? I mean, really….how far ahead was this scheduled? If it is supposed to start at 12:00, why make the American people wait. Obama has had….oh I quit counting….up-teen press conferences and I don’t believe even one has started on time.

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Will Obamanomics slow the economy?

Sep 20, 2010 16:15 UTC

These two charts pretty well sum up one version of the economic impact of the White House tax plan — such as raising high-end tax rates — at least according to a computer model run by the conservative Heritage Foundation. You can disagree with the modelling, I suppose. But I am not sure any model would show higher taxes boosting the economy right now.




the destruction of the u.s. in the making , he is doing what no al qaida ever could .

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A chat with Peter Navarro, co-author of ‘Seeds of Destruction’

Sep 20, 2010 15:57 UTC

Looking for some bipartisan solutions to America’s economic problems?

Well, I just read a great book on U.S. economic policy that is definitely worth checking out: “Seeds of Destruction” written by Glenn Hubbard and Peter Navarro. Hubbard is the former head of the Council of Economic Advisers under George W. Bush and is now dean of Columbia Business School. Navarro, a Democrat, is a business professor at the University of California, Irvine and author of  ”The Coming China Wars.”

Here are some excerpts of a chat I recently had with Navarro. (Later this week, I will post my interview with Hubbard.):

What’s wrong with the policy ideas coming out of Washington?
The Democrats are infatuated with the idea of using fiscal and monetary policies to spend our way to prosperity. And the Republicans have long been infatuated with the idea that the only way you can get to where we need to go is to cut taxes. And both of these solutions either don’t work or are too simplistic or both.

How must our economic approach to China change?
We identify a set of mercantilist and protectionist policies that China engages in to gain a competitive advantage, not just over American manufacturers, but manufacturers throughout the world. And our whole policy thrust is constructive trade reform with China. I think the big ones are the export subsidies they continue to engage in despite [World Trade Organization] prohibitions, the undervalued currency is certainly a big one, the intellectual property issue, and of course when you are competing with a nation that has very lax environmental and health and safety standards, that is difficult as well.

So if you are going to engage in trade reform on the mercantilist side, you need to deal with all of those things. At the same time, there are protectionist measures that China now engages in, things like non-tariff barriers such as forced technology transfer as a condition of entry into a market, and things like forced offshoring of research and development — all of which are prohibited under free trade rules.

What has gone wrong with the U.S.-China policy?
My own view is that the Bush administration wasn’t watching China because of their free market ideology. And the Obama administration thinks they need China’s money to finance their budget deficits.  I think that is a really bad bargain. At some point, the White House has got to acknowledge that these are really important issues and that simply relying on China to voluntarily go forward isn’t working.

So what should we do?
If I were Tim Geithner, I would fly over without any public announcements or press at all — a secret mission to China — and sit down with the “powers that be” over there and say, “Look, for both political and economic reasons, we can no longer tolerate this, but we do not want to confront you publicly on it. And unless you deal with this, then we are going to have to take these steps. We don’t mean to impugn your honor or integrity, but that is what is going to happen. And then I would go back home and see what happens, but not breathe a word of that to the press.

And if they don’t play ball?
Brand them a currency manipulator. And as I have written before, all you need is simple bill in Congress that says we will trade with anyone that abides by rules of free trade and leave it at that. Don’t mention China or anyone else.  There is a legitimate difference between taking measure for self defense vs. engaging in protectionism. If China dumps goods in the U.S. that are substantially below costs and countervailing duties are imposed, that is not protectionism. That is self defense. A lot of Republicans seem to not quite understand that free trade does not mean export subsidies and an undervalued currency and things like that. And Democrats, with things like “buy American,” drive me nuts, too.

Many economists contend that China needs to consume more and move beyond export-driven growth. Does China see it that way?
The people in power have seen China prosper with these “beggar-thy-neighbor” policies. But what we are advocating is in as much their interest as ours.

Were there any areas of sharp disagreement while co-authoring the book?
We began at the outset seeking a middle ground, and I think once you’ve analyzed the problem, the solutions become, if not obvious, then kind of evident and it makes it easier to figure out what to do. We really never had a substantive disagreement on anything.


I work at a very big software company that all of you have heard of — there is only one reason why this company hires Indian IT firms — PRICE!!!!! In India and China, there is plenty of SLAVE LABOR and the U.S. Govt. has decided to equalize U.S. JOBS and Salaries with these SLAVE LABOR conditions to do one thing: support a CEO to average worker pay gap of 400X (see below.) Don’t listen to anything else that the companies say, it’s about price. We could easily train Americans to develop these skills on the job in about three months. Price includes training and having to deal with workers who require health benefits and everything else that a person working should get.

There’s a big difference from the old days when American people cared about one another and nowadays where greed rules the day: while corporations have robbed pension funds that were committed to, banks have falsely appraised real estate for the past 10 years and aren’t held to account for the fraud when the borrowers are held to the falsely valued loans, and executives get paid 400 TIMES the average worker — see the following article:(http://www.opednews.com/article s/The-Wide-Divide–You-Are-B-by-Steve-Ell iott-080616-912.html), Americans continue to vote for the creators of these schemes: Republican schemers. It’s crazy how you are shooting yourself in the feet, ladies and gentlemen. Please get a clue. Yeah, Obama is not the best and is having a hard time, but if you think cutting more decent jobs is the answer, watch out because I can replace ANY U.S. Worker, and I mean any, (skilled or not, doctor, lawyer, IT, CEO, McDonald’s person, whatever) with a Chinese or Indian worker who will cost 5% of your total salary — want to compete with that? And I mean ANY job.

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How will the midterms affect the stock market?

Sep 20, 2010 13:33 UTC

The always insightful and interesting Ed Yardeni gathers some numbers on elections and market returns:

So what do stocks do just before and just after midterm elections and in the third year of the Presidential Cycle? They usually go up, and by quite a lot. Let’s review:

(1) According to my friend Laszlo Birinyi and former colleague at Deutsche Bank, in the 12 midterm election years going back to 1962, the S&P 500 has on average risen 2.4% in the two months prior to the election and gained 7.5% in the three months following. The only post-election downer was during 2002, when the Republicans under George W. Bush retook the Senate and held on to their slight majority in the House. The biggest gain was 14.6% during 1998 (under Clinton) and the smallest gain was 3.3% during 1994 when the Democrats under Bill Clinton lost both the House and Senate.

(2) According to Deutsche Bank chief U.S. equities strategist Binky Chadha, the S&P 500 has produced gains in 18 out of the last 19 midterm election cycles. The S&P has returned an average of 13% in the six months after midterm elections, and 17% over the next 12 months. The indicator works regardless of which party wins control of Congress, but it’s especially strong when there is a Democratic president and Republican legislature. When that scenario is in place, stocks average 14.6% annual returns, according to Bill Stone, chief investment strategist at PNC Wealth Management. “It’s the best of all iterations,” he says.

(3) The DJIA has risen 24 times and fallen 5 times in the 29 third calendar years of the Presidential Cycle since 1891. The overall, average gain for the 29 third calendar years is 12.31%, with the 16 Republican presidencies averaging gains of 5.12% and the 13 Democratic presidencies averaging gains of 21.14%.

(4) Joe analyzed the four-year Presidential Cycle of the S&P 500 since 1952. He found that this index increased on average by 4.4% during the first year, 4.8% during the second, 18.4% during the third, and 5.7% during the fourth. Excluding second terms of reelected Presidents, he found that the first term of all of them since 1952 averaged 3.2% during the first year, 2.2% during the second year, 21.6% during the third year, and 11.5% during the fourth year. In other words, third years tend to be the best ones, and have been up years during every Presidential Cycle since 1955.

While the historical record suggests that the stock market is likely to do very well over the rest of this year, and even better next year, might it be different this time? I’ll discuss this possibility tomorrow.

Me: This also plays into the “gridlock into good” mantra. And certainly there should be less anti-market legislation in the second half of Obama’s term than the first half. But the U.S. does have real problems that need attending to — budget reform and tax reform, in particular.

Queen Elizabeth (Warren) finally arrives

Sep 17, 2010 11:23 UTC

Had enough of me writing about Elizabeth Warren yet? And I haven’t even gotten to her dodgy bankruptcy study! Anyway, here is my Reuters Breakingviews opinion-torial (half opinion, half editorial) on the pick:

President Barack Obama is tweaking the legislative fine print to get his consumer champion. Coming from a credit card issuer, Elizabeth Warren might not like that modus operandi. But Main Street will welcome having her establishing the U.S. consumer financial protection agency. The president may not care that Wall Street feels differently. Still, the manner of his pick carries risk.

As the saying goes in Washington, “people are policy.” The appointment of Warren to a special advisory role is a case in point. Thanks to the Harvard law professor’s plain-spoken criticisms of banks, she has become a folk hero to liberals who have been clamoring for her to lead the new Bureau of Consumer Financial Protection. And Obama will need them to turn out in force if Democrats are to minimize what are expected to be steep losses in the November midterm elections.

But as something approaching a hate figure for the financial lobby, Warren was too radioactive for Obama to risk the Senate confirmation process that would have been needed to make her the formal head of the new agency. Hence the clever interim Plan B, under which she will advise the president and the Treasury on setting it up.

Obama himself has warm words for Warren, but she isn’t especially popular within his economic team. As head of the Congressional Oversight Panel, for instance, she has publicly clashed with Treasury Secretary Timothy Geithner over the $700 billion bank bailout. While Geithner thinks the bailout was crucial to economic recovery, Warren thinks it an opaque and unaccountable bank giveaway that has failed to restart lending. It’s a significant disagreement with an accepted White House strategy, albeit one inherited from the previous administration of George W. Bush.

Nor does her appointment do anything to heal White House divisions with Wall Street. While the president may not be too bothered about that politically for now, longer-term it makes practical sense to have a constructive dialogue with the financial sector. Shorter-term, hiring Warren in a way that’s seen as an end-run around Senate Republicans could prompt GOP senators to retaliate by further delaying three stalled nominations to the Federal Reserve board, including Janet Yellen as vice chairman.

Consumers may be justified in liking the idea of having Warren in their corner. But as she of all people could tell Obama, the fine print can contain hidden costs.


Give me a break. Elizabeth Warren is one of the few people in this country who cares about middle class people like me. We have had 8 years of corporations doing whatever they want and the result has been the worst financial catastrophe since 1929. Add to that is the fact that the rich and poor divide is growing. I am not interested in people like you being critical of someone who has been working to help ordinary people. If more people in Wasthington were like Elizabeth Warren maybe the nation wouldn’t be in this mess. Finally, even as an Obama supportor I am no fan of his good old boy economic team. Frankly, he needs to fire them and start over. These guys have been singing the praises of Wall Street until relatively recently. It will be good for them to deal with someone who isn’t afraid to take them on. It’s about time.

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Uncle Sam has plenty of dough

Sep 16, 2010 18:15 UTC

Here is a point that has gotten lost in the Bush tax cut debate. Even with the tax cuts, Uncle Sam will have plenty of revenue. As I wrote earlier this week:

Now let’s say all the tax cuts were permanently extended — Orszag’s nightmare scenario. According to Orszag’s old pals at the Congressional Budget Office, federal tax revenue would be 18.6 percent of GDP in 2020, 19.2 percent in 2035, 19.8 percent in 2050 and 22 percent in 2080. In other words, even with all the tax cuts extended, government revenue would still rise well above its historical average of roughly 18 percent since World War Two.

And this chart also illustrates the point:


A few thoughts on Elizabeth Warren

Sep 16, 2010 15:20 UTC

It looks like an end-run around the Senate, but liberals activists have still managed to get Elizabeth Warren into the Obama administration. A few thoughts:

1. I keep hearing how the WH is going to adopt a new tone with business. But picking Warren means that adjustment is more of a 2011 thing, I guess.

2.  I also hear that this Plan B might provoke senate Republicans into holding up Obama’s stalled Fed nominees.

3. Doesn’t this undermine Tim Geithner just a bit? She has been highly critical of Geithner in relation to TARP, which he has touted as key to the economic recovery.  Warren would also have preferred, her work on the TARP panel suggests, bank nationalization and mass bank executive firings in 2009. Geithner was completely against that.

4. The financial industry will complain about the Warren pick, but it now seems unlikely that either Warren or Michael Barr will end up running this new agency.  The two differ more on style than substance. So maybe the eventual pick will be someone more moderate that can better deal with a more Republican congress.

5. There is an old management rule: Never hire someone you can’t fire. Obama violated this rule by picking Hillary Clinton for secretary of state.  And he just did it again.

Just how scary is Elizabeth Warren?

Sep 14, 2010 14:15 UTC

That is the sort of question I get all the time from my business and banking contacts. And the White House may try to end run the Senate by temporarily appointing Warren to head the new consumer finance regulator. But how bad would she be for business and Wall Street (assuming she would be negative)? Here is how her opponents put it: “Let’s put an ideologue at the head of a new regulatory agency with extremely broad and undefined powers in a nation where business is crippled by uncertainty? Hey, what could go wrong?”

Then again, all the negative publicity might force her to be more moderate.  It also makes her an easier target for Republicans if they are in control of one of both Houses of Congress in 2011.  Here is what I wrote earlier this summer:

1. The Consumer Financial Protection Bureau created by the sweeping U.S. financial reform legislation will put Main Street protection under one roof. Though it technically will be housed inside the Federal Reserve, the agency will have vast power thanks to the fear of more sins like the ones that led to the housing crisis. It’s rare for a regulator to be empowered to perform “any” action necessary to protect consumers from abusive practices.

2. What’s more, virtually any link between consumers and a financial institution will get oversight. Rules will be tough to overturn. The new systemic risk council – made up of the Treasury secretary, Fed chairman and financial regulators – can only reject a proposal if it threatens the safety and soundness of the banking system.

3. The agency’s first director will set the tone, as well as precedent, for how far it can go. And Warren, who has been chairing a congressional panel overseeing the Tarp bailout fund, looks a leading candidate. The consumer protection bureau is her pet idea. The Harvard professor has said she believes banks are destroying the middle-class by loading them up with debt using deceptive products. Unions and anti-bank activists openly support her nomination.

4. Banks would prefer Michael Barr. Treasury’s point-man on the consumer agency is also an academic, but seems to have less of an ideological ax to grind. He may also be more sensitive to the need for financial institutions to earn their way back to health.

5. Warren’s bark is fearsome but Wall Street’s fears may be a little overblown. Rather than shutting down exotic ideas, she may instead push for more disclosure on them. But even if a Warren commission were to clamp down on some complex and risky products, it’s hard to believe the financial engineers won’t find a way to design simpler, and profitable, ones for consumers.


Ginchin, you have certainly made your biases clear! You have also distorted every fact you could get your left hand on. But let me ask you: exactly how did a “lack” of regulation lead to the housing bubble, the collapse of which triggered the financial crisis of Fall, 2008? Precisely which existing federal regulators failed to do their jobs, and how will the new Democrat proposals fix that? And while you’re at it, please discuss the role of personal responsbility in financial affairs. Thanks in advance for your erudition.

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