The election of your lifetime.
That's what it's been called, and it's probably true in many policy areas. The two candidates differ on a host of issues, from international affairs to economic strategy to tax policy. Even on basic issues of applied science -- stem cell research (biology), global warming (chemistry), missile defense (physics) -- there are huge distinctions between the Republican and Democratic candidates.
When it comes to the capital markets, conventional wisdom assumes that the outcome of this election will matter a great deal. I disagree.
Why? There are simply far too many structural factors at work that hamstring what any president can do. The postbubble environment has its own problems that will be cured only by time. The budget deficit will continue under either man, and neither will be able to avoid the ongoing weakness of the dollar.
Indeed, the president has far less power over the economy than most people believe. The business cycle of a multitrillion dollar economy is not readily changed by minor -- or even major -- course corrections.
Consider the environment the president-elect steps into: With the 2003 stimulus fading, the economic expansion has started to slow. The trend of the past four quarters of GDP growth is revealing: 7.4% in the third quarter of 2003, 4.2% in the fourth quarter, 4.5% in the first quarter of 2004, and 3.3% in the second quarter.
Unless another trillion-dollar stimulus package is forthcoming -- and that is highly doubtful, given the huge deficit -- economic growth will be in the 2.5% to 3% range. And that's without factoring in the impact of $50-plus-a-barrel crude.
So far, it's been the consumer who has kept this recovery going, via advantageous interest rates and home-equity refinancing. At this point in any recovery, 36 months after the recession's official end, we should be seeing the corporate half of the equation ramping up. But we are not. What we hear from CEOs during earnings conference calls is not particularly encouraging, with the focus on cost-cutting and "hitting their numbers." They are not very sanguine about 2005, expecting little in the way of expansion. Few are announcing increases in capital expenditures; fewer are stating their intentions to ramp up hiring.
For those who are hoping for a robust expansion, this is troubling. The consumer cannot carry the entire economic burden themselves. For the recovery to continue, it needs to be organically self-sustaining -- i.e., not reliant on government stimulus and handouts. For that, the economy requires new jobs and capex spending.
In these circumstances, how much of an impact can any president make? The answer is little, and only at the margins.
The Postbubble Environment
In the run-up to the tech/telecom/Internet bubble,
a tremendous amount of overcapacity was created through massive overinvestment. This is enormously important for the future of the present economic recovery. Why? Companies will not hire or buy new capital goods unless they need to in order to meet increased demand. That won't happen when their customers have warehouses full of those very same goods.
Consider what the
National Bureau of Economic Research -- the group responsible for dating the beginning and end of recessions -- has to say about it: "One could define expansions and recessions in terms of whether the fraction of the economy's productive resources that is being used is rising or falling."
In other words, when there is excess capacity and lowered utilization, there is little need to increase capacity any further. So you see anemic expansion until that excess gets worked off.
Conservative economist Arnold Kling looks beyond the industrial utilization rates to LUCY -- the
Labor Capacity Utilization Index. LUCY suggests there are broad and deep structural issues within the labor market that have yet to be resolved. That does not bode well for job creation in the near future.
What does all this economic gibberish mean to whomever gets elected? First, the economy remains a long way from its potential. Kling argues it will "take years to eliminate all of the slack in the labor market." Second, unless the
continues to apply aggressive stimulus, GDP will remain low and possibly keep falling. And third, we are very likely to see large budget deficits for at least three or four more years.
The Japan Model
The closest comparable to the postbubble U.S. is Japan in 1989-2003. After its bubble popped, it took Japan 14 years to work off their excesses. It didn't matter much who got elected, the cure was very low interest rates -- and time.
That's the bad news. The good news is that we learned from Japan's mistakes. To its credit, the Federal Reserve cut rates more quickly and more deeply than did Tokyo's Central Bankers.
Compared with Japan, we're not so bad off.
Ten Years After
This means it shouldn't take the U.S. the same 14 years Japan needed to get through its postbubble nightmare. With any luck, the excesses from the '90s should be worked off by 2008 -- just in time to have this debate all over again.
Whoever gets elected president in 2004 will have a lot of important economic decisions to make. He will appoint the next Fed chairman, influence tax policy, and affect a host of regulatory issues. But none of these issues will rise above the broader structural environment we presently are mired in.
Stem cell research, sure. The broader markets? Unlikely.
senior market columnist Aaron Pressman's take on the election, click
Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes
The Big Picture
, his macro perspectives on the economy and geopolitics, entertainment and technology industries. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to