I was born shortly after World War II.
I’ve paid close attention to speeches by presidential candidates ever since Eisenhower.
And I can tell you unequivocally: Despite everything they may say, they’ve always had more in common than not.
Typically, no matter how they struggled to differentiate themselves, many still came off sounding like Tweedledum and Tweedledee.
This year may be the paramount exception — Clinton declaring last week in San Diego that Trump would lead the nation into war; Trump retorting from San José that she’s guilty of criminal activity; each offering a radically different choice for voters.
But more so than ever before in our lifetime, when it comes to our money, our retirement and our entire financial future, the next president’s number one challenge is White House impotence.
Fast forward seven months, put yourself in the president’s shoes, and you’ll see exactly what I mean …
The Day after Inauguration, January 21, 2017
You’re in the Oval Office. The Rose Garden is blanketed with snow.
And regardless of what you may have planned for this memorable day, you’re confronted with a series of fix-or-fail financial and economic disasters that trump all else.
U.S. Commercial Real Estate
You thought the real estate boom-and-bust story was done and over. So did all your economic advisers.
You should have known.
But it seems everyone’s eyes were on the last war (the housing market). So they underestimated — or completely overlooked — the epic new bubble (in commercial real estate).
|This chart, presented by Mike Larson at the Las Vegas Money Show in May 2016, stood out as a blatant warning of the coming debacle in commercial real estate.|
Specifically, no one on your team saw or paid much attention to this chart, demonstrating that …
1. The year 2016 brought an epic commercial real estate bubble …
2. That bubble greatly exceeded the comparable bubble of the 2008-2009 real estate debacle. And …
3. The commercial real estate market began to peak in the middle of the presidential campaign.
If you’re president of the United States in 2017, this is a huge shock. It takes priority over your list of favorite spending initiatives, be it for jobs, health care, or walls. And for reasons I’ll explain in a moment, there’s virtually nothing you or the Fed can do to stop it.
U.S. Automobile Industry
The domestic auto market delivers your second shock, and again, you or your advisers should have known: A full eight months before Inauguration Day, JD Power released telltale numbers that clearly forewarned of this debacle:
They showed that over 31% of auto borrowers owed more on their cars than their cars were worth, a record high.
They showed that a 29% of auto loans stretched out as long as six to seven years, triple the level of 2010 and also a record high.
They showed that even 84-month loans weren’t enough to satisfy the auto makers’ lust for sales to consumers unable or unwilling to pay for the car they want. So they decided to push leases like never before, accounting for a record 33.6% of auto purchases.
And as if all that was not enough to lure in buyers, auto salespeople were offered huge incentives of approximately 9.3% of the cars’ sticker prices, also a new record.
Exactly eight years earlier, your predecessor faced what appeared to be a similar battle on the Detroit front. But alas, as I’ll explain in just a moment, the weapons he had at his disposal for that fight are now gone.
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Sinking Global Economy
Now, as POTUS #45, if you and your experts weren’t prepared for this particular shock, you truly had your heads in the sand.
Why? Because 21 days before the 2016 Indiana primary, when Donald Trump became the presumptive Republican nominee, the IMF declared in its own bold headline …
Moreover, in their World Economic Outlook, they listed a host of reasons …
“The slowdown and rebalancing in China
“A further decline in commodity prices, especially for oil, with sizable redistributive consequences across sectors and countries
“A related slowdown in investment and trade
“Declining capital flows to emerging market and developing economies,” plus
- “A host of noneconomic factors, including geopolitical tensions and political discord.”
Thus, as you look beyond our shores from the vantage point of the January 2017 Oval Office, you see that one by one, the largest economies of the world have taken big hits, due to precisely the factors cited by the IMF months earlier. You see …
China, the world’s second largest economy, on the verge of a volcanic eruption due to extreme income inequality, spurring popular revolts, labor protests, massive government crackdowns and more revolts. (For more proof, don’t miss The Biggest Global Risk Right Now and The China Fallacy.)
The European Union, with a combined GDP that rivals that of America’s, very vulnerable to surging anti-EU forces.
Not to mention Brazil, already in its worst recession since the 1930s … Russia, long-ago devastated by oil-price collapses … and every major commodity-producing economy on the planet, suffering similar hits.
“Strange,” you say to no one in particular. Why is it that none of this even rose to the level of background noise during the 2016 presidential campaign? Now how are we gonna scrap, or at least redirect, America’s biggest trade deals?
“For the backburner” comes the immediate answer. “With the largest economies in trouble, the ships of global trade are sinking across the Atlantic and Pacific. No one, not even someone with intense scorn for NAFTA or TPP, wants to rock those boats just now.”
Meanwhile, back home, America’s large corporations began cutting back sharply on their capital expenditures one year before Inauguration Day.
Then, a half year before Inauguration Day, on June 3, 2016, the U.S. Labor Department shocked the world with news that job growth was collapsing.
So right now, no one, not even among politicians enamored with the idea of a $15 minimum wage, wants to poke more holes in the job market.
No More Weapons
All of these disasters — and others — funnel into one, single, not-so-strange economic phenomenon: Recession.
And alas, that’s also something you should have known. On average since World War II, recessions have struck every 73 months. And by January 2017, you’re already into month 91.
What is out of the ordinary is this: Unlike any other president in modern history, you’re virtually powerless to do much about it.
You see, every other president in the last century has always had a powerful ally for combating recessions — the Federal Reserve. And the Federal Reserve has forever had a very simple, very effective weapon — interest-rate cuts.
In fact, in past recessions, the Fed has always dropped its official rates sharply, and all your predecessors in the Oval Office had this great advantage …
In 1960, under Eisenhower, the Fed cut the effective Fed Funds rate by 2.5 percentage points.
In 1970, under Nixon, the rate cut was 6.2 percentage points.
Ford presided over a whopping 8.3-point cut in the mid-1970s.
And the Fed under Carter beat them all with a 10.3-point cut in the early 1980s.
George H. Bush got a 6.9-point cut from the Fed.
Bill Clinton got a 5.5-point cut during the Tech Wreck of the early 2000s.
Plus, your immediate predecessors, George W. Bush and Barack Obama were in office when the Fed gave them a 5.1-point cut to combat the housing bust.
Ever since 1960, presidents of both parties got magnanimous nonpartisan gifts from the Fed in the form of rate cuts averaging 6.4 percentage points.
But you? No. You’re out of the luck, at the tail end of the chain letter. You get nothing. Zilch.
You give the Fed Chair a call. You ask her what she can do for you.
She talks about below-zero interest rates. “Maybe a half point at most,” she says.
But even then, she warns, it’s highly experimental. It impacts only a very tiny portion of the nation’s largest financial institutions. It never reaches the people. And by the way, we already know it’s not working for the Europeans or the Japanese.
“How about some more money printing,” you ask a bit sheepishly.
“Been there, done that,” she retorts. “Ran into law of diminishing returns. Economy sinking regardless. Looking for the exit doors for months now. Still can’t find ’em. But there’s no way in hell we’re going back there.”
You meet with folks from all political and financial persuasions. Your first week in office comes to an end. Then your first month. No one has any brilliant new ideas.
And you haven’t even begun to worry about government gridlock.
My advice to both the reader and future presidents: Don’t overestimate your power to adapt to — let alone bring about — change. Prepare yourself ahead of time for economic disasters already in the pipeline. And always beware of your limited ability to stop them.
Good luck and God bless!