Why Democrats (and Moderates) Shouldn’t Count on Mueller and the Mid-Terms to Save the Country

The unstoppable economic tide is more politically powerful than any sense of duty or principle. Don’t say I didn’t warn you.

Over the past year and a half, like many other people I assume, I’ve found myself dedicating an inordinate amount of time and effort to thinking about the future of the United States. Every aspect of the Trump Presidency and the simultaneous capitulation of Congressional Republicans to his every whim has been deeply disturbing to me.

But while I’ve tried to find ways to be optimistic about the future, when I break down the probability of outcomes over the next couple of years, there are two common quotes that keep springing up and knawing at me. The first is the oft-uttered analysis of historical events and their famous disregard for schedules:

“There are decades where nothing happens; and there are weeks where decades happen.” - Vladimir Lenin

The next year could very well prove to be one of the most pivotal and consequential periods in the nearly 250-year history of the United States of America. I have absolute confidence that future historians will be penning countless pages on how the next two years play out — regardless of the outcome.

Then, the second quote frequently bouncing around my thoughts is:

“I’d rather be lucky than good” -Lefty Gomez

Devastating in its simplicity, the famed major league baseball pitcher Lefty Gomez pointed out that outcomes are inherently random and — all things being equal — it is always better to stumble into a good situation rather than skillfully or righteously enter a bad one.

And right now, it’s looking more and more to me that the GOP is poised to be the “lucky” to the Democrat’s “good”.

Let me explain.

First, let’s look at the best-case scenario held by most Democrats/Liberals/Progressives/Moderates for the next two years:

Democrats regain Congressional majorities in November 2018. Robert Mueller releases his report which includes undeniable evidence that Trump has committed (multiple?) impeachable offenses. The general public is furious. Trump’s approval rating drops into the 20’s. Most Republicans either directly condemn Trump or, like his base, fall silent in embarrassment. Democrats push for impeachment and — facing the issued report and the furor of the general public — GOP members acquiesce. Trump is impeached or resigns and we reset to the sociopolitical zeitgeist of the summer of 2015. Recognizing that the Trump problem is resolved, our allies welcome the US back into the fold. Trade alliances and diplomatic ties are renewed and bolstered. All is well again.

Clearly, this optimistic scenario is entirely predicated on the Democrats ability to regain Congressional majorities. Only if this occurs does the rest become possible. Conversely, if it doesn’t occur, the battle to mitigate the damage caused by the Trump administration is pushed back to 2020 as the Republicans — regardless of the what comes out in the Mueller Report — are unlikely to do anything to stop Trump. So a lot is riding on the “Blue Wave” and should it take place, I’m sure many people will likely be relieved and hopeful for the future.

Unfortunately — due to circumstances beyond the Democrats control — I think it’s going to be a lot more complicated than they imagine. In my estimate, the Democrats regaining majorities in the House and Senate could actually pan out to be the proverbial Pyrrhic victory.

Don’t get me wrong. Regardless of my concern, I still believe the country’s best chance for a return to normalcy is through Democrat victories in the House and the Senate this November. In fact, I’ve asked family members and friends who identify as Republicans but are vocally alarmed by Trump to vote Democrat down the ticket, just this once because — as conservative stalwart George Will recently said — “the congressional Republican caucuses must be substantially reduced. So substantially that their remnants, reduced to minorities, will be stripped of the Constitution’s Article I powers that they have been too invertebrate to use against the current wielder of Article II powers.” More plainly, “The Trump Administration must be checked and the Republicans won’t do it”.

So then what do I mean when I say that a “Blue Wave” congressional victory could turn out to be a Pyrrhic Victory? I mean that a GOP loss in November might actually prove serendipitous for them.

Here’s why:

A QUICK PREFACE

I believe that while the majority of Americans are disturbed — or at the least uncomfortable — with the Trump administration, they have been willing to put up with it due to the favorable economic climate we are currently in. Call me a cynic, but I believe the majority of people hold politics in their periphery until it affects the most important thing to them — their bank account. And despite looming trade wars and trade agreements being renegotiated, unemployment is low and the stock market is still bullish. Which means that, currently, a lot of Americans are taking a “don’t rock the boat” approach.

But, in my opinion (and the opinion of a number of financial experts), the current period of relative economic bliss is on a collision course with reality. The first thing you should understand is:

CURRENT STOCK MARKET AND ECONOMIC GROWTH ARE RUNNING LARGELY ON INERTIA (AND CHEAP CAPITAL OFFERED UP BY CENTRAL BANKS OVER THE LAST DECADE).

While many GOP voters and Trump supporters consistently point to the success of the stock market as proof of his successful economic leadership, zooming out a little, it is apparent that these numbers are simply a continuation of a trend going back to the recovery from the stock market crash of the “Great Recession” in 2009.

The same goes for the continued lowering of the unemployment rate. Again, just a continuation of a trend.

Furthermore, the growth of equities (stocks) and equity markets in the US is also in line with global equities increase as seen in this comparison between the All-World Index and the S&P 500:

Basically, the US economy and stock markets aren’t doing well because of the “genius” deal-making wizardry of Donald Trump, but rather because of a global trend that is an economic resurgence following the 2008/2009 global recession and the ensuing efforts of central banks to recapitalize and promote growth.

In line with this reality, the actions that Trump is taking now — e.g. igniting global trade wars and blowing up the deficit— won’t immediately be felt, but are currently being baked into the future economic cake. For good or bad, we will eventually feel their effects.

Another reality is that economies are cyclical. There are ups and downs. And for many people — myself included — it feels like the relative “good times”are about to come to an end.

The important takeaway here is to think of the economy as a massive oil tanker that takes time to see the movement once the wheel is turned. Barring a “Black Swan Event”, the economy doesn’t turn on a dime.

THE TAX CUTS AND THE ENSUING CORPORATE STOCK BUYBACKS OF 2018 ARE THE LAST PUSH OF THE ALREADY LONG-IN-THE-TOOTH BULL MARKET

As I mentioned previously, we’re in a fairly extended bull market as of right now. In fact, this is the biggest and longest bull market for the Dow post-WWII.

The length of the bull market has many investors preparing for an inevitable pullback. And while it’s important to note that market corrections aren’t precipitated by a length of time but rather by underlying fundamentals, there is a reason to believe that the coming market correction has been held at bay by tax-cut induced corporate stock repurchases.

(IMPORTANT SIDE NOTE: Stock Repurchases are when a company decides to use balance sheet capital to buy back shares of its own stock. This lowers the number of stock in circulation and thus increases the value of the remaining stocks.)

Stock valuations are at relatively high levels, historically speaking. The Shiller Price to Earnings ratio — a common metric for equities market comparative valuations — is matching that seen before the infamous stock market crash of 1929 and only topped by the enormous levels preceding the tech-bubble burst at the turn of the 21st century. See here:

AN INCOMING YIELD CURVE INVERSION SIGNIFIES A COMING MARKET CORRECTION

Another significant indication of coming economic turmoil is the likelihood of the yield curve inverting in 2019.

SIDE NOTE: The yield curve refers to the rate of return on debt instruments of equivalent quality over different periods of time. In normal scenarios, the longer the period until debt maturity, the better the return. After all, if you are allowing someone to hold your money for a longer period of time, as an investor you’d like a better rate of return due to the increased risk. A normal yield curve looks like this:

An inverted yield curve, on the other hand, is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. It looks something like this:

Why does this matter? To avoid getting into a long explanation about the causes of yield curves, you just need to know that inverted yield curves attract attention from the economic community not only because of their rare occurrence but also due to their historical reliability as a leading indicator of recession.

THIS MARKET “CORRECTION” COULD BE PRETTY NASTY.

And that recession is going to play a very important role in the political landscape of the next few years.

The reason that it will play such a large role in the political landscape is that, unfortunately…

THE AMERICAN PUBLIC (GENERALLY SPEAKING) DOESN’T HAVE A FIRM UNDERSTANDING OF THE ECONOMY — IT’S FUNDAMENTALS OR CYCLES.

Yes, I understand that this statement can easily be construed as “elitism”, but regardless, it is true in the same way that the American Public generally doesn’t understand, say, physics. Sure, some people have a general idea of what it entails but their rudimentary knowledge ends at that hard border between casual conversation and applicable utility.

To further bolster this point, I’ll refer to a survey of roughly 6000 Americans which found — among other things — that half of the American adults in the survey did not know that if they kept their money in cash at home that they were at greater risk of capital loss due to inflation. Or that a full third of American adults could not explain how falling interest rates would affect business. Or that more than half of the students in the survey did not understand what a “budget deficit” is.

The intent of pointing this out isn’t to mock the American Public for its lacking in economics — after all, people don’t tend to be mocked for not having a firm understanding of quantum physics, or computer science, or linguistics. Understanding economics and capital markets (or any academic discipline for that matter) takes time and effort. However, an important distinction between quantum physics and economics is that almost everyone has an opinion on economics. Which makes sense I suppose because, whether they study it or not, the economy affects people in a very tangible sense.

The intent of pointing this out is that this commonplace ignorance and/or misunderstanding of economic cycles could well prove disastrous for the Democrats (and the country as a whole) in the near future because…

IF THE DEMOCRATS PULL OFF A CONGRESSIONAL VICTORY IN NOVEMBER, THEY ARE POTENTIALLY WALKING INTO AN ECONOMIC BUZZSAW AND WILL LIKELY BE HELD RESPONSIBLE FOR THE DOWNTURN BY AN UNWITTING PUBLIC.

Now, I don’t have any empirical data or charts to convince you of this next pronouncement, but I feel that any reasonable person could accept it as valid as the statement that the sky is blue. Are you ready? Here it goes: If the stock-market/economy tanks in 2019 after Democrats regain Congressional majorities, President Trump, Mitch McConnell, and every GOP associate will work tirelessly to pin the blame on the Democrat resurgence.

Shocking, I know.

Unfortunately, this effort might prove very successful. I fear that a lot of Americans might make the critical thinking error of attributing a 2019/2020 economic downturn to the correlative factor of a Congressional shift at the end of 2018. But as we can see, this economic down-cycle is already in the works and will have little to nothing to do with a Congressional changing of the guard.

If the GOP proves successful in painting the Democrats Congressional success as the causality of the economic downturn, in the short term, it could provide just enough political cover to avoid an impeachment of Donald Trump following the Mueller report. And perhaps worst of all, it could, in the long term, provide a big boost in the 2020 election cycle to the (false) argument of the GOP that they are better suited to be in charge of the country’s economy.

Further supporting the possibility that the American public might side with the GOP following a financial crisis is a recent comprehensive historical study done in which the primary finding was:

… that politics takes a hard right turn following financial crises. On average, far-right votes increase by about a third in the five years following systemic banking distress, as shown in Figure 1. This pattern is visible in the data both before and after WWII and is robust when controlling for economic conditions and different voting systems. The gains of extreme right-wing parties were particularly pronounced after the global crises of the 1920s/1930s and after 2008. However, we also find similar patterns after regional financial crises, such as the Scandinavian banking crises of the early 1990s. Moreover, we identify an important asymmetry in the political response to crises — on average, the far left did not profit equally from episodes of financial instability.

IN SUMMATION:

The US is in for a very bumpy road over the next few years — both politically and economically.

Although still the best case scenario for a return to normalcy in the affairs of the United States, restoration of Democrat majorities in Congress are not a guaranteed resolution and could actually backfire.

An unfortunately timed and impending stock market correction/economic recession could very well spell doom for Democratic Party efforts in 2019 and 2020.

For this reason, Democrats/Liberals/Moderates shouldn’t be resting their hopes solely on the Mueller Investigation or a “Blue Wave” Congressional win in November. But something needs to be done because…

All economic and political bets are off in the case of a two-term Trump Presidency.

(FINAL NOTE: This is the first part in a series. The second part will discuss options for (non-violent) action outside of voting. For instance, I’m currently heading up an effort to organize an exit strategy for people that are pessimistic about America’s long odds considering the current circumstances. You can find out more about that effort — the MayFlower 2020 Project — by going to the website www.mayflower2020project.com and read the Green Paper proposal.)