It Apparently Wasn’t the Economy, Stupid!

Democracy is the theory that the common people know what they want, and deserve to get it good and hard. H. L. Mencken

The recent results of the mid-term elections have a number of pundits puzzled, including ourselves.

It was felt that the economy would be dominant. Inflation is at the worst levels in 40 years, falling markets are chewing up savings and folks’ 401K plans, there are no eggs at Costco, rents are soaring, and only about 21 days of diesel fuel is left in the country.

Crime is out of control in major cities, and the border is wide open for anyone, terrorist or bricklayer, to come into the country.

The Federal Budget is completely out of whack.

Surely, people are feeling this. It is evident at the meat counter, at the gas pump, and on the electricity bill.  There is no way the media can hide this reality from the American people. These are the conditions for a Red Wave. Or, at least, that is what was thought.

We think the American people are feeling the pain, despite the best effort of the press to hide the problems. But, it seems voters think Russia is the cause and not the Democrats and they were more concerned about abortion and “election denial” and the “taint of Trump” than they were about kitchen table issues thought to be more important.

So, it seems the economy is not the most important issue for voters. What else can one reasonably conclude?

But it is also true, few people, including leading Republicans, understand the budget crisis. If they do, they are so terrified to talk about it because Democrats will portray them as “pushing grandma off a cliff”, if they even bring up the subject in a campaign. We urge you to watch the video by Congressman David Schweikert.

Independents apparently broke heavily for Democrats late in the game. Usually, they are independent for a reason and break late for the challenger. It didn’t happen. Younger, unmarried women also voted heavily for Democrats.

Republicans consistently polled that they are more trusted on the economy. But since the economy did not seem to matter that edge was lost. Did the Republicans blow it because they too got bogged down in peripheral issues? It appears they did.  

Independents voted against Republicans because of the “taint of Trump”, so says the Wall Street Journal in a perceptive analysis of Arizona results. Republicans took Congressional seats 6-3 and took the legislature. But many identified with Trump lost narrowly. Those like Kimberly Lee, not identified with Trump, won handily.

If the Wall Street Journal is correct, that sort of makes our point. The public was turned off on Republicans despite the weak, inflationary-wracked economy. The economy was not paramount after all.

The result is that while the Republicans barely took the House, they won’t be able to do much but hold off additional bad decisions on the economy, and they certainly will not be able to mount a counterattack to reverse many bad decisions by the Democrats. Meanwhile, Biden will be free to use his executive power to wreak havoc. The courts may eventually correct some of that, but it takes too much time to occur to help a declining economy.

We think of the ever-ebullient Larry Kudlow, who advised us that Republicans would do well, and that “the calvary was coming”, to make the economy better.

But the cavalry got mauled badly just as they did at the Fetterman Massacre in 1866. Similarly, Republicans got massacred in Pennsylvania by a truly radical Democrat of the same name, who can barely speak a complete sentence. He will likely destroy the once vibrant energy sector that has employed so many Pennsylvanians. But then again, rural Pennsylvania went all Republican and the rich environmentalists around Philadelphia and the black vote carried the day.

You can’t say in this race, the Republicans ran a poor candidate, certainly compared to the Democrats. One was a brilliant doctor, and the other was brain-damaged. Say what you will about the Democrat Party, it was a stroke of genius to run Fetterman. He was just what the people wanted.

That leads to our concluding thoughts. If indeed people were not concerned enough about the economy, but other things, they are likely to get it “good and hard” as the sage of Baltimore suggested. This is as it should be. Unfortunately, all of us will pay for the mistake.

The reason goes back to Kudlow’s observation, but with a negative twist. The cavalry is not coming and the likelihood now of a serious recession looms.

To be sure, many of the about-to-be-mentioned factors were present before, and they would be difficult to deal with in any case, but now, there is really no chance of reversing the impact of bad Democrat policies. 

And, we would add, the economy has its own complex cycle, independent of politics. But the distortions of the Biden Administration (gunning the money supply 40%), chocking off energy production, and blowing out the deficit, touched off an inflationary burst that the Federal Reserve has to address. We have long felt an economy that had become addicted to cheap money would suffer withdrawal symptoms when the cheap money is withdrawn.

Here are some of the negative factors we currently see:

The increase in interest rates needed to fight inflation causes an immense increase in borrowing costs for our bloated government debt.

Borrowing costs will soon be the blob that eats whatever is left in the 16% of the budget that is “discretionary”, that is the part our leaders actually vote on.

The yield curve is inverted, that is short-term interest rates are higher than long-term rates. This has been a reliable indicator of recession, regardless of politics.

Corporate earnings are now in a downtrend with 75% of the S&P companies announcing downgrades.

Inflation may have come off its peak, but the FED wisely has said one or two data points do not make a trend and that they will keep raising rates, which they should. The old maxim is the FED will keep raising “until something breaks.” We wonder if the crypto disasters we keep seeing are not the leading edge of a liquidity crisis in an over-leveraged economy.

It will be no fun when something big does indeed break. It will be scary.

The rate of change of the money supply is falling fast, and the velocity of money is contracting.

The combination of rising mortgage rates and the housing bubble is making home affordability a serious problem for future demand. According to Charlie Bilello, it now takes $107,000 in income to afford a median-priced home, which is up a whopping 45% in just the past 12 months. The American dream is getting crushed.

The Leading Economic Indicators have now been down for eight months in a row, more than long enough to establish a trend.

According to David Rosenberg, the consumer sentiment number kept by the University of Michigan averages 71 during recessions and hovers around 88 during expansions. The latest number is around 55, the lowest in about 70 years. The consumer is in trouble and consumer spending is 70% of the economy.

While anecdotal data, the fact that Amazon and FedEx are both laying people off, during the time of the year they normally hire temps because of Christmas shopping, suggests shipping demand is way off. If you are making stuff or buying stuff, it has to be shipped. If stuff is not being shipped it is for a good reason…the economy is contracting fast.

The same can be said for container prices which are falling sharply. This indicates a sharp slowdown in international trade.

Home prices have started to decline and homes are the main source of wealth for most of the population. They are highly leveraged contracts as we found out in the last housing crisis. People can walk away from their commitments in most states, sticking taxpayers with the bill.

Existing home sales have been down for nine months, off 28% from last year.

Federal debt has ballooned so much that interest payments will soon be equal to defense expenditures. When you have to borrow money to pay for interest and essentials, you are in real trouble. However, negative trends compound in a welfare state economy. Demands for more spending will soon be heard, while revenue to the government will decline. Deficits will go up even more. The deficit crisis, long ignored, will reach the critical stage.

However marginal the Republican win in the House, fiscal policy will be less stimulative and the Fed will keep monetary policy tight until the inflation fever breaks. The era of easy and cheap money is likely over, for at least a while.

A number of nations centered around the BRICS economy (Brazil, Russia, India, China, and South Africa) are toying with a new payment system that will not use US dollars. Without that demand, the dollar will have to be valued on its fundamentals, and those fundamentals are not that great.

The Green New Deal and ESG have starved capital investment in energy. New alternatives are not comparable and are being brought on too slowly. An energy crisis is likely to unfold in the next few years.

After throwing $80 billion at the Ukraine war, Biden is asking for another $37 billion. How much, how long, and to what end?

We could go on with another ten or so factoids, but hopefully, the point has been made. We are now more likely to have a serious recession and no political relief is likely.

Perhaps the silver lining in all of this is that as the economy gets worse, especially if unemployment starts to rise to a painful level, it successfully focuses the minds of voters. If this happens as is likely, in 2023 and 2024, peripheral issues will take second or third, or tenth place behind the economy.

If we are not in one already, a recession is likely sometime next year. If forced to guess, we would say by next spring.

If things turn as bad as we think they will, Democrats will not be able to dodge responsibility during the next election cycle.

History shows when the economy turns sour, those in power have to take the blame.

The dictum that it is “the economy stupid” will take center stage once again. But to get there, the American people will have to have their attention focused by getting a recession good and hard.

That is nothing we wish for, or voted for because it necessarily involves all of us regardless of party. But, voting has consequences.