The Economic Perils Of The 'Do Nothing Congress' Strategy

Includes: GLD, SLV, SPY, TLT
by: Eric Parnell, CFA

This is not an article about political partisanship, for I can heap both praise and criticism on Democratic, Republican, Whig and Federalist administrations going back to the founding of our country. Instead, this is an article about leadership, or the lack thereof in Washington D.C. And this dearth of leadership in our time of ongoing crisis threatens to plunge the U.S. economy back into another deep recession and the stock market into sharp decline.

The next Presidential election is quickly approaching in early November. Given the persistent sluggishness of the economic recovery since the outbreak of the financial crisis several years ago, President Obama has embraced a "Do Nothing Congress" strategy. Successfully applied by President Truman during his notable comeback in the 1948 campaign, the strategy entails a focus on Republicans in Congress allegedly blocking the President's economic agenda so that the lack of a strong recovery would help propel a Republican back to the White House.

Unfortunately, this strategy is both misguided and ill timed for several reasons.

First, this is not 1948 where Americans get their information from a daily newspaper and occasional radio broadcast. This is 2012 where people through all different forms of media know every little nuanced detail about the day-to-day activities all across Washington D.C. Thus, voters are much better informed today even if by default.

Second, Mitt Romney is not Thomas Dewey. In the 1948 campaign, Dewey's undoing was that he initially enjoyed such a wide lead in the polls that he ran a hollow campaign that eventually succumbed to Truman's firebrand rhetoric. Mitt Romney is shaping up as a vastly different candidate in 2012, however. Sure Mr. Romney is not the most dynamic candidate and the Republican party ran through every other conceivable alternative before finally rallying behind the former Massachusetts governor, but he is experienced, solid and promises to be a formidable opponent to President Obama. Not only is he likely to be far more assertive than Mr. Dewey in 1948, but he is also already vocalizing and contrasting his various views on how he might address the current economic challenges differently than the current administration today.

Third, it is highly unlikely that President Obama will enjoy any meaningful economic tailwinds heading into the election. When President Truman reclaimed the White House in 1948, he had the benefit of an economy that had recovered from some mildly negative Real GDP growth quarters in 1947 and was generating several solid quarters of +6% annualized Real GDP growth heading into the fall campaign. For President Obama today, Real GDP growth remains anemic at less than +2% and is showing signs of fading once again as we head into the second half of 2012.

Lastly, and perhaps most significantly, the U.S. economy faces a potential flashpoint with the fiscal cliff looming at the end of the year. Basically, if no action is taken, roughly $100 billion in government spending cuts and $400 billion in tax increases is set to take effect at the start of 2013. This alone represents a potential -3.5% drag on U.S. GDP and would likely thrust the economy back into recession if its not there already by the end of the year. While this is an issue that will not culminate until after the November elections, it is one that is likely to capture the attention of voters as the deadline draws closer. And the obvious question is likely to increasingly arise along the way - "why are we waiting to take action on this potentially major issue?"

Clear and decisive leadership is critical in helping to guide the U.S. economy toward recovery. A sizable number of frustrated Americans are eager for someone to take the reins and finally set out a viable plan to lead us to recovery. And for many, they are looking to the President of the United States whether they voted for him or not to accomplish this task. So by assuming the "Do Nothing Congress" approach, President Obama is falling worryingly short in this regard.

The key to effective leadership is the ability to influence others to achieve a common goal. In this case, the objective is to guide the U.S. economy to a sustainable economic recovery. In regards to President Obama's leadership in this case, it is woefully insufficient to simply submit proposals to Congress that most in the know are well aware will not pass and then vocalize frustration that these proposals have been rejected. This is not leadership. Instead, it is posturing. And by complaining that the opposition is not supporting your ideas instead of returning to the table to negotiate, the problems fester unresolved.

Now it should be noted that Republicans have certainly been less than accommodating since they regained control of the House of Representatives in 2010. It should also be noted that unlike President Truman in 1948, President Obama still does enjoy a majority in the Senate. But even with that being said, if the Republican controlled House is truly standing in the way of programs that would otherwise help support a sustainable economic recovery, they should be exposed for doing so not by more rhetorical campaign speeches but instead by substantive action and compromise in the trenches. Once again, this is where effective leadership comes into effect.

One has to look no further than the comparable period of President Clinton's presidency from 1994 to 1996 to find a relevant contrast. Following the 1994 mid-term elections, President Clinton was facing a Republican Revolution led by a then younger and emboldened Speaker Newt Gingrich. The Republicans set to work with an ambitious agenda that included seeing President Clinton replaced in the White House following the 1996 election. But instead of posturing, President Clinton turned to leadership. He took the Republican Congress head on, engaged in compromise and negotiation, and in the end worked through these challenges to enact productive legislation with his opposition. Two years later along the way, President Clinton reclaimed the White House in a landslide victory. And in subsequent years, President Clinton along with the Republican Congress compromised on a number of achievements including welfare reform, lowering capital gains taxes and balancing the federal budget. And all of this occurred despite the fact that Congress impeached him along the way in 1998. It was certainly a highly contentious relationship, but also highly productive one due at least in part to effective leadership.

Of course, President Clinton had the luxury of serving in a very different economic time than President Obama. For Clinton held office during the later years of a secular U.S. economic expansion, while Obama has served during the worst financial crisis in nearly a century. But this fact highlights all the more the importance of why President Obama and the country would be best served by his abandoning his "Do Noting Congress" campaign approach, particularly if he wishes to stay in office past this year.

The U.S. economy faces obstacles that are mounting by the day. And it can ill afford to delay addressing these problems until after the November election. Decisive action is required today to begin addressing the problems that threaten to plunge the U.S. economy back into recession including the fiscal cliff at the end of the year. And the excuse that Congress will not accept the President's proposals is simply not a good enough reason for inaction.

The President's job is to lead, and this entails applying influence and finding compromise where it otherwise may appear unlikely. If the President offers truly substantive solutions and demonstrates the willingness to negotiate and compromise to get things done, the American public will take note. And if the Republican House is truly unwilling to negotiate and compromise in getting things done, once again the American public will take note. But by simply not acting at all and leaving the economy to fester including the resolution of the fiscal cliff until after the election, we are squandering precious time and risk a far worse outcome in the end than what we are experiencing today.

Of course, the longer we delay in addressing the risks overhanging the economy including the fiscal cliff at the end of the year, the more the strain on investment markets is likely to build. The stock market (NYSEARCA:SPY) is already struggling with the potential for crisis in Europe and signs of economic deceleration both here and abroad. Adding mounting uncertainty about the fate of the U.S. economy as the year progresses is likely to pressure the earnings outlook and compress valuation multiples even further, which implies a stock market that could head much further to the downside even with more monetary stimulus from the Federal Reserve along the way. This is why portfolio hedges such as Long-Term U.S. Treasuries (NYSEARCA:TLT), Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) remain an important part of a diversified investment strategy to help protect against these risks.

Time is drawing short for the U.S. economy. And the time for leadership is now, not after the November elections. Hopefully our President will not delay in finding compromise and taking action with Congress to begin addressing these problems before it is too late. Otherwise, he may be left with no other choice but to step aside for someone else to take a try at it starting next year.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Disclosure: I am long TLT, GLD, SLV.