As investors take a look at the state of the world and inventory a list of the problems that challenge the global economy, perhaps one that is not being considered revolves around political leadership. In France, President Nicolas Sarkozy is embroiled in a political scandal. Italian Prime Mininster Silvio Berlusconi continues to fiddle while Rome burns (figuratively speaking). In the United Kingdom, Prime Minster David Cameron is trying to ensure that he is sufficiently distanced from the News Corp. phone hacking scandal. For Japan, a revolving door of Prime Ministers continues to usher out one Prime Minister after another. In India, anger over corruption is beginning to taint its well respected Prime Minister Manmohan Singh.
For the United States, there is little in the way of scandal that is raising voter frustration. The “to do” list for the US starts with reigning in the federal budget deficit and begin to formulate a coherent policy to bring down the national debt. As well, US employment must be stimulated at the same time as budget cuts are made - a difficult task to say the least.
Even the Federal Reserve, recognizing that it is close to out of bullets, has implored the White House and Congress to come up with fiscal policy initiatives to stimulate the economy and reduce spending. It should be noted that up until now, the Federal Reserve has always been above partisan politics. But the political environment is such that even the Fed is feeling political pressure.
With a Fed low on ammunition, high unemployment, voter frustration and a divided political system, many are looking to the 2012 election as a catalyst to possibly shake up economic policy.
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This brings us to the chart included which shows real corporate profit growth and presidential re-election outcomes over the last century. Corporate profits are a barometer for the state of the economy. If corporate profits are falling, then things on Main Street to Wall Street are not usually going well. For most of 2010, corporate profits rose and the stock market continued its ascent from 2009 but the benefits on Main Street were not being seen to the same extent. But now, the stock market is showing anxiety to match that of the average voter.
As a result, weak or negative real corporate earnings growth in the last two years leading to a re-election bid has corresponded with a changing of the guard in the White House. The only true exception to this has been Theodore Roosevelt in the 1904 election who was "re-elected" after taking over the presidential reigns from McKinley despite overseeing negative real corporate earnings growth. Gerald Ford, oversaw negligible corporate earnings growth in the two years prior to his "re-election" bid against Jimmy Carter but also lost.
The Obama administration is no doubt aware of the importance of the economy. Perhaps bold and unexpected moves to stimulate the economy could emerge in attempts for the President to win a second election. Either way, continued deterioration of corporate earnings and corporate earnings estimates for 2011 and 2012, could forecast a change in the White House.
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