During their second term, Presidents become obsessed with “legacy.” One of the yardsticks to measure their success is the stock market. Many people can relate to it. Retirement depends on it. It’s mentioned even on NPR several times a day. Outside of a few shorts, everyone wants it to go up. But President Obama must now be biting his fingernails down to the quick.
The stock market bragging started with President Clinton. In January 1993, while he was unpacking boxes in the White House, the S&P 500 stock market index was at 437. It then zigzagged up until it breached 1,500 in March 2000, a 243% gain. Those were the 500 biggest, most lethargic companies. Nimbler ones bursting with creativity, the tech companies on the NASDAQ, multiplied in value, some of them on a monthly basis.
Many of these gains became taxable events. The wealth effect bamboozled people into borrowing against the fruits of their stock-market wisdom. Some became day-traders. And they all spent some of this money, and it cranked up local economies. Sales-tax revenues jumped. Companies like Cisco used their inflated stocks as homemade currency to acquire other companies, sometimes paying billions for tiny startups. Unemployment dropped below 5%. Income-tax revenues soared. And suddenly there was a mirage on the horizon: a federal budget “surplus.”
Then it crashed. When President Bush was inaugurated in January 2001, the NASDAQ was evaporating, and the S&P was down to 1,342. But for Clinton, it was still up over 200%. Part of his legacy that – unlike the Lewinsky jokes – he never tired of bragging about.
Bush rode the S&P down to 800. Then the recovery started – the first “jobless” one. Wall Street was goosed by the Fed’s easy money, and housing was performing miracles. While waiting for a flight in late 2004, I was sitting next to a chick who was giving instructions on her cell phone to flip the house she’d bought months earlier. She had a day job with a nasty boss who’d dock her pay if she left early to meet her broker…. The housing bubble had just been declared.
Stocks marched upward. “Merger Monday” became part of the calendar. And in early October 2007, when Bush was already working on a rough draft of his legacy, the S&P set a new record, oblivious to the hissing from the housing bubble and the stench around banks. Then on November 7, Cisco CEO John Chambers, during the earnings call, said that growth in the US would be “very lumpy.”
Markets went south. The rough draft of Bush’s legacy went up in smoke. By the time he handed the scepter to President Obama, the S&P was at 831. The government that had for the briefest moment seen the mirage of a surplus at the beginning of his term was running a deficit of over $1 trillion. During Bush’s time in office, the S&P had plunged 38%. A catastrophic legacy.
If the Fed had printed a few trillion in 2007 and 2008 to delay the blowup and drive the S&P to 2,500 or something, Bush would be bragging to this day in a Clintonesque manner about how his economic policies and his two wars had made Americans better off. He would have handed President Obama the bubble to let it blow up in his face.
Instead, on March 2, 2009, less than two months after Obama had become President, the S&P bottomed out. The Fed had been handing trillions to Wall Street to re-inflate asset prices and bail out the banks. Obama had picked the bottom with near impeccable timing. His hallmark. He won the Nobel Peace Prize before he started the surge in Afghanistan.
Now the S&P is once again setting records on a near daily basis. The Federal Government is raking in tax revenues from income and capital gains. It had the largest April surplus since 2008. Even California is stepping away from the brink. Everybody loves a good asset bubble. Particularly politicians. It dissolves tough budget choices and gets them reelected. Now asset bubbles are everywhere. They’ve reached junk bonds, farmland, housing…. Even members of the Fed are pointing them out. And this wonderful stock market of ours, with margin debt at a near record, no longer knows any limits – though corporate revenues have been lousy and employment has barely kept up with population growth.
Obama has nearly four years left. An eternity for financial markets. He must persuade the Fed to keep printing or else he might get Bush-ed. He has already maneuvered devoted money-printer Vice Chair Janet Yellen into position to replace Chairman Bernanke. But Friday, something happened that should cause Obama to bite his fingernails to the quick: Bernanke issued a warning at a banking conference in Chicago.
“In light of the current low interest-rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” he said in his bland manner.
He, who’d so far pretended to be oblivious to any bubbles, suddenly admitted their existence. His focus would be on “monitoring” – a word he used 28 times. But eventually, “monitoring” might turn into unplugging the money printer. And then the air will hiss out of these bubbles once again – not at all what Obama needs for his legacy. And it might just ruin his aura of impeccable timing.