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Why the market is totally wrong about the Fed!

The 2024 US election is only 11 months away. 

Biden is trailing Trump in the polls but history says he can win if the economy improves between now and the Election Day. 

What does history say about the performance of the US economy in the 4th year of a president's first term? 

What does history tells us about the calculus of the Fed Reserve in an election year? 

Who are the biggest hurdles in Biden’s quest to get the economy to hum next year? 

How will the stock market do in a highly consequential close presidential race?


 Democracies hold elections. Dictatorships hold sham elections.

 Yet, empirical evidence suggests that even in democracies power begets power. 

 The existence of incumbency advantage in democracies is well documented. 

 Yes, in most democracies the odds of holders of political offices winning their re-elections are better than 50/50.

Incumbency advantage is especially conspicuous in the United States. 

In the most recent general elections in 2022, Congressional incumbents had a 98% win rate (Chart 1)

Indeed, in 41 out of the 50 states, all congressional incumbents went on to beat their challengers. (Chart 1)

Of course, this was not because the incumbents were doing such amazing jobs. 

Before election day, approval rating for Congress was barely above 20%. (Chart 2)

 In case you are wondering, there is nothing special about the 2022 election. In the 2020 election cycle the win rate for congressional incumbents was 96%. 

 As much as incumbency advantage is an entrenched feature of American democracy, it is by no means unique to American democracy.

 For example, in Japan, the Liberal Democratic Party has been in power almost continuously since 1955. 

 In Sweden, the Social Democratic Party was in government with only two interruptions from 1982 to 2022. 

 What is the reason for the incumbency advantage? 

 There are many reasons

 For example, where and when people vote according to their party affiliation, they care less about the individuals they are voting for. They vote tribally.

 Incumbents also enjoy greater name recognition.

 When voters struggle to choose between candidates, they may simply decide that the devil you know is better than the devil you don’t.  

 But in the end, money is often the decisive factor behind incumbency advantage

 In the US, incumbents have much better access to campaign financing. 

 For example, in the 2022 senate race, incumbents raised on average 30 million dollars per person, versus just 2 million dollars for the challengers. (Chart 3)

 That is more than 10 times the amount (Chart 3)

 It is therefore not too surprising that the US is ranked as a flawed democracy as opposed to a full democracy in the widely followed Economist Democracy Index. (Chart 4)


  How important is the incumbency advantage in the US presidential election? 

 Since 1951, when the constitutional amendment was ratified to limit presidents to two terms, incumbents have had a nice run. 

 Truman, Eisenhower, Nixon, Reagan, Clinton, Bush W, Obama were all two terms presidents.  

 The only ones who failed to win their re-elections were Carter, Bush Senior, and Trump.

 And it is not a mystery why they lost their re-elections. 

 In the case of these 3 one-term presidents, the US economy suffered a recession in their first term. 

 But it is not just the recession but its timing 

 Recession on its own is not a problem. 

 For example, the US economy went into a recession in the first year of Reagan’s first term. 

 The same happened to Bush Junior. 

 The US economy was still in a recession when Obama was sworn in.  

 Recessions early in the presidency don’t matter. 

 What matters is when the recession happens late in the first term. 

 As you can see on this chart, in each of the 3 cases in which the incumbent failed to win re-election, the unemployment rate climbed in the fourth year of the presidency. (Chart 5)

 It didn’t matter that the recessions that killed their chances for a consecutive win were, strictly speaking, not their fault 

 Unless you think Carter could have stopped the 1979 Iranian revolution that unleashed a global oil price shock.  Or that there was something Bush could have done to prevent Iraq from invading Kuwait resulting in another oil price shock in 1990. 

 Not to mention Trump and COVID.

 But American voters don’t care about excuses. 

 They only care if they have a job, if their paychecks can get them through the month, if they are able to keep up with the Joneses. 

 It is not that complicated. 

 We should assume this will be no different in the 2024 election. 


 Behind the Political business cycle theory is the idea that governments will pursue expansionary fiscal and monetary policies ahead of elections to help them hold onto power. 

 What is the evidence for the existence of a political business cycle in the US? 

 On this chart I have plotted the median annual real GDP growth rate in the first, second, third and fourth year of American presidencies from 1960 onward.   (Chart 6)

 What you see is that growth tends to:

- slow slightly from the first year to the second year

- maintain the same pace in the third year as in the second

- accelerate rapidly in the fourth year

- slow sharply in the first year of the next presidential term (Chart 6)

 This pattern is exactly what we would expect from the political business cycle theory

 The one thing we can be absolutely sure of is that Biden will do everything in his power to get the economy revving up in 2024. 

 The only question is whether he will be successful. 

  There are three things Biden can do to pump prime the economy in 2024. 

 One, persuade the Federal Reserve to cut interest rates. 

 The good news for Biden is that the Fed has penciled in three 25bps rate cuts in 2024. (Chart 7)

 The bad news is that with the market having priced in 6 cuts, 3 rate cuts won’t move the needle. (Chart 8)

 In fact, given the market has moved way ahead of the Fed, if the Fed only cuts 3 times next year financial conditions will be tighter than when they are right now. 

 There is another important consideration that we need to bear in mind. 

 The Fed loathes changing interest rates during election years. 

 This is because the Fed takes its independence very seriously (as it should) and it cannot afford to be seen as taking sides in elections.

 I have calculated the average changes in the Fed Funds rates in the first, second, third, and fourth year of presidencies since 1960. 

 What you can see is that in the fourth year the changes are smaller than in the other 3 years. (Chart 9)

 This is no coincidence. 

 If history says that the Fed likes to stay far away from election year politics, this will likely be 10 times more true in the 2024 election year

 given that it will be not only the most contentious but the most important election in decades. 

 Believe me, regardless who wins the election, Jerome Powell does not want anyone to think that he and the Fed cast the decisive vote.

 Indeed, I would not be too surprised if the Fed’s decision at this week’s FOMC meeting to clearly signal 3 cuts next year is because this gives them a perfect cover when they cut. (Chart 10)

 If I am right, this would mean that growth and inflation would have to slow a lot more than the Fed is currently forecasting for the Fed to cut more than 3 times next year

 The bond market, in its current euphoric state, does not seem to appreciate this subtle but important constraint. 

 But Biden and his economic team understand this very well

 They know that they cannot count on Jerome Powell to help Biden get re-elected. 

 They know that if they want the Fed to cut more than 3 times next year, they will have to give Jerome Powell not just a good but a great excuse.

 This brings us to the second thing Biden can do to boost his chances for re-election. 


 If the Fed is to be persuaded to cut more than 3 times next year, either growth or inflation or both have to come in lower than they expect

 What can Biden do to bring down inflation faster without hurting growth? 

 There is one thing he can do.

 Drive down oil price. 

 And this is what he has been doing for the past year. 

 Under Biden, US strategic oil reserve has fallen to a 40-year low. (Chart 11)

 Despite the sharp decline in oil price lately, the energy department is taking its time to replenish the reserve. (Chart 12)

 We should assume that the energy department will continue to drag its feet in 2024. 

 Under Biden, Iran’s oil exports have been surging. 

 However, renewed conflict in the Middle East is forcing him to start enforcing existing oil sanctions against Iran again. (Chart 13)

 This could be why Iranian oil shipments fell in November. (Chart 14)

 Biden recently agreed to ease oil sanctions on Venezuela, another authoritarian regime. (Chart 15)

 But if the president of Venezuela were to carry out his new threat to annex the oil rich region of Guyana, it would almost certainly force Biden to backtrack. (Chart 16)

 Biden could try to undermine the OPEC+ unity but the Hamas attack on Israel on Oct 7 killed his planned three-way deal with Saudi Arabia and Israel. 

 What about US oil production? 

 It has increased by 1 million barrels per day this year. (Chart 17)

 Can Biden get the US oil majors behind him to boost production further in 2024? 

 We certainly cannot rule out this possibility, especially given that the ongoing consolidation in the US shale industry involving US majors requires his blessing.  (Chart 18)

 But the oil majors might also decide that Trump, under whose first term the US oil industry witnessed a huge boon, is a more reliable ally. 

 I don’t think Biden can seriously compromise his green credentials in the election year without sacrificing votes from his progressive base. 

 Recent polls suggest that inflation remains a major concern for American voters. (Chart 19)

 Biden’s economic team knows that lower oil price would lower inflation and would make the Fed more willing to cut rates. 

 Given how important this election is for Biden and for the Democrats, I am assuming that they will leave no stone unturned in their quest to bring down oil price further. 

 We should not underestimate their determination but, as I argued in another video, neither should we underestimate the willingness of Putin, Mohammed Bin Salman, and the rest of the OPEC + to do whatever it takes to protect oil prices

  This brings us to the third and last thing Biden can do to boost the economy. 

 He can persuade congress to loosen fiscal policy further. 

 He knows from the first three years of his presidency that fiscal easing is the most reliable way to juice the economy. 

 Sure, US budget deficit in the fiscal year that just ended hit $2 trillion. (Chart 20)

 Sure, Moody’s, the last major rating agency that still has a AAA rating on US credit rating, has just downgraded its rating outlook. (Chart 21)

 But these are not serious impediments on their own.

 Not if you think that a Trump victory will be the end of American democracy, even the end of America as so many Democrats are now openly predicting. (Chart 22)

 The bigger impediment is the fact that Democrats don’t control the House of Representatives. 

 But even this will not stop Biden from trying. 

 Everyone has a price. Everyone can be bought when the price is right. 

 For example, Biden is said to be considering to offer Republicans a win on border security reforms in exchange for $61 billion for Ukraine.  (Chart 23)

 There are reports that the Democrats and the Republicans are closing in on a deal to resurrect the expired child tax credit (a priority for the Democrats) and reinstating the full deductibility of research and development investments (a priority for the Republicans). (Chart 24)

 If they agree on the deal, it would represent a $100bn stimulus for the economy. 

 There are many Republicans in Congress, especially in the Senate, who don’t want to see Trump return. 

 Biden will try to exploit the rift within the Republican party to get more stimulus for the economy. 

 But he will have to get through Mike Johnson, the new speaker, first

 Johnson’s challenge will be to keep his party united behind him in 2024. 

 We won’t know until January when the current continuing resolution expires whether Johnson will rise to the challenge.  

 I don’t know if  Johnson will be successful.  However, given he is a supporter of Trump, I am going to  assume that he will not make it easy for Biden. 

  The 2024 US election is the most important election of our life time.  There are many known unknowns that I don’t care to speculate on.

 These are the known knowns.  Biden is trailing Trump in the polls right now (Chart 26)

 If the election is held today, Trump has a good chance winning

 However, if the US economy were to improve between now and the election, Biden stands a good chance to get re-elected.  History says that we should not bet against the US economy in the fourth year of a president’s first term  But history also says that Biden will not be able to count on the Fed to help his re-election

 The biggest hurdles that Biden will face are Putin, MBS and Mike Johnson.  These men will not make it easy for him.  Biden’s odds are not better than 50/50.  The stock market doesn’t like 50/50.  Regardless how the economy does next year, a highly consequential close races is almost a guarantee for a sub-standard if not a poor year for the stock market. 

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Based on this video, you seem to believe the one person (Biden) is sufficient to make a major change/ changes to important factors such as price of oil, Fed interest rates, border security, etc. That is not the way our government works. One President does not an economy make ! Also, the upcoming election is NOT guaranteed to be the most important in our lifetimes. What is most important is how a President responds to existing and -as yet to be - challenges.😊

Replying to

Robert, when I say Biden, obviously I mean Biden, his team, his party machine. As much as I think Biden has been a terrible president, I have to admit that I am very impressed by the coordination across his various teams and the party machine to get him re-elected. The GOP is never so organized.


Dear David,

Do we have script for the video?



Replying to

Transcript added


Great video, David. Thank you!

Replying to

Thanks Brian


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