Since the writing of this article in early July for our
Investment Strategy Outlook newsletter, the global
financial business has utterly changed. The candidates have debated
twice and survived and we are now in increased U.S. sovereign risk
with Russia/Venezuela/Georgia being factored into the overall
equation. Senators McCain and Obama had a minor, but uselessly
vocal, part in the fiscal rescue package. Now both are scrutinized
even more about their financial strategies and ideas. And with this
evolving financial landscape comes a new gift of sorts - a
screaming USD in the face of one of the great flights to safety in
modern history.
With that backdrop, I will review my previous analysis about each
candidate's domestic fiscal agenda and refocus the conclusions now
that there are far fewer major banks in the U.S. (and no investment
banks any longer) with the EURUSD now trading at 1.3610 versus
1.5720 when this article was originally written. In addition, let's
remember that the U.S. government just took on a new contingent
debt obligation of an estimated $700 billion for the rescue, $240
billion for Fannie Mae and Freddie Mac and potential trillions for
saving the money markets too. The point is that each candidate's
desire to spend and/or cut taxes is simply too trivial and
unsophisticated an approach for the highly volatile and stunned
financial markets. Worse, each candidate's original plan did not
factor in the new debt as a result of TARP, or the rescue plan. Now
the Fed is buying commercial paper - in essence bailing out
corporations - and there is a possibility that the U.S. government
might be printing money, inviting a dangerous inflationary and
value destroying environment. Little has been offered by either
candidate for modulating their strategy based on this new
mathematics. It is only the flight to safety issue that is helping
the USD against the EUR, given Europe's more dire vulnerability to
the banking/credit crisis. The issue is whether either candidate's
fiscal and economic plan supports the stronger dollar, which both
publicly state they want.
Here are some key highlights of the existing candidate plans and
potential changes in positions:
| Hot-Button Issue | Obama Plans | McCain Plans | USD Impact | Issue |
| Taxes | Projected to raise taxes $627
billion over next 10 years | Projected to reduce taxes by
$596 billion over next 10 years | Marginally positive for McCain,
negative for Obama | Neither plan is credible
according to Tax Policy Center given latest financial crisis
(Source: Tax Policy Center) |
| Budget Deficit | Up by $3.5 trillion over next 10
years | Up by $5 trillion over next 10
years | Very negative regardless | McCain does not spell out well
how to recoup Treasury revenue other than cutting spending. Good
idea, but how to execute in a democratically controlled Congress.
Obama is perhaps more realistic about raising revenue receipts, but
will add fuel to the recession fire.(Source: Tax Policy Center |
| Energy | Same 10-year, $150 billion
package for alternative energy, except now he publicly speaks more
about accepting nuclear power plants as an option | No change to original ideas
which is to open all spigots with more emphasis on nuclear | Neutral | Issue: Given that crude oil has
dropped from a high of 147 to the mid-$80's, energy is not as hot
an issue as it was previously for energy consumptive businesses
(airlines, retail, food). |
| Real Estate | As part of rescue, continues to
want home mortgages to be bought and or restructured | Wants Treasury to buy impaired
individual mortgages | Extremely negative for both
ideas - over 16 percent of homeowners have negative equity in their
homes, up from 4 percent in 2006. For those who bought in last 5
years, the negative equity rate is 29 percent. Not good. | McCain's idea to buy mortgages
is populist, but incredibly dangerous. Freddie and Fannie were
unable to manage it, so why does he think Treasury can? Definitely
dollar negative on that idea. |
Senator McCain continues to advocate growing the economy out of its
problems mostly through a $1 trillion tax cut over his term. Like
other Republicans before him, he pledges the ill-fated statement:
"NO NEW TAXES". He now may have the advantage of being able to
extend the Bush tax cuts beyond 2010 without a great deal of debate
as the economy moves rapidly into recession. The USD would strongly
benefit should he fulfill his promise to reform and rein in
entitlement spending, as stated in the debate last week. However,
his credibility is on the line given that the rescue package which
he and Obama voted for (perhaps there really was no other choice)
included an array of pork barrel spending that was downright
unseemly. If he had no effect on that "Congress as usual" activity,
how does he do it as president?
Senator Obama stays steadfast in seeking a balanced budget through
a redistribution of wealth by enacting a series of tax
re-calibrations and now a $240 billion stimulus package. The tax
changes are aimed at corporations and the wealthiest two percent of
tax earners (those who earn over $600,000 will see a +$93,000
increase in their taxes). He would eliminate tax requirements for
the neediest in the U.S., such as seniors making less than $50,000,
along with a general promise not to increase the tax burden to
middle class citizens. Obama still seeks to cut spending, though
mostly through foreign policy measures of scaling back the Iraq war
commitment.
In short, the USD's future is always more dependent on investment
flows, the general state of the economy and interest rate
differentials. But we are in a brave new world that is fully
dependent on solving a global liquidity problem. Until that
concludes, the president will have a USD that is generally firmer,
due to the markets pricing in the global bailouts and excess
capital to shore up weak global banks.