Trader’s Narrative

In today’s highly charged political environment, apparently everything and anything is game for the machinations of partisan political hacks. Even the US dollar has been pulled into this. So much so that it is generally believed and accepted that the US dollar is kaput, done for, worthless. And that the blame resides on the shoulders of Obama and his young administration.

But what if we step back from the raging and weeping talking heads on TV and instead of opinions, we just look at the facts?

Here is a chart of the US dollar for the past quarter century:

Reagan’s presidency presided over a boom and bust in the dollar - with the bust being the winning side. Trickle down didn’t really work but the deficit ballooned as tax cuts to the wealthy reduced government revenues. In 1989, the Republicans continued control of the White House with H. W. Bush’s presidency. While his administration managed to avoid a similar feat, the US dollar fell to new lows during the first half of his term.

The US dollar regained 50% of its value during Clinton’s presidency. You could argue that it was due to the balanced budgets and the elimination of the federal deficit. Or that it was due to the increase in the tax burden on the wealthy. There was even talk of reducing the federal debt. All that ended with the advent of the W. Bush administration.

Budget deficits and the US debt ballooned due to massive spending increases as well as tax cuts for the wealthy. The result was another major decline in the US dollar. Almost at the end of Bush’s second term the US dollar fell to multi-decade lows but recovered slightly as the last days of his administration drew to a close.

And that brings us to the present day with President Obama. He inherited an economy which almost overnight went into free fall. While I don’t agree personally with the measures taken to buttress the US economy, it bears noting that the US dollar is still above its recent W. Bush low. Also, as a contrarian, it is difficult to ignore the incredibly bearish view on the dollar right now.

So talk of a US dollar crash is either prophetic (if it becomes true) or Chicken Little-ish (if it doesn’t). And while 25 years or so is too small to make judgements on which, the Republicans or Democrats, are the better custodians of the US dollar, it is reminiscent of the counter-intuitive result of looking at the returns of the stock market under different political banners.

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Unless you’ve been hiding under a rock, you know 2008 is an election year in the US. Will it be Hillary? Obama? Romney? Huckabee? When it comes to the stock market, it may not matter. Just the fact that this is an election year should put a smile on your face.

Like the 4 year cycle, an election year is a powerful cyclical pattern in the market:

So far this year, we’ve stumbled out of the gate. OK, more like tripped on our laces and landed square on our collective noses. But according to the election year seasonality, that’s in line with other years.

In fact, we could be in for more pain all the way to the summer. But as we get closer to November 4th, 2008, the market should pick up steam. Or rather, more accurately put, it has performed better in the past.

So even though we can’t count on the boost of the four year cycle this year, we have this to look forward to. It almost makes it worthwhile to sit through all those political TV ads, doesn’t it?