Next Prez? It's The Economy.

Forget the polls, ignore the impeachment, if you really want to know who will win the Presidential Election: watch the Federal Reserve.

Forget the polls, ignore the impeachment if you really want to know who will win the Presidential Election: watch the Federal Reserve.

It's hard to remember a more hyper-partisan time, than right now. Here we are in the middle of what promises to be a particularly hard-fought campaign for the Presidency.

Each day the tracking polls measure the popularity of the various candidates. As the Democrats are still deciding who will be their candidate. And the incumbent, President Trump takes the steps that he feels will help him be re-elected.

While over-arching the campaign, the House of Representatives has impeached the President, and the Senate is now holding the trial. A trail that will determine whether he should be removed from office.

It really is a complex time, full of intrigue, and uncertainty.

However, there is one way to cut through all this. Using a simple criterion that has proven to be an excellent predictor of the election.

As James Carvell, then the campaign manager for Bill Clinton back in 1992, famously said: “It's the economy stupid.”And I think he's absolutely correct.

Ultimately it will be the economy that will determine this election. Now that may seem a little overstated, as, by most current measures, the economy seems to be humming along. With low unemployment, steady, but unspectacular growth in overall GDP, and corporate earnings, which although they're soft, still are above recession level.

So, if you read the press, you are assured that all is well.

But not so fast.

For those of you who carefully follow our Central Bank, you no doubt have seen some dramatic moves over the last years. Moves that indicate that all is not well with our economy.

The Fed began the year with a return to “normalization.” That is the move by the Fed to eliminate some of those draconian strategies that the Fed had used to fight the Great Financial Crisis of 2008.

After a decade of excessive stimulus, it was time for the Fed to put the economy back to where it was before the crisis: to return to normal.It was the right move.

Unfortunately, this new “normalization” turned out to be an incredibly ham-handed move. With the Fed attempting to go too far, too fast. Threatening to push the economy back to recession.

But, there was a second part to this dynamic, one that is often overlooked. Yes, the Fed was much to aggressive in its return to normal. But the second part is that the economy was just not strong enough to sustain the Fed's tightening.

In short, it was the first sign that our economy is much more fragile than those top-line numbers indicate.

Yes, we have low unemployment, sustained economic growth and all the rest but ONLY if the Fed is giving us a boost.

Without the Fed's help the economy does not seem to continue on its own.

We saw our second indication of the fragile Economy's began last September, when the ultra short term financing market began to run out of funds. There was a sudden run on the overnight repurchase market. The Banks were short on cash and needed to go to the Repo market to obtain financing.

At first, the price ofRepo's went through the roof, sky-rocketing due to the excess demand. In fact the demand became so great, that the New York Fed's trading desk had to step in to supply liquidity. Something that continues to this day.

Again, pundits were quick to question this  strategy by the Fed. But for the second time, the Fed was really being reactive. Trying to put out a fire. A fire which indicates additional fragility in our financial system.

And here's where we get back to the political.If the Federal Reserve continues to manage the economy through this fragile period, then the odds of Donald Trump being re-elected go way up.

The current economy with historically low unemployment, acceptable overall GDP Growth, and moderate growth in corporate earnings, I believe is enough to push Trump over the top.

However, should any of these “liquidity” issues arise, such as a major bank needing to be bailed out, or the REPO Desk unable to supply liquidity? Then I think all bets on the Election would be off.

When will we know how all this is going. The answer is right now, it is unfolding as we speak.

First corporate earnings are being announced daily. We will continue to look for any surprises here.

Then next Wednesday afternoon, the Fed will announce their latest interest rate decision. There should be no surprises here.

Then on Thursday morning will come the first reading for 2019's 4th quarter. This will be the first look we have at that quarter. The Street is looking for a growth of 2.1% the same as the quarter below. I think that any reading above the 2% growth level will be another step toward re-electing the President. However, if GDP drops below 2% that could be a real problem for his campaign.

So forget the polls, and ignore the impeachment: follow the advice of James Carvell, and see how the economy is doing.

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