November Surprises?

While pundits like Dick Morris are wary of an "October surprise," voters and investors should be aware of three possible scenarios in November. One involves market volatility, one a political party civil war, and the other deals with civil unrest. First, let me provide a little back story about the first possible surprise.

It's been strangely calm in financial markets coming up to the election. Crude oil, gasoline and precious metals have all gone down... the Dow has stayed above 13,000... and it's been very quiet on the European financial front. This hasn't been because of any change in economic fundamentals. Many European governments and banks are still over-leveraged, and still need to be bailed out (again). German Finance Minister Wolfgang Schuable warns that the worst economic events are yet to come with the Euro crisis. 

Ditto for the United States, with an official national debt of over $16 trillion - plus unfunded liabilities of anywhere from $50 to over $200 trillion.

It's not a matter of if the global financial system collapses, but when. The laws of mathematics are as solid as the law of gravity. Doesn't matter if you believe in it or not, it still works every time. Printing money, borrowing and spending can solve the problem in the short-term, but it's like trying to keep a beach ball below the water - inevitably, it'll pop back up again.

That's what I see when the election is over, and the short-term financial "patches" don't (or can't) work anymore.

Here's November Surprise #1: Increased volatility in world stock and commodity markets.

If Romney gets elected, the US stock market will probably go up in the short-term. But that still doesn't change the ugly fundamentals a Romney Administration will deal with the next four years. No matter who gets elected President, it will be tough financial and political sledding. Democrats will want to maintain the welfare state, Republicans the warfare state.

The President and Congress know that any real cuts in federal spending will cause short-term economic pain, and political hari-kari. Voters will be angry because their federal ox has been gored, and they'll be open to attacks that he or she didn't "care" because they cut spending and programs.

We'll probably see Washington continue to "kick the can" down the road as far as possible, until we hit a currency or cash flow "crisis wall" that will force Congress and the President to make these tough decisions.

I believe that European banks and governments have been kept quiet this election season, because they've gotten financial assistance from the IMF, Federal Reserve and/or other institutions to stay solvent. The day of financial reckoning is coming closer, and the massive amount of debt will have to be repaid or defaulted upon.

This debt and derivatives de-leveraging will result in much higher volatility in world financial markets.

However, if Obama wins re-election, this will lead to November Surprise #2:

A civil war within the Republican party.

It's no secret the Establishment never really liked Ron Paul or his libertarian supporters. Reports of vote rigging in Iowa, Maine and other states - not to mention the fiasco at the national convention in Tampa - left a lot of folks unhappy with the formerly Grand Old Party.

If the Republican nominee can't beat a President with the worst economic performance since Jimmy Carter, that would be pathetic. Limited-government and 'small L' libertarians will escalate their political uprising against party leadership.

And if you thought the natives were restless before, just wait if the Establishment's choice for President loses again.

This will be the beginning of the end for the Republican Party. Even a Romney victory will only delay the inevitable. I don't believe that a big-government, Rockefeller Republican from Massachusetts will be serious about limiting the size, scope or spending at the federal level. Once enough Republicans wake up to the fact that he's doing the same thing as Bush and Obama did, the political jig will be up.

For the last few years, the GOP has been a loosely bound coalition of imperialistic war hawks, social conservatives and libertarians. While there's some overlap between these factions, many folks in each group tolerate each other only for political convenience. Under the surface, there's real animosity between the limited-government faction and the rest of the party.

Ron Paul Republicans played nice because they wanted the Congressman to get nominated, and now the Establishment is pleading with the Ron Paul folks to support Romney. If the Establishment thinks that Ron Paul supporters will come back and lick their political boots, they've got another thing coming.

While older Republicans look down upon younger, more liberty-minded activists, they do so at their own risk. The Establishment needs limited-government and libertarian voters to maintain power. Libertarian voters haven't gotten any support from the Establishment, so why should they help out or stick around? When the GOP eventually breaks up, social conservatives will probably migrate to the Constitution Party... limited-government activists to the Libertarian Party... anarcho-capitalists and frustrated activists will probably re-register Unaffiliated - or drop out of politics altogether.
 
However, if Romney does manage to get elected (as I think he will, by a small margin), that could lead to November Surprise #3:

Civil unrest in poor, urban areas around the country. Although there's little difference between Romney and Obama, the perception is that Romney will cut federal spending and programs. People who are dependent on those entitlements will be angry because they may lose that support, and the country's first black President has been defeated.

The U.S. is more polarized and divided than any time in history, with maybe the exception of the Civil War. Americans are frustrated because of a stagnant economy and tight job market. They're worried about their futures because most of them don't understand the economic causes (or solutions) to America's problems.

Unfortunately, a lot of Americans - both Republican and Democrat - have been conditioned to believe that elected officials have magical powers to overcome laws of economics, mathematics and finance. Some "true believers" buy into their candidate's rhetoric, some voters will vote for their party's candidate no matter what, and some citizens just want someone to believe in.

They understand very little about what causes booms and busts, and what it takes for a country to make its way back from an economic recession or depression. Too many Americans have put their trust in charming personalities, instead of sound financial principles.

I'll add a fourth November Surprise: Americans of all political stripes will be disappointed with President Romney, and a still-sluggish economy between 2014 and 2016. 

I know this may sound like heresy to loyal Republicans. However, it will take several years - and maybe a decade or more - before the financial excesses get cleared out of the financial system, and we see true, sustainable economic growth again. It doesn't matter who gets elected to the White House, this will have to happen... or else the US stays mired in a longer-term recession/depression for at least 10 years.

Fiscal conservatives will probably be disappointed, unless President Romney gets "fiscal religion" and makes the tough budget choices in Washington. Based on past history, I'm not optimistic that will happen.

While this isn't a complete list, these are a few things to watch for. As the Chinese blessing (or curse) says: "May you live in interesting times." That's the best description I have for our world in October 2012. I hope that you and your family are prepared today for the interesting times to come.

Will The Economy Improve If Romney Gets Elected?

That's the implied promise from the Romney campaign (and supporters) - or at least the hope - if the Mittster gets elected on November 6. However... hope can be a dangerous thing. Just look back four years, as Obama promised Americans "Hope and Change" if he was elected.

He got the "change" part right - federal debt, deficits and unemployment all changed for the worse. Ditto for individual liberties and freedoms. And there's no doubt that this administration is one of (if not the most) power-hungry and corrupt in American history. However... what is America being offered as the alternative?

A big-government, Rockefeller Republican who seems to be in almost perfect agreement with President Obama on a majority of issues - including the economic ones. He was in favor of TARP, the President's stimulus package... thinks Ben Bernanke is doing a great job as Fed Chairman... and doesn't think we should cut that much in defense or other spending.

If this is the case, then I don't think we have much "hope" of a better economy if Romney is elected. The problem with our economy is too much borrowing, spending and money creation by the Fed. The solution (albeit a painful one) will be to balance the budget as quickly as possible... stop expanding the money supply... and stop creating excess credit.

The 1000-pound elephant in the room that neither party wants to acknowledge is this: We can't continue borrowing and spending in excess like the "good old days" of decades past.

There will be short-term economic pain before we can see honest and sustainable economic growth again. Even if Romney gets elected and stays true (as much as a flip-flopper from Massachsetts can) to his principles of the past, I don't believe a Romney administration will make the tough economic choices - until we hit one or more "crisis walls" in America.

Does a 2nd Obama term concern me? Absolutely. Especially when it comes to individual liberties and freedoms - not to mention the economy. However... I'm not sold that the Republican alternative will be much better.

Watch what Alan Keyes says in just four minutes about Obama and Mitt Romney. He acknowledges the danger of Obama... but also of the possibility of Romney being elected, and implementing the very same policies as Obama - but getting a free pass from conservative Republicans because he's "our guy."

Or read Chuck Baldwin's column on Insanity - lot of good food for thought as well.

And to all the Romney supporters out there: Yes, for the 4,373,672 nd time - I know that Obama is a Socialist/Marxist and his Administration has been a disaster. However, I'm not sold that Mitt Romney is a true "limited-government" alternative. I'm not asking for an ideological purity test or the "perfect" candidate. I realize that in the world of politics, compromises have to be made and you won't get everything you want.

Having said that, the GOP Establishment didn't listen to the limited-government grass roots at all... and instead of a nominee that believes in less government, we got the corporatist, Rockefeller nominee - whether the grass roots liked it or not. It was the same story in 2008 with John McCain, even though the Republican nominee had a snowball's chance in hell of winning right after a real estate and stock market crash.

To answer the question I posed in my title: No, I don't believe the US economy will significantly improve if Romney is elected.

Based upon the massive amount of debt and money supply - and if our leaders do the right thing and balance the federal budget (which is highly unlikely) - it would still be at least several years in a best-case scenario before we would see a healthier economy.

Bureaucrats and politicians have promoted this myth that the Fed and government can "manage" the economy like a mechanic manages a car. Pull this lever... push that button... jigger that switch, and voila! These adjustments will have Ol' Betsy running as good as new. Unfortunately, economies are more like living organisms - not machines.

You can't keep giving them big doses of economic steroids without consequences. It's great in the short-term, but there are major longer-term "side effects." Namely - devaluation of your nation's currency, with a loss of purchasing power and wealth for its citizens. It's impossible to always have economic growth in any country or economy - no matter how "exceptional" it's been sold to be (i.e., America).

The laws of economics and finance still apply to the good ol' US of A. The consequences of decades of bad economic policies are showing up - and will continue to show up - in the economy, regardless of who is elected President on November 6.

The Growth Myth of Economic Recovery

Lately, it seems like the message du jour from mainstream media and talk radio hosts, is that the solution to our economic problems is being able to "grow" our way to recovery. That sounds nice on the surface, but I don't think it's feasible looking at the gargantuan amount of debt in America in the public and private sectors.

Our "official" national debt has passed $16 trillion and rising. When you factor in unfunded liabilities, estimates range from over $50 trillion, up to Lawrence Kotlikoff's latest estimate of $222 trillion. Even in more "normal" economic circumstances - with a lot less public and private debt in the system - we'd be hard-pressed to achieve this lofty-sounding goal.

With a GDP of around $14 trillion, even if you took every penny of economic activity and applied it to these liabilities, it would still take almost 16 years to retire this debt. When you do the math, there's no easy economic way out.

Neither Romney or Obama have plans that include the honest-to-Pete spending cuts and tough choices that will need to be made sooner, instead of later. Before we can see a true economic recovery in the US and Europe, this 900-pound gorilla in the room (known as DEBT) will have to be dealt with. The majority of it will probably be defaulted on instead of repaid - especially national sovereign, state and municipal debt.

I don't hold out a lot of hope that either party will "get religion" and make the tough choices before we have another crisis on our hands like we had in 2008. Frankly, I don't see much difference between Socialist Party (D) and Socialist Party (R). The Rs have better limited government rhetoric, but haven't done anything significant to fix the budget deficit and debt problems.

I have a lot of friends who are "true believers" that if elected, Romney and Ryan will (really!) reduce the size of Fedzilla, cut spending and bring us closer to a balanced budget. Unfortunately, I don't share their optimism.

I think another economic crash is coming, and the best thing to do is to brace for impact. Forget about waving signs, making multiple political Facebook posts, or trying to argue your point about why your candidate is best. Our political system is broken, and it won't be fixed working within the rigged political game.

Corporations, lobbyists and special interests rule DC with an iron fist, and to a lessor extent at the state level. I still hold out some hope for change at the local level, but its also difficult to make positive change in large metropolitan cities.

I think the best thing most Americans can do is focus on their job or business, and prepare friends and family for the next crash to come. I don't paint a very rosy picture of the future, but I think it's a realistic one. Hope for the best, and plan for the worst. And for the sake of you and your family, I hope that you'll do the same.