MACRO: TRADING IN A RANGE;PRESIDENT OBAMA'S....

This insight was published on July 21, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.

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TRADING IN A RANGE . . . PRESIDENT OBAMA'S APPROVAL RATING

We’ve outlined the Rasmussen Presidential Approval Index going back 18-months below and the interepretation is quite clear.  Since the start of the year, President Obama’s approval has been mired between -10 and -20 on this index (a comparison of Strongly Approve versus Strongly Disapprove), which indicates that between 10 and 20% more Strongly Dissapprove of the job President Obama is doing.  At this point, it seems very unlikely that this range bound negative approval rating will change much heading into the midterms this Fall.  This will not help the Democrats in defending their majority in both houses.

  • Battle for the House – Currently the Democrats hold 255 seats, the Republicans hold 178 seats, and there are two vacancies.  If the midterms were held today, according to a Real Clear Politics poll aggregate, the Democrats would win 202, the Republicans would win 202, and 31 would be toss ups.  In effect, there is a jump ball for the house, which is huge shift from 2008.
  • Battle for the Senate – Currently the Democrats hold 59 seats and the Republicans hold 41 seats.  According to a Real Clear Politics poll aggregate, if the election were held today the Democrats would have 48 seats and the Republicans would have 42 seats, with 10 seats being a toss up.  Since only 1/3 of the Senate is up for re-election very two years, this is actually a meaningful shift and once again suggests the potenital for change in power.

While the potential shift in Congress has been widely bandied about, what is more interesting is the threat to President Obama in 2012.  According to a poll out from Quinnipiac University today, if the 2012 Presidential election were held today 36% of those polled would vote for Obama, 39% would vote for a generic Republican candidate, and the remainder are either undecided or it would depend on the candidate.
 
In aggregate, the point, which is probably somewhat obvious, is that the Democrats are currently in a world of potential electoral hurt.
 
In another poll by Fox News (and we do get that Fox News may have some biases), the key issues that Republicans are seen to have an advantage with are outlined below.  According to the poll:
 
“By double-digit margins, Republicans are seen as the party that would do a better job on terrorism (+16 points), the size of government (+16 points), the federal deficit (+15 points) and immigration (+13 points).”
 
The implication of this poll, and others that mirror it, are that the Democrats, and President Obama specifically, may try to overcompensate to make up ground in the areas in which they are being perceived poorly.  From our perspective, one key area is likely to be American Austerity. As the drum to cut the budget and narrow the deficit beats louder, the more likely it is that the Democrats shift their stance in attempt to regain approval in these areas.  Politics and the need to get re-elected will ultimately trump the strict adherence to Krugman orthodoxy.
 
While not technically a politician, Chairman Bernanke sounded the American Asuterity horn today when he introduced the idea of beginning to reduce the balance sheet of the Federal Reserve, which is certainly a slight change of tone, especially versus expectations of further quantitative easing.  In our view, this is likely a precursor to a more gradual political shift from the Democrats towards supporting broad based spending cuts and deficit reductions.
 
The short term implications of this change in policy would ultimately be a potential for slower economic growth in the short term and it is increasingly looking like the Democrats will need to dramatically shift sentiment in the coming months to retain political control.  A hail mary  pass of American Austerity policy could well be the catalyst.  Certainly though, President Obama needs to do something to break out of his range and help his party’s fortunes in the upcoming midterms.

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Daryl G. Jones
Managing Director