Editor's note: The following is an excerpt from The Bear Traps Report on the upcoming U.S. presidential election. The problem is the data is starting to tell a different story, as it usually does following a two-term president. For over 110 years, a recession within 12 months, following a two-term presidency, has always occurred. The recent GDP data does suggest we are in late-cycle territory as in the last three months the U.S. has averaged only a meager 1 percent GDP growth. Source: The Bear Traps Report This chart documents how the market acts during times of presidential elections following two-term presidents. As we stressed late last year, there's a powerful historical financial precedent supporting higher market volatility in Q3 of a two-term election year. The stats regarding the correlation of market and economic weakness during, or following, the election after a two-term president, are almost absolute. The stats do not say "three out of five" or "seven out of ten," this phenomena happens EVERY TIME. However, our current paradigm is not reflective of this historical reality. Source: The Bear Traps Report The S & P 500 is at all-time highs despite our aforementioned fears. Central banks and a rush to yield has led investors to ignore prevailing fundamentals; this trend as we see it is unsustainable. More from The Bear Traps Report : Inside Q2 GDP and Earnings; The Good, the Bad and the Ugly Here is what the Fed is really dealing with, the economy is stagnating and the very thing the Fed has been trying to encourage with their extraordinary accommodative monetary policy is proving to be less and less effective. Source: The Bear Traps Report The steroids are wearing off. As we see in the chart above, we are now in a period where debt gets you a fraction of the growth it used too. Another way of saying this is that for the U.S. to see growth materialize the economy needs more debt then it used to. The problem is debt is growing too quickly relative to growth. When growth is low, like it is now, and debt is growing, you get a double whammy effect as an economy that is extremely levered needs growth to offset or lower its debt pile. As we see above, this is what has happened, even though deficits have been shrinking debt/GDP is still expanding rapidly because of the lackluster growth. Debt has and will continue to weigh on the system, it is estimated that interest payments on government debt is expected to grow by 275 percent over the next decade and is the fastest growing part of the federal budget. For more independent commentary and analysis, visit thebeartrapsreport.com
