A “Hung” Senate with No Majority on November 4? Could Senate Independents Take Charge, Break Gridlock?

In Australia at present, a small group of Senators, elected not under the party banner of either Prime Minister Tony Abbott’s Liberal/National Coalition or the opposition Labor Party led in Parliament by Bill Shorten, but rather of the People United Party or PUP, led by mining and property magnate Clive Palmer.  PUP has effectively taken charge because they are in a position to deny the Government a working majority for its legislative proposals.  This handful of senators has been in a position since the last Australian election  to control the future direction of pubic policy and even the terms of debate on key issues including taxes, environment and immigration.  Could the same situation arise in the United States as a result of the upcoming Congressional elections on November 4? Maybe so.

We do not follow a parliamentary system of government like Australia, of course, but our situations are otherwise not dissimilar. In both countries, the lower house of the legislature has a clear and virtually impregnable majority. In Australia, it is the Party of the Prime Minister, however, and in the US, the Republican opposition to the Chief Executive. But the Senate  in each country is the key to enacting any legislation and is elected under different calendars of terms just as in the US, so it can swing from time to time away from the pattern of control in the lower house and the Executive branch. Moreover, in the US, it can exercise significant control on the Executive branch, especially in terms of appointment of key officials and judges.  It also operates under special rules where debate and appointments can be blocked by a minority of Senators and, for a limited time, even by one Senator.

Occasionally, US Senators have been elected under an “Independent” banner, but Senate rules and traditions push them to “caucus” or join forces in terms electing Senate leadership with the party that holds the majority since that party will control assignments relating to committees, office space and other perks that are important to their states and constituents. This situation has prevailed in the current Congress, where the two Independent Senators (Sanders of Vermont and King of Maine) have caucused with, rather than challenged, the Democratic Party, which holds an arithmetic governing majority sufficient on its own, to elect Senate leadership and control the terms of debate. But the numbers in terms of voting control is expected to certainly change for the Congress taking office in January 2015 with the November 4 election results.

Current polling and statistical analysis suggests at least a 60% likelihood that Republicans will swing to outright majority control of the new Senate. Some surveys suggest their chances are even better:  up to 95% according to a late-breaking Washington Post poll. Nate Silver, who famously calculated the 2012 Presidential election results with uncanny accuracy, puts the odds of Republican takeover, however, a bit lower than that: more like a range of 60% to 75%, but also raises the possibility that polling may be inadvertently statistically biased enough to make the outcome closer.  Moreover, there are signs that two new “Independent” candidacies in Kansas and South Dakota are making serious inroads into traditional Republican majorities in those two States – enough perhaps to shift the odds tighter. Is there a scenario in which a victory by these candidates  could result in a situation where neither Party winds up with even 50 votes in Senate (let alone a majority of 51) or even with a dead heat below 50 – such as 48?

If that were to occur, it would create a serious diversion from the usual situation where Senate Independents simply tag along with the “majority” Party in order to secure favorable committee assignments. The battle lines would start with neither side holding a majority and needing at least three of the four Independents to join up in the case of the Republicans (to get to 51) and two for the Democrats (since they can count on Vice president Biden’s votes to break a 50-50 leadership tie).  The questions then gets down to whether there is a credible pathway to a 48-48 balance of power resulting from the midterms and when will we know.

Apart from current Senate seats not involved in these midterms, and seats in elections that are universally considered “safe” for one party or the other, there are 16 seats in play in this year’s midterms, with varying odds for victory mostly tilted Republican, against the background of 43 safe or continuing Republican seats, 39 Democratic and two Independents, who are currently caucusing with Democrats.

Let’s assume for the moment that Democrats win all four seats in which they are generally polled to win fairly easily: Michigan (long-serving Senator Carl Levin’s retired seat); Minnesota (incumbent Al Franken); Oregon (incumbent Jeff Merkley in a state Obama won handily) and Virginia (where incumbent Mark Warner leads all polls albeit against a well-funded opponent). That would bring their total to 43.

Doing the same for  states where Republicans clearly leads in most polls, they would pick up West Virginia (which shifted strongly to the Republican side in recent years and where long-time incumbent Democrat Jay Rockefeller is retiring); Kentucky (with incumbent and current minority leader leader Mitch McConnell seeking a sixth term); Arkansas (where incumbent Democrat Mark Pryor, a former senator’s son, is widely considered to be in trouble in a “Clinton State” that is virulently anti-Obama); and Alaska (where Democrat incumbent Mark Begich is polling consistently behind his GOP challenger and needs a strong turnout in remote Eskimo villages to have any chance). Those four would give the Republicans a total of 47. The Montana race to replace outgoing Democrat Max Baucus is considered so far gone from the Democrats that the Congressional “Roll Call” analysis above already has it in the “safe” Republican base count of 43.

That leaves eight races left with the count at 47 Republican and 43 Democrat and two Independents. Let’s assume for the moment that the strong Independent candidates running against Republicans in Kansas and South Dakota pull off what many would have considered upsets until recently. That would up the Independent total to four.  In that case, Republicans would need to win in four of the remaining six races to get to a clear 51 seat majority and make the Independents essentially irrelevant to the Senate leadership decision. Let’s give them Colorado to start with, where their candidate against incumbent Democrat Mark Udall is polling very solidly, holding a steady lead in mid-single digits. That would get them to 48. But if Democrat Jean Shaheen should hold her seat in New Hampshire by a slim a margin over former Massachusetts Senator Scott Brown, and Bruce Braley manages to win Iowa in Democrat Tom Harkin’s old seat against a strong Republican challenger, and incumbent Kay Hagan does the same in North Carolina, that would take the Democrat total to 46, just two behind the Republicans.

The battle would then come down to the races in Louisiana and Georgia, where Republicans are favored but Democrats may stand a chance due to third party candidacies and, in the case of Georgia, the fact that their candidate is the daughter of well-regarded, centrist former Senator Sam Nunn. Two wins would bring the Democrats even with Republicans at 48, but with neither holding a pure majority of Senators. This situation would create maximum leverage for the Independent “Gang of Four” if they could hang together in the “hung Senate.”

If two of the four hooked up with the Democrats, that would take them to 50 and a marginal majority with the Vice President’s tie-breaking vote. And if three of them caucused with the Republicans, Mitch McConnell would become majority leader with 51 votes. But if the four held out to see which Party would agree to their terms, they would have the chance to demand at least procedural changes to break the partisan divide. For example, by guaranteed up-or-down votes on such gridlocked matters as immigration reform – the previous Senate’s approval would not a carry-over – climate policy, tax reform, entitlement reform, the Surgeon General nomination, and so forth.

Unfortunately, if this scenario emerges from the results of the November 4 elections, the Independents would have a lot of time to plot their strategy. Both the Louisiana and Georgia races could be kicked into runoffs in December and January if nobody wins more than 50% on the first round.

A “hung Senate” would be bad for the economy at least in the short run, as was the “hung Presidency” in 2000, which may have triggered a recession.  But it could be good in the long run if the new “Gang of Four” makes a breakthrough on gridlock.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: Tmidhe New Normal In Higher Education.

Will CNBC Market Negativity Again Bail Out Short Hedge Funds?

All during the run-up in the stock market over the past couple of years, the major cable news outfit covering the financial markets, CNBC, has been relentlessly pushing the idea that the market needs to have “correction” of at least 10% to warrant further investment equities. Day after day, night after night, the CNBC website carries stories with ominous headlines predicting a coming dramatic fall in the market, trotting out gloom and doom prophets on its programs like Marc Faber, to renew their predictions of a crash of 30-50% just around the corner because they perceive the market to be “ahead of the curve” of the real US economy.

Here are some examples from just the past couple of days of CNBC’s own  fear-promoting  stories, despite the fact that that US unemployment is down to 5.9%, job growth per month at 227,000 for 2014 is the best year-to-date performance since the heady days of 1999, and US dollar is reaching the “King dollar” heights advocated by leading CNBC commentator Larry Kudlow:  fear of “black swan,” fear of earnings; fear of the rising dollar trade.

CNBC “Armageddon” scare stories have been cited previously in this blog, going all the way back to the previous CNBC promotions of the theory that Greece was going to collapse, that the Euro was going to collapse, that Germany was going to leave the Euro, that Spain was going to collapse, that Italy was going to collapse, that the US was going to default on its debt, etc., all of which of course would potentially trigger a market crash.  Not one of which actually happened. But, never mind. For a while, each of these hysteria scenarios heavily promoted by CNBC drove down the equity markets for a few days or weeks. This provided enough time to allow short hedge fund positions to be unwound at a big gain and for the same funds to buy into leading stocks more cheaply to reap gains when the scenarios turned out to false – which the hedge fund managers probably knew they were!

The same pattern emerged last fall when CNBC actively promoted the outright lie that the Federal Reserve had decided to begin to unwind its extraordinary stimulus at its September meeting, which many market participants thought would be too early given the state of the economy. Not surprisingly, this led to a sharp drop in stock prices and an even more pronounced rise in bond yields. In fact, the Fed deferred its decision to “taper” its bond purchases until later in the year, and bond yields have actually come down as it has continued an orderly pace of wind-down to the present moment. Again, the equity markets also quickly recovered to gain a massive 30% increase, as measured by the S&P 500 for all of last year, once it was clear that the doom scenarios promoted by CNBC did not hold water and the short hedge funds had relatively poor results, which carried on into 2014.

But on CNBC, hope (and hype) springs eternal for a “correction” to bail out these hedge funds. At first, there was a gift from Mother Nature to the short side. The past winter was terrible and GDP fell by 2.6% in Q1 (along with expectations for the economy for the rest of the year). Stock markets were moribund, and bond prices surged, and the shorts began finally to look smart.  But, as Chauncey Gardiner of “Being There” predicted, “In the Spring’ there turned out to be real signs of growth.  In late July, we learned that the economy grew in the second quarter by 4%, a figure later revised up to 4.6% in the final data. Suddenly the shorts didn’t look so smart and in fact were fighting off more losses. The stock market revived, but CNBC, right on cue, was ready with a new chamber of horrors facing the market: the Gaza war, the Ukraine war, the ISIS emergence, the Ebola outbreak, the European near-recession and deflation, the Chinese students in the streets of Hong Kong.

It’s not that any of these occurrences haven’t in fact been happening. All of them are real. But are they signals for a US stock market correction or crash? Do they singly or collectively threaten the surge of growth in the US economy? Do they justify a fall to 2.0% in the ten-year treasury bond interest rate, a level consistent with a US recession, confidently predicted currently by a leading trader on CNBC’s “Fast Money” program?

Granted that any TV news organization would rather cover a train wreck than an on-time arrival at the station. But CNBC’s constant denigration of the equity market begs a question: why on earth would the cable network do their level best day in and day out to scare viewers out of the markets that they covers?  If the only players left in equities are machines run by hedge funds, who needs to bother watch CNBC?  CNBC seems to daily go out of its way to talk down the market and talk investors out of investing. So why should they bother watching TV when it constantly tells the viewers that “Stockmageddon” is just around the corner? Or as one “Fast Money” trader said last week about Ebola: “Sell first and ask questions later!”

CNBC is not alone in this game. Without a shred of data to back up its assertion, USA Today warned that the surprisingly good jobs report of October 3 could lead the Federal Reserve to increase base interest rates sooner than the financial markets expects in 2015, despite the absence of any evidence of emerging inflation.  But CNBC is leading the charge to warn viewers that the fall in the Russell “small cap’ stock index by over 10%, technically a “correction,” is “trying to tell us something” about a coming downward direction of the US economy (multiple quotes from CNBC trading guru Guy Adami, who is the one who predicts the 2.0% ten-year note, consistent with a coming US recession).  Seems to this blog that traders are trying to tell the rest of us to sell out of the market so they can swoop in to buy it cheap because they know darn well the US is not heading or a recession.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Unanswered Questions for a Consequential Autumn

Chinese Checkers?

The Dow Jones Industrial Average set an all-time record during the trading week of September 15, but fell 104 points along with NASDAQ and the S&P 500 Average on September 22. The hot new Chinese internet IPO also fell 4% after its 38% pop on day one of trading. The sell-off was foretold even before the market opened by futures prices that were dropping on word that the Chinese Finance Minister said the country was not looking to change policy to provide additional stimulus to its slowing economy, beyond actions already taken. The unasked question: was the Minister’s statement really a disguised way to have same effect on European bond markets, while the Chinese clip the wings of the uber-capitalist Jack Ma given his inordinate (by Chinese standards) success in building a US dollar fortune on the backs of Chinese consumers?  If so, then the markets may be misreading the macro-economic impact of the statement itself. Indeed, one can imagine the Chinese taking further near-terms stimulus actions if growth continues to fall and simply characterize them as not representing any “change in policy.”

Draghi’s Inferno?

When European Central Bank (ECB) head Mario Draghi spoke on the last day of summer with a particularly downbeat take on the European economy, he had much the same depressing effect on values in the European bond markets as the Chinese Minister’s overnight speech had on the US stock market.  While the ECB head promised that the Bank would take further stimulus actions, if needed, to try to halt the rot, is it possible that Draghi was really trying to light a fire under European governments  (particularly Germany) to take stimulus actions of their own to expand economic growth, particularly if the Germans – despite Draghi’s assurances his Bank’s principals were “unanimous” in their commitment to further monetary stimulus – don’t really want the Bank to engage in American-style Quantitative Easing (i.e., German bond buying)?  Was Super-Mario in fact making a speech that might sounded defeatist to European bond traders but nevertheless was heard as an “offer they can’t refuse” threat to his political opponents who have resisted expansionary economic policies? He must be truly frustrated by Germany’s preference for preserving its relatively large slice of Europe’s shrinking economic pie at the expense of helping to bake a larger pie that might help other European nations trade their way out of recession.

Obama’s Disapproval Ratings: A Three-Way Street?

As we head full-tilt into the 2014 election season, much is being made of President Obama’s unpopularity in the polls, particularly as drag on any Democratic chances to capture additional seats in the House of Representatives or prevent a new Republican majority in the Senate. On almost every major issue, the polls show, for both domestic economy and foreign policy issues, that Obama’s approval ratings have trended to the low 40% range, with disapproval moving well into the 50th percentile. But the question left unanswered by the polls is whether or not these figures mean that those “majorities” that disapprove of Obama’s handling of ISIS, or Russia’s attack on Ukraine,  immigration, or unemployment, have coalesced around policy options opposite to those chosen by Obama. For example, do those who disagree with Obama’s decision to attack ISIS in Iraq and Syria largely through US (with some Arab) air power, a coalition of neighboring states and Syrian volunteer armies, and no US “boots on the ground” except special forces, all agree with John McCain and Lindsay Graham that the US should commit combat troops to defeat ISIS? Or do they side with those like Representative Barbara Lee who have expressed their strong reservations about any bombing campaign, let alone any troop commitments?

Although that precise question has not been polled, one could well strongly suspect that neither of those positions would command anything close to a majority of American public support. Could it be that, on the question of confronting ISIS, Obama’s announced policy actually commands a quite respectable 40% of American support, while those urging clearly alternative policies, have yet to persuade more than about 25% of the populace?

Similar “grains of salt” might season the polls that suggest that American are united behind a rejection of Obama’s policies on immigration. They have led to a fairly significant majority vote in the Senate approving comprehensive immigration reform along the lines of the President’s proposal to enhance border security while providing both penalties and a path to citizenship for undocumented immigrants who have not committed crimes and additional “Dream Act” style benefits for any children they brought to this country. While politicians decrying “amnesty” (which by definition does not apply to a program involving mandatory penalties) and urge “enforcing existing laws” might seem in the reported polling data to have the upper hand versus Obama’s approach, there is, in fact, no polling that supports mass deportation (which is of course what “enforce existing laws” means). Likewise, apparent disapproval of Obama’s plans to act by executive order if Congress fails again in its forthcoming “lame duck” session to consider comprehensive reform almost certainly consists of those who believe Congress should act, those who believe it would be an overreach of Presidential power, and those who believe Obama should have acted already. Again, Obama’s policy on the immigration issue is most probably consistent with approximately a 40% plurality of American opinion.

Finally, while a majority are recorded as disapproving of Obama’s handling of Russia in the context of President Putin’s actions in seizing parts of Ukraine, there is utterly no polling data to support the proposition that we should be attacking Russia militarily rather than only by the economic sanctions Obama has led a coalition to impose. The unanswered question, on this issue also, is: exactly what is the majority opinion on how Russia should be handled? The hard truth is, there isn’t one. In this age where public policy discourse in unfortunately dominated by cable TV and talk radio networks that exclusively present one-sided and biased views of virtually all important events to suit their audience “base,” it is any wonder that the President or Congress can espouse and command majority support for any policy whatsoever?

In the American democracy we have collectively (or by passive default) chosen to have at the moment, to serve and assuage our divergent biases, the question is whether a governing plurality, as Jack Nicholson said, is “as good as it gets.”


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Market Manipulators Are Back In Season for The Fed “Septaper” Sequel: “Septighten”

The summer is coming to an end without much success at the movie box office, but one “sequel” has emerged a winner this week although its ultimate fate awaits further developments.

Readers of this blog will recall that questions were raised here in late August last year about the steady drumbeat of financial market expectations that the Federal Reserve Board’s Open Market Committee would announce that it would commence “tapering” its program of bond purchases known as Quantitative Easing III which was intended to stimulate increased economic activity. Speculation that this would happen had begun late in the spring and continued throughout the summer based on a response by then-Fed Chair Ben Bernanke to a question at a Congressional Committee hearing as to whether such tapering would ensue by Labor Day. Bernanke said if the economic conditions improved sufficiently, tapering could be commenced “later in the year.”

In the wake of those comments, interest rates on ten-year Treasury securities spiked upwards rather violently, causing the stock market to swoon down as well. Commentators parsed every word and phrase used by Fed Board members over the summer months, and some commentators even detected that the Fed had actually “said” it would taper in September (Dennis Gartman live on CNBC). This was, as a matter of record, completely untrue, but by then the market was definitely in a “print the legend” mood.

In particular, hedge funds that had in 2013 and 2014 staked out a net short position in both the stock and bond markets (and as a result were carrying massive losing positions for their clients into the summer) were salivating at the prospect of reversing their fortunes thanks to the market perception that the Fed would move quickly to begin to reverse its “highly accommodative,” easy-money policies. Any perception of monetary policy “tightening” was then likely to send both bond and stock markets down as it did, thus bailing out the short hedgies.

Well, it didn’t all work out that way. The Fed in fact took its time to get more and better data before it began tapering; the markets, after the initial September surprise rather than the “expected” (or at least highly promoted) idea of a “Septaper.” That timing was always premature, as anyone who was paying attention to this blog, or more importantly to Chairman Bernanke when he called out the anticipatory run-up in interest rates, caused by those twisting his words on TV for self-serving purposes into a “Septaper” commitment, as distinctly “unwarranted.”  Yet many fools and their money were parted by the wily hedgies, who were sucked in the Cable TV producers anxious to have a crash to cover (or at least call it in advance).

The only clear winners were the hedge funds. Having scared so many into selling in advance of the “Septaper,” which turned out to a be as much a phantasm as the El Nino that never came to spare us the brutal 2014 winter, they were in pole position to scoop up bonds and stocks on the cheap and profit from the inevitable rally that they knew damn well would come when the expected (but in hindsight clearly premature) “Septaper” didn’t happen!

Does all this sound a bit familiar? It should. The hedge fund market players find themselves in the same position as they were last summer: short and wrong. Both stocks and bonds based on ideology or just dogged insistence that both markets are long overdue for a “correction,” as more than one CNBC commentator confidently predicted was on the visible horizon as summer’s end approached. The crises in Iraq, Israel and Ukraine were cited by certain large investors as firm grounds for a severe market crash of up to 60%,  others disagreed, contending the market has more room to run up, despite the international situation. And for a while this September, that view carried the day as markets continued their climb. No doubt, this was much to the chagrin of the short hedge funds, who by now were counting on a literal re-run of the play from just 12 months ago.

But before the market open on Monday September 8, the shorts got a gift that kept on giving right through the week thanks to an overnight Financial Times article suggesting  that the Fed’s standing policy that interest rates would not be increased (“tightening”  policy) for a “considerable time” – generally thought to mean about six months – after the end of QE III would at least “at the September 16-17 meeting, based on conflicting comments some of both the “hawk” and the ‘dove’ rates camps within the Board. The article went on to speculate that a decision to change this policy statement to a more hawkish posture (presumably a less “date-based” fixation and a more purely “data based” giving emphasis to improving economic statistics) was not in fact likely until the late-October meeting.  Market commentators, however, perhaps egged-on by hedge fund shorts who saw a chance to snatch victory from defeat with a last minute “Septaper 2.0” play, ran with the mere possibility and turned it into a virtual certainly of a policy tightening change at the September meeting!

By Friday, the bond market had rung up bond yields to over 2.60 from a level closing in on 2.30 just a couple weeks ago, bailing out bond bears, and the equity markets had turned south with a first losing week in six. Even seasoned and respected CNBC market analysts like Steve Leisman and Art Cashin had jumped on the “Septighten” bandwagon by week’s end. Leisman cited observers who focused on a very recent San Francisco Fed paper calling attention to the gap between Fed member’s collated estimate of a 1.2% overnight money rate by year end 2015 versus the trading market’s expectations are anchored at .76% as evidence of a Fed desire to change its guidance sooner rather than later to tighten up that gap. And Cashin, by week’s end, was telling listeners (including this writer) near the close of trading that markets now “expect’ a policy change at the September meeting.

To be clear: Leisman and Cashin are certainly not manipulators.  They are simply reporting the extent to which the market has talked itself from a “possibility” into a near certainty. And yet others were not so sure, as Barron’s reported, citing a leading analyst to the effect that the Fed may be even more concerned that a guidance change just now might lead markets to get ahead of the Fed in terms of the likely onset and pace of rate tightening. That problem would be harder to fix than the opposite case.

The sense here is that the latter analysis points to a similar result as with “Septaper” expectations in September last. Fed Chair Janet Yellen will wait one more month to be more certain of the overall direction of the job market and the economy and how employers are approaching them in their 2015 planning cycle. She will have September payrolls and the latest read on both Q2 and Q3 GDP, so a “data-based” change would be far more appropriate around Halloween than the Autumnal equinox. Like Margaret Thatcher, “the Lady’s not for turning”, even by the hedge funds!


Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

As Long As We’re Talking About 2016, How Will They Manage The Republican Playoff With 20 Candidates?

Hillary Clinton may be getting all the attention, but her path to the Democratic Party nomination for the Presidency in 2016 looks to be virtually clear of any serious opponents at this point. It’s her race to lose and she is starting out alone at pole position with not even a dark horse contender surfacing as yet unless you count Joe Biden, who has yet to make clear whether he will run regardless of what Clinton does. Martin O’Malley of Maryland may persist to the point of announcing a candidacy, but one suspects he hasn’t yet had “the talk” with the Clintons about his “future in politics.” Elizabeth Warren probably should run in 2016 if she is to ever make a race (she’s only four years younger than Clinton), but she continues to actively disown support for her candidacy. So we will presumably get Hillary, “ready” or not.

The Republicans, however, have a field that would crowd the track at the Derby and looks much like the NBA playoffs or even the college year-end tournament.  At last count, there were at least 20 currently “mentionable” potential GOP candidates. With the Party determined to run a short, efficient and, if possible, “lamestream, media-free” series of tightly-controlled “debates” with no tough questions from out of “left field,” it’s hard to see how to accommodate anything other than some sort of literal playoff system. Maybe they can even borrow big-time college football’s special playoff committee to narrow the field down. At least that could keep the field down to 20, since Condi Rice, an otherwise possible GOP contender, is also on the football selection committee!

Let’s take a look at the Republican lineup to face Hillary Clinton and examine in a “nutshell” (excuse the expression) their respective appeal and chance of making the final cut.

Start with the six Governors (GOP folks think we need a “proven executive”):

Rick Perry (Texas): If at first you don’t secede, try try again, at least for the Presidency of the country you want to shrink. A man of indictment but he hopes not of conviction, he’ll focus on the ISIS problem on the Rio Grande (which is certainly no farther from Iowa than Guatemala is from Texas) but is unlikely to again threaten the Federal Reserve Chair with “Texas justice” until he himself finds out what that is, exactly.

Mike Pence (Indiana): A lot closer to Iowa, and a lot closer to the Koch Brothers, whose money may make a real difference in 2014 outcomes thanks to Citizen’s United. But maybe he’s 2016’s Mitch Daniels (the “perfect candidate” who never runs).

John Kasich (Ohio): The ultimate swing state in the Electoral College, and his track record as governor has clearly improved since his early attacks on unions backfired. Plus the nominating convention is in Cleveland. But unless he’s got LBJ (LeBron James) as his running mate, he may prove more like a VP himself.

Scott Walker (Wisconsin): Another ‘border state’ (to Iowa) candidate, and a recent ‘swing state’ as well. The Gov the unions love to hate. But he took the fight to them and won, so folks will try to measure how he might take the same skills to Putin and ISIS. However, his legal troubles may turn out worse than Perry’s.

Chris Christie (New Jersey): Speaking of legal troubles….his candidacy has been “abridged’ in 2014, but he’s still in the hunt and is making a push in the 2014 midterms for candidates outside his home state, probably because his popularity in New Jersey has shrunk in inverse proportion to Jersey’s rising deficit (a dirty word in the GOP). But he has real NY money behind him.

Bobby Jindal (Louisiana): He’s back from one bad speech and a second term focused on campaigning against the “Common Core” K-12 standards, which he wants scrapped in favor of strictly local controls on education, a popular Tea Party issue. But what good did local control do Louisiana?

Now let’s list the four Senators (who all start with handicap weight because that’s where Obama came from):

Ted Cruz (Texas): A noun, a verb and ObamaCare. But he was born in Canada with a foreign father (at least it’s closer than Kenya). Has renounced Canadian citizenship, but would make it up to them with the Keystone pipeline. Will be popular with hard liners for his “no compromise” stance. Helped if Perry implodes again.

Rand Paul (Kentucky):  Inherits his father’s young libertarians, scares neo-cons with his “left-of-Clinton” foreign policy and ambiguity about Israel, plus has harder line on immigration.  All adds up to a “fortress America” candidate which may be attractive after two more years of the wheels coming off in Europe and the Mideast.

Marco Rubio (Florida): Another swing state man with Latin roots, but has turned sour on immigration reform and ultra-hawkish on foreign policy. He and Rand Paul should go one-on-one. But has interesting new ideas on the “safety-net” reform that has to come in the next President’s term. Helped (like Christie) if Jeb Bush doesn’t run.

Bob Portman (Indiana): Again a daily double with Pence from the same state. Could have (should have) been Romney’s running mate. Has done some top tough jobs, maybe too moderate for the Tea Party, but exudes competence and executive presence. Romney without the money. And with a gay son.

Next let’s check the House of Representatives; here there are four:

Paul Ryan (Wisconsin): Yet another double with Walker, but has his own game (the budget) and identity from the VP run. More Ayn Rand than Rand Paul, and can go one-on-one with Obama on the numbers, but Obama’s not running.

Michelle Bachmann (Minnesota): Yes, again, for lack of a better option, (strangely – what about Marsha Blackburn?) the only Tea Party woman thinking about the race.  But does the Tea Party really like any women but Sarah (see below)?

Mike Rogers (House Intelligence Committee Chair): Will embark on a talk-radio career and ride the ISIS horse as long and far as he can; a true alarmist but does not look threatening. Will Rush Limbaugh and Sean Hannity drown him out?

Peter King (New York): Same foreign policy appeal as Rogers, but will have more sway as a sitting member of the House over the next two years. Possible VP if we’re at war.

We’re at fourteen already and haven’t even got through the five “formers:”

Jeb Bush: Ex-governor of Florida and permanent brother of George W. Bush. “Soft on illegals” image kills him with the Tea Party, but the most proven executive if times really troubled.

Rick Santorum: Ex-Senator from Pennsylvania, voted out of office and into permanent Presidential candidacy for the Christian right especially if Huckabee again chooses a pot of money over a shot at history.

Mike Huckabee: Ex-Governor of Arkansas and lead guitarist for Christian radio. Polls well in Iowa, but not well-funded.

Mitt Romney: Speaking of money… we know where he’s from, but not where he’s going. Popular now because he made the right call on Russian trouble-making potential.  But if the economy keeps improving, his business experience stays the liability he made it.

Sarah Palin: Ex-governor of Alaska and reality show hostess; sharp tongue gets attention but not respect. Suspect she doesn’t really want the exposure of a candidacy for some reason. Shouldn’t really be counted except as placeholder for Donald Trump.

And lastly, there is the Herman Cain Memorial List of “Others” candidacies, which includes the aforementioned Trump (who is no longer the “Donald” thanks to the Mr. Sterling, late of the NBA Clippers), and the much more formidable Dr. Benjamin Carter, the neurosurgeon who struck a nerve with the President re: ObamaCare at a prayer breakfast — can anything be more Republican than that? A Fox News favorite, he may last longer than many expect.

How will this extraordinarily large field be sorted out?  Most likely, by limiting the debates to those who meet a gradually ascending minimum in the polls (i.e., 2% in the first, 4% in the second, etc.). This will put an enormous premium on an early start – a fact that most of those listed have already figured out. It’s going to be a long winter, twice!

Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.




























Mobility Math: More Folks Renting = Fewer Mortgages = Lower Deficit and Lower Unemployment

Don’t look now, but renting is in! The mobility revolution isn’t only about the Internet, the I-phone and advertising (although that’s a big part of it). Think for a moment about automobile transportation. Starting with ZIP Cars and now on to Uber and Lyft, we’re witnessing the emergence of successful new business ventures in “just-in-time” rental transportation arrangements. Or in a less down-to-earth mode, look at the emergence of the “jet-rent” industry: as the saying goes in another advertising context, even Warren Buffett’s a fan!

But the “new mobility” is contributing to an even more profound shift in consumer habits in a sector of commerce even more central to the economy than the auto or airline industries – namely, the housing market. But in this case, it’s not a shiny or clever new business model that has captured the attention of millions of consumers. No, in the case of the personal home market, the first “change agent” turns out to be the Great Recession of 2007 to 2009, which itself was triggered by the home mortgage market meltdown and the financial institutions that milked it for all it as worth, and then some.

There is no need to rehash the full history of how the financial system was brought to its knees by the slicing and dicing of mortgage-backed securities to create the illusion that the repayment risk of sub-prime, floating-rate mortgages (i.e., loans that on the face of it could only be repaid if the homeowner could sell the house before the interest rate increase came due). This colossal example of a Ponzi scheme ran out of runway when the Federal Reserve’s interest rate hikes, as the economy fully recovered from the “dot-com” crash at the turn of the century, jacked up mortgage rates generally and floaters in particular, and the markets for both homes and the intricate web of financial instruments based on them suddenly ran out of buyers.

The resulting economic crash, with its bailouts and bankruptcies, led to hundreds of thousand losing their jobs (and their mortgaged homes) every month, and put taxpayers on the hook for billons in loans that kept the economy from completely collapsing in another great Depression. Time, tax cuts and other economic stimulus programs, along with a highly experimental Federal Reserve zero interest rate policy and bond-buying program, has led to a modest but now quite steady general economic recovery. But the ability of millions of unemployed to find new full time work has lagged behind as many have been unable to relocate to “where the new jobs are” because they’ve been literally held literally captive to “underwater’ mortgages for homes they cannot sell or can’t just walk away from without killing their credit ratings.

Enter the solution: the rental housing market. Sell your underwater home to an investor who will either rent it back to you or to somebody else who’s trying to do the same. Or if  you’re lucky enough to be a rising housing market because of local economic recovery, sell while you can and switch to renting because you don’t want to be immobilized by a mortgage again and you’d rather have the flexibility  to go where the jobs are the next time a recession hits. Or if you’re a millennial stuck after college in your parents’ house with student loan debt but can’t find a decent-paying job in their neck of the woods, move out to where the job market craves your generation and skills, and forget about being a “first time home buyer” for a while longer and just rent.

All this adds up. While there was a strong recovery in both new and existing home sales over the past couple of years – driven in large part by all-cash (i.e., no mortgage) investor purchasers and a strong pace of “market clearing” distressed sales – the trend  definitely leveled off  in the first half of 2014 due to a reduction in distressed sales as they ran their course and the difficulty of obtaining mortgages under stricter credit terms particularly  for first-time homebuyers, who have tended to “prime the pump” for the housing market in the past.

Indeed, it has long been US government policy to encourage home buying among young adults, especially by providing favorable tax subsidies for homebuyers in the form of the famous mortgage interest deduction and the substantial amount of forgiveness of capital gains taxes on profits from the sale of primary residences. The interest deduction was originally not a big deal when income tax was first imposed (since only about 3% of citizens actually owed the tax at first (circa 1910). But the rising middle class that emerged during and after World War II increased the number of taxpayers (to 30% and homeowners to 55% in 1945 up from 40% in 1940), and when they pushed the government for tax relief, the mortgage interest deduction was a convenient vehicle. Whether the deduction actually stimulated home ownership is highly debatable, but politicians from the Bushes through the Clintons bought that idea. Democrats liked the idea of the deduction’s tax break for the middle class (even though most of its benefits go to the wealthy) and the GOP thought home ownership would convert liberals to conservatives.

What every budgetary hawk in Congress and think-tanks knows for sure, however, is that the deduction has been a major contributor to the rising national debt. As one of the largest “tax expenditures” of the federal government, it has cost the treasury up to $100 billion in revenue in some past years. But as the economy has recovered from the Great Recession that number has not picked up but has actually gone down to around $70 billion. Congress should be delighted with a $30 billion annual deficit reduction it doesn’t have to vote for!

 The trend away from historical growth patterns of home ownership and mortgages seems solidly established: even the Mortgage Bankers Association has forecast a fall in home sales in the US this year (the first in four years).  Meanwhile, a report by the Joint Center for Housing Studies of Harvard University has found that “recent economic turmoil underscored the many advantages of renting and raised the barriers to home ownership, sparking a surge in demand that has buoyed rental markets across the country.” The report shows increases since the recession in renting across all but the oldest age groups, with families with children now nearly as likely to rent as singles. In the last five years, rental vacancy rates have dropped by nearly 20%, and multifamily housing construction starts have more than doubled!

Could it be that the decline in the unemployment rate from over 10% to now nearly 6% might also be connected to these new renting-instead-of-buying converts’ ability to move to where those new construction jobs are?

Recently published on the Huffington Post.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.







Tough Choices Indeed – For Everybody

At the very least, Hillary Clinton came up with a timely book title. Hard choices confront policymakers in the US and abroad in a seemingly overwhelming quantity. Never mind blaming all policy “gridlock” on “maximalist politics.”  There has indeed been a good deal of that in recent years fueled by the realities of on-line fundraising, the Citizens United ruling and talk radio. But that’s not the whole story. Some of the choices are just plain “hard” and that means any official who gets caught actually making a “choice” is going to be pilloried from all sides and his or her “approval rating” – the most pernicious polling device ever invented – will plummet even lower than the rating that prevails while dithering.

Three boxes sit on any policymaker’s desk:  “In,” “Out” And “Too Hard.” Comprehensive immigration reform typifies the kind of issue that inhabits the “Too Hard” box, where it has sat for many years. As is common to the “Too Hard” box, the need for a fix is glaringly obvious. The outlines of a fix, moreover, are also reasonably evident. But those who actually have to decide the set of issues and make a real choice are also deeply convinced that, however low their dreaded “approval rating” is now, it is guaranteed to be lower once a resolution is actually decided. And the longer an item stays in the “Too Hard” box, the more this impression becomes embedded. This is because the “decider” knows that none of the “sides” in the matter will be satisfied with the chosen outcome unless it consists of total victory for themselves.

Policymakers aren’t making this stuff up. History abounds with examples of the “Too Hard” box issues that took not years but decades to resolve. The “Troubles” in Northern Ireland, for one example. Israel/Egypt was another. In both, only an unusual confluence of circumstance and personal leadership created an opportunity to move these issues out from the “safety” of the “box” and into an essentially enduring resolution. Same with the end of Apartheid and transition to a pluralistic rule in South Africa. But the Israeli/Palestinian/Hamas conflict remains an ever more current and confounding “Too Hard” box issue for all the players.

Likewise when someone tries to take an issue out of the box without fully building an enduring consensus among the competing interests, the result can be unsatisfying and politically punitive: think ObamaCare. 

Here the obvious “compromise” fix was to reject the Left’s insistence on a “public option” and rather adapt the Right’s notion of a “market-based” expansion of both insurance pools and coverage underwritten by a “public mandate” on both employers and individuals. But instead of “buy-in’ from both sides, the hard-liners on each side quickly disowned the resolution, leaving the President’s “approval” to sink under the weight of the rage of both “sides” and – more importantly – the unintended transference of the public’s inherent distrust of the private insurance market onto the very government which the public was asking to rein in abusive the insurance practices!

No good deed (no more preexisting conditions, higher prices for women, sick kid kick-offs), as the saying goes, goes unpunished (in the approval polls). Any politician watching what happened to Obama after passage of the Affordable Care Act quickly put a “Too Hard” box on his or her desk if one was not already there.

Judges actually have it easier on this score.  They certainly tend to get the “Hardest Cases,” including ObamaCare, but they generally have life tenure so they don’t need to worry about approval ratings. Moreover, they get to issue “dissents” if they lose and thus at least create the impression of living to fight another day. Yet the Court probably should have kept Bush v. Gore in its own, seldom-used “Too Hard box” (a “political question”). It may be tempted to do so with the coming cases on same-sex marriage (“certiorari improvidently granted”) in view of contemporary analysis questioning the timing wisdom of Roe v. Wade vis-a vis the emerging pace of political change. But is same-sex marriage really a “Too Hard” a case as Bush v. Gore? Why should a Federal Constitutional level freedom and right (however lately perceived) wait upon intricate, complex state constitutional amendment processes for vindication?

The real “Hard Cases” – and their possible solutions –are these:

  • ISIS: if Obama bombs them in Syria, which appears necessary to put them out of business, it will also help the rag-tag rebels who we earlier concluded had no hope of taking it to Assad. We didn’t want to waste equipment on them that would only be lost to ISIS as with the Iraqi Army. But here the way out of the box is pretty straightforward. Assad is evil, but the lesser evil for the US as compared with ISIS, because Assad poses no direct threat to the Homeland. Bomb ISIS: approval rating will go up, and terror threat will go down.
  • Ferguson: if the Missouri Governor appoints a special prosecutor, he will be giving in to what many perceive as a mob, but if he lets a possibly tainted prosecutor stay in place the result (whether an indictment or not) will never be viewed as legitimate by the losing “side”). With a 12-member grand jury only 25% black (at least a better representation than the Ferguson police force), put in a neutral prosecutor, take the short-term heat, but enhance the chances for tamping down the rancor especially if the officer’s conduct is vindicated by a preponderance of eyewitness testimony supporting a genuine perceived threat of grievous bodily hard by a  person out of control. The answer will probably come from more from ballistics analysis rather than conflicting eyewitnesses. (Think Warren Commission – speaking of ‘Too Hard” cases!)
  • Executive Immigration “Amnesty”: if Obama acts on his own with a conditional type of “pardon” before the November election, he risks a backlash among true supporters of comprehensive immigration reform who would rather see permanent legislation as well the obvious outrage from the Tea Party and the GOP. But if he doesn’t, his Hispanic supporters will sense a wimp-out and stay home from the polls. But if he simply announces, before the election, exactly what he will do effective January 1, 2015, and give the lame duck Congress “one last chance” to pass comprehensive reform before year end, he will be following more or less the same pattern that Lincoln used with the Emancipation Proclamation (with a stronger war-powers underpinning to begin with). Lincoln’s action became effective on January 1 after a September 22 “proclamation.” Watch that date – a Monday – for Obama’s decision.

 Recently published on the Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.