Ladies and Gentlemen: Gridlock Is Good

One of the marvels of the continued bull market in stocks this year – and to a much lesser extent in bonds, too – is that it’s taking place in spite of what appears to be a tremendous amount of dysfunction and conflict within the federal government. But it’s perhaps more accurate to say that the bull market continues to motor on because of, rather than in spite of, the gridlock.

Leave it to the Republican Party to create government gridlock single-handedly – without any assistance from the opposition party. Here is a party that controls both houses of Congress and the presidency and yet still manages to screw things up.

Then again, maybe it’s wrong to think of Donald Trump as a Republican president. Rather, perhaps the correct way to think of Trump is as America’s first Third Party President, who just happened to use the machinery of the Republican Party to get elected, but is no more a Republican than Ross Perot was.

Quite clearly there are three active parties, or factions, in Washington, and all of them are aligned against each other – the Republicans, the Democrats, and the White House.

Unfortunately, only one of those factions appears to be interested in doing its job, which is trying to help the American people and enact the agenda it was elected on. The Democrats are only concerned about thwarting the Republicans and Trump, while the Republicans – or at least a sizeable number of them, including some of the most powerful – are only concerned about thwarting Trump (they don’t seem particularly worried at this stage about the Democrats, who are perfectly capable of sabotaging themselves).

That leaves Trump, who is surrounded by and supported by only a small coterie of family members, loyalists, and military brass. He appears to be the only one with his eye on the ball but is powerless to get a lot of what he would like to do without legislative help, as we’ve already seen with Repeal and Replace. There’s only so far executive orders can take you.

Will he have any better luck – and more help – with tax reform? Here’s an issue where he should be able to count on widespread Republican support, and maybe even a little from the Democrats. But success at this point is a toss-up at best.

While we wait to see what happens, let’s enjoy the gridlock. While it would certainly be better for the American people and the economy for our elected officials to enact laws that make our lives better, the next best thing is not having them do anything that just makes things worse. Right now, that seems to be the best we can hope for and based on the 20% rise in the Dow Jones Industrial Average since the election and 12% so far in calendar 2017, that’s plenty good enough.

And we can expect this state of affairs to continue. Over the next few months, we will be hearing a mounting chorus of government officials and media savants warning us about the impending doom about to befall us: The government is going to shut down if Congress doesn’t enact a budget. The Treasury is going to default on its debt if Congress doesn’t raise the debt ceiling, sending the global financial markets into pandemonium. Indeed, the doomsday chorus has already begun to sing.

This week’s Bloomberg Businessweek warns breathlessly that if the U.S. defaults on its debt “, it could also shake the foundations of the global economy.” Is that really going to happen? Has it ever happened? How many times have we heard this same scare talk over the past decade or so? And how many times has it ever amounted to anything? By my count, never. The only thing we haven’t heard yet is how many people will die if Congress fails to increase the debt limit, although I’m sure it’s only a matter of time.

With repeated apocalyptic warnings like this year after year that never seem to come to pass, is it any wonder that smart investors, businesses, and workers simply ignore what goes on – or more accurately, doesn’t go on – in Washington? And if the economy can show more improvement under these circumstances than it did under the previous administration – 2.6% annualized GDP growth in the second quarter, the strongest in the past eight quarters – what does that say about the need for government help?

If my “gridlock is good” theory is correct, it can only mean that the economy will outperform expectations over the near term. And if that’s the case, then we can expect the Federal Reserve to raise interest rates at its next meeting in September.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.