25: Americans Are Miserable, and It's Swaying The Election

it's pretty settled who's going to be the winner. But in both the Democratic and Republican races, we have these very unusual races this year, and so suddenly New York City was the center of the world. You had politicians coming to pander, Ted Cruz going to a matza factory, John Kasik eating Italian food up in the Bronx, very unusual sites that you don't normally see in an election year. So did you vote in the primaries? Um, no comment. I didn't. I don't, I don't know. I don't support

anyone yet. Okay, Well, the reason I ask is not to gauge how dedicated you are to the democratic process, but actually to try to make a point about markets and politics. And again, I know this is one of

your favorite favorite topics. I absolutely love this topic. I mean, I think one of the biggest stories in the world right now is this process that we're seeing where parties that are deemed to be centrist of one way or another across Europe and the US are seeing their support collapse and we're seeing these more radical parties gain power. And so far there hasn't been anything too dramatic, there's been no major default or nobody has left the Eurozone.

But as the center of gravity moves to the outside, I think that's going to have a profound implications on things right And there's a line of thinking, a strong line of thinking that what's happened in markets over the past few years has a direct relation to the rise of fringe candidates or more extremist candidate, whatever you want

to call them. And I'm very excited to talk about that today because we're going to have someone on who basically talks about the public mood and it's connection with markets constantly. Yeah, me too. This is gonna be a

great conversation. We're gonna be talking with Peter Atwater of Financial Insights, who does all kinds of fascinating work looking at public polling, looking at when there's public euphoria when the public is very depressed, what part of the public is depressed and so forth, and what that means for financial markets investors. And there's a lot of interesting connections and interesting patterns throughout history to be gleaned. All right,

I'm excited, let's do it. Peter Atwater of Financial Insights, thank you very much for joining us. Thank you, Jo glad to be here. So your work involves gauging the national mood, trying to figure out when people are in euphoria, when they're depressed, who's depressed, who's happy? How do you do that? How do you gauge the national moods? So I look at some objective datas like gallops daily Economic

Confidence Index that gives me a broad sense. But then I look specifically at extremes of wealth to see how are they doing. So I'll look at the you know, the uber financial elite, and you know, when you see somebody like Bill Ackman flipping ninety million dollar condos, that says something incredible about the euphoria of the financial elite.

At the same time, things like you know, the riots in Ferguson or in Baltimore are telling me a great deal about how the other end of the financial spectrum is doing. So it feels like when you're gauging confidence, it kind of by necessity still has to have some degree of subjectivity in it, right, Yeah, I think the qualitative measures are often much more powerful than the quantitative measures. Uh. Certainly at extremes in mood, the behaviors are just so

over the top, either good or bad. But the qualitative just plays of how we reflect confidence are you know, very often far easier to understand than just a whole pile of data. So we're in this election season right now, and one of the big storylines is the fact that both on the Democratic and Republican sides, there are these more radical candidates than what we're used to doing. Quite well, we don't know if they'll win yet, but it's this

phenomenon that everyone's talked about. And what does this tell you about the national move Well, what it tells me is that, um, on the Republican side, it is very depressed. Um. You know, folks like Gallup measure it as being equivalent to how everybody felt back in you know, the financial crisis. Um, so they're the Republicans are feeling extreme anxiety and stress and their needs reflect that, and somebody like Trump and

we can come back to that. On the Democratic side, their mood is better, but it's not nearly as po positive I think is the Democratic establishment certainly believed and should believe today. Wait, Peter, you're saying on the Republican side, there's basically been no improvement in mood or confidence since

the financial crisis. Why has that happened? I think, you know, some of it is a function of, you know, the when you are not the incumbent where the you know, in office party, your mood naturally is lower than you know the other side. And that's you can go back and see that. But this distortion suggests that for the average Republican jobs, lower gas prices, um, the things that you would normally associate with a economic and positive recovery

are not translating at all into that segment. It sounds like it fits. And one of the recent Nobel Prize winner and economics Angus Dton, recently came out with research pointing out that for or lower class why it's there's been this huge surge in the mortality, there's been a surge. I don't know if it's a huge surge, but there's been a rise in the mortality rates despite the fact that generally mortality rates are trending down. Suicide alcoholism is rising.

And though the Republican Party it's ah there, you know, there's people think of the wealthy and the powerful, but there is also this rural white base and it sounds like, um, that fits in very well with what you're saying. Yeah, and I and I think that those are expressions of mood that you clearly can see correlated to confidence. But I think for the Republicans, I mean, it's not just a man session that the the less educated uh certainly manufacturing. Uh.

Their behavior is very reflective of extreme weak confidence. And I think you're really seeing it manifest in this very blatant xenophobia. You know you touched on it just then. Can someone expl into me how the Republican Party can simultaneously be the party of big business and to a certain extent a corporate elite, and also represent the interests of less educated, not as wealthy white people. I've never understood that. I've been out of US politics for the

majority of my life, so I might just be missing something. Well, I would say, increasingly it can't, and you're seeing the very high end Republican establishment uh increasingly abdicate or vacate the party. I mean, the Koch brothers have announced that they're pulling back from their uh anticipated plans in Cleveland, and I think they're now quite fearful that the party has been usurped taken over by folks that are no

longer familiar with them as Republicans. I think that for the longest time, you could have put what today is now a very bifurcated Republican already under one umbrella that you know, endorsed, you know, less government, uh, certainly more conservative social values. What you're seeing is, I think a split between a traditional Republican party and a much more authoritarian Republican party, and that in manifesting and Trump. So this is the current political situation. What's a good historical

and analog to where we are right now? I mean when you look at you look at patterns over time of societal behavior. So what's something that we can point to in the past that say, okay, this this is familiar. Well, I think you can look clearly at the late nineteen sixties. I think the parallels to George Wallace, are you certainly appropriate and very consistent with what we're seeing today in the form of Donald Trump. And I would expect that the the convention is going to look like something out

of the nineteen sixties. Uh, you can go back even further into the the era of the Great Depression to see similarly positioned authoritarian candidates coming to the four You know, I'm conscious that we haven't mentioned the Democrats that much just yet. You say, the mood on the Democratic side is certainly better than the Republicans, but it's not that great either, which might be one reason we've seen Bernie Sanders do better than a lot of people initially expected.

It's not just that he's done better, it's that he's still considered to be viable. I mean, if you were to look strictly at the objective data of super delicates and popular vote, there would be no question that Hillary should be the candidate. Everyone from the media to their polsters to the population should be telling Bernie Sanders it's time to stop. And you're not seeing that at all. And that's I think a reflection of the vulnerability that

that Hillary Clinton has to falling mood. And you know, I was sharing this morning, just how much mood has fallen uh in the last couple of weeks, and that's really to Sanders benefit. So let's talk about how this all effect all effects financial markets because we sit here vice versa. Right, Yeah, how it goes back and forth because we sit here with the mood seemingly glum everywhere gallops numbers of confidence not going in the right direction.

Yet at the same time, the SNP five is very close to its all time highs A how can that be? And be does something have to give here? Can we predict that the national mood will go up if the economy keeps improving? Or does your work tell you to be wary of the market here? So how does the market go up and mood not? Uh? If you measure markets on nominal terms, as you know the wealthy do they certainly feel it in nominal terms? There's been no question that this is a state of euphoria. And you know,

you look at billionaires row on Street. That's certainly reflecting what the markets are saying. So this is the idea that the wealthy have been the ones who have benefited the most from the market rally over the past few years. Yes, I think that that unknowingly, certainly not deliberately, the focus that the FED put on asset values has manifested in

an extraordinary generation of wealth for the wealthy. They were in in two thousand and nine, they've stayed in, you know, gone all in, and if you look at the average American they were not in, and they are even less in today than they were. Some of the statistics on American investment in aggregate suggests that, you know, the consumer

having been burned in housing, exited everything. Can this just be solved by full employment and rising wages or is there something deeper that the traditional economic statistics can't or traditional economic measures can't pick up? Well? I think that if if it could have been fixed by employment, it would have been at this point. You know that the figures on initial jobless claims unemployment levels would suggest that consumer confidence should be far higher than it is today,

so that hasn't translated. I think wage inflation would have helped the consumer in this case, uh, particularly just in terms of making ends meet their Their obligations, especially in healthcare, have gone up significantly during this recovery, their wages have not kept track with that. Similarly, in things like higher education. So the cost of what they need has gone up

substantially and their wages haven't gone up. You're you're seeing I think tension, real tension manifesting between owners of capital and employees of capital, and that it's almost as if the American employee is a union member in in trying to negotiate higher wages and as just today, very unsuccessful in that. Okay, wait, I have the flip side of Joe's question. What if you focused on something bad happening

as a way to boost general confidence. So what if, for instance, we had a big bear market in financial assets and that took some of the air out of the financial elites tires? Would people feel better relatively speaking? Or would that be bad overall? No? I think they shouldn't experience. For the consumer, average consumer, I think they would be UM. I don't know that their confidence would be boosted, but their anger might subside. Lesson might lesson? Uh,

you know that? And I think one of the consequences, Tracy, is that you won't see Congress stepping in to bail out the financial elite should things start to go down versus two thousand and nine, that the public outcry isn't isn't going to be there? Um, you know, going back to history lessons, what was the period have we ever seen the reverse where the mood was really starting to rise in the public and there were tangible signs of it, but financial markets hadn't caught up and say, oh, this

is very bullish. It's a great question. Um, I have to I can't think of a time when that would have that correlation, that association. What about just a general time of euphoria? What's that leg and what caused that? So general time of euphoria looks like where the entire spectrum of wealth from the low end to the high end is feeling enthusiastic. You could say have said the same thing about nineteen sixty six, so you know, the the end of the Camelot era, where you know, again

all of America feels united. There's a there's a common sense of what is normal, and I think that's one of the telltale signs of extreme high confidences. There's a there is a clear black and white as to who we are, what we look like, what we stand for. So unity as a nation is kind of is not the norm, and it's almost scary when we're too comfortable and who we all are? Yeah, we go from you know, from being all of one thing to being very scattered

and then reform. All right, Peter Atwater. We can talk about this for hours, I think, but we're going to have to cut it short. Thank you, Peter, Thank you very much. Thanks Jeff, Thanks crazy stuff. You know, Joe, there's one his historic method for gauging the public mood when it comes to economics and markets. Do you know what it is? Yes? I do. That was I'm supposed to say, should only because I sent you the schedule for this. That was supposed to be a set up

to what you're going. What is it, Tracy? What's the tried and true measure? Thank you for playing along. That would be the misery index. That's right. This is people have used this index for years, across decades, across countries, and it's super simple. All you do is you add the unemployment rate to the rate of inflation, and the higher it is, presumably the more miserable the country, and

the lower it is, the happier. Um. So, if you have ten percent unemployment and ten percent inflation, then your misery index is twenty and everyone's miserable. That's exactly right. I'm impressed. Um. So it's about as simple as again. But there is a problem with the misery index now because even though we have all these presidential candidates who are saying that Americans are more upset than ever, are more angry than ever, the misery index doesn't actually show that.

So we're going to talk about that. We're going to bring in Carl RICKA Donna, who's Bloomberg's chief US economist, and he is going to give us a rundown of why the misery index doesn't say Americans are more miserable right now, Uh, Carl Donna, chief US economist of Bloomberg Intelligence, Thank you very much for joining us, my pleasure. So the misery index, is it something that you look at, is it's something that you feel is a useful gauge for the public for how the economy is doing well.

It it's kind of an informal economic indicator, so as we think about let's say monetary policy or you know, growth forecasts or interest rate developments, it's a little crude for those purposes. However, the misery index is a phenomenal predictor of election outcomes in presidential election years, and we can go all the way back to nineteen sixty four, and this index has an accuracy rate of presidential elections.

And one of the exceptions is the Carter victory over Ford and seventy six, which was arguably a referendum on Watergate. So if we strip out that exception, then the success rate is actually well. Carl tell us how the index used to be used in presidential elections because people used

to use it as like a campaign tool. Basically, it was definitely a campaign tool, especially in the nineteen eighty Reagan Carter election when in his closing remarks of the presidential debate, Ronald Reagan asked the audience, UH, and and voters to ask themselves, are you better off now than four years ago? And he's specifically referred to employment, can

scans and inflation. So this was a hot topic, uh in let's say the nineteen sixties and especially the nineteen seventies, an era that was plagued by stag inflation i e. Rising unemployment or elevated unemployment and a fairly high inflation rate as well. So when those economic issues are pressing concerns, voters tend to act based on what's happening in their pocketbook. Okay, but now if I look up the misery index, which

is on the terminal, right, the Bloomberg terminal. Uh, it actually doesn't look that high, certainly relative to where it was in the seventies and eighties. And I guess that's probably a function of inflation. But does that mean that it's totally irrelevant in the current campaign. It's not irrelevant because it continues to be a good predictor of election outcomes. It's called every election, with the last exception being the

victory of Clinton over Georgia Georgia H. W. Bush. So it's still mad if households are feeling better or worse about economic conditions, whether it was the high inflation and high unemployment of the seventies or even in current the current environment where things are at much more redesirable levels, it still matters. If voters sense that the economy is moving in the right direction, then they tend to reward

the incumbent party. If they sense that the economy is falling apart, Uh, then they tend to quote unquote vote the bums out. And the great example of this was Obama's victory in two thousand and eight, the stock market was crumbling, unemployment was backing up, and uh, you know, the economy was in in a bad situation, and voters opted for change. All right, I have a few problems with this whole thing, just a few. So the Fed would like to see inflation higher. So then does Janet

Yellen want to see the U s economy more miserable? Well, she wants inflation to be only slightly higher. So the risk here there has been a lot of hand ringing in recent years about too low inflation constantly. Absolutely, you can't keep winning and going in lower and lower and lower inflation, because then you end up in deflation. Uh. And there's a whole other set of problems that arise because of that. And we can look no further than Japan,

uh to see some of those consequences. So Janet Yellen doesn't want us to be much more miserable, but she would like a little bit more inflation, because actually that won't make us miserable. That helps to pay off your mortgage or your car loan by inflating that dead away. If prices are falling, then there's very little and it's

harder for you to pay off those outstanding debts. But also you're happy keeping your money in the mattress instead of putting it into risk your investments, which are the basically the lifeblood the economy. All right, and so here's my other issues. So you mentioned the Carter forward and the Reagan year election. That was a period character arise by stagflation where we had very weak growth, high unemployment,

and inflation. But economists and I don't like to talk about this thing called the Phillips curve, which insinuates that there's this that inflation and unemployment are kind of these opposite forces and that tip and that right, there's a

strong negative correlation, and yeah, there's this negative correlation. And so I'm wondering, did the misery index really just sort of makes sense as a thing during the stag inflation era where we got both at the same time, but that every time else, it's just not a very meaningful thing. If there's going to be this Phillips curve framework where they move in the opposite direction, maybe we need a

misery index adjusted for the new normal, right. I don't think we do, because it worked in the stagflationary period because people were really miserable, But It also works in periods where there was not great UH stagflation, for instance, Reagan's re election in four UH, the eighty eight election, UH, the early two thousands. So it certainly was a hot button issue in the late sixties and the seventies, but it's also worked another period. So it's not just the

outright level of misery. UH, it's really the change matters. So if you have really bad economic conditions and they get a little better, you're still arguably pretty miserable, but things are heading in the right direction by looters reward the incumbent party. I'm looking on the terminal right now, and the misery index has ticked up just a little bit. It's so very low by historical standards right now, so you know that might be something to worry about. It

just ever so slight. And what's important here is we have to look at moving averages. So for my analysis, I look at a six month moving average, because what's happening in the latest economic developments sometimes takes a while to actually be processed by main street UH, and so if we look at the broader moving averages, then we tend to eliminate some of that noise and UH you know.

So that makes the wiggle room and the important thing here as we look at the outlook, so where we are now versus where we'll likely be on November eight, election day. UH. The unemployment rate, Let's look at that first. Where at five percent? Now? The unemployment rate has been steadily grinding lower for the last five to six years, at a pace of about one percent per year, so it's been moving sideways a little bit lately. But the Fed and most private sector forecasters are looking for it

to move lower by about thirty basis points. That puts it at four point seven percent by year end. UH, and private sector forecasters and the FED expect core inflation to be about thirty basis points higher. So if those forecast pan out, you basically have an unchanged misery index over the next six months or so. However, UH, the index has been in a broader down trend since the end of the financial crisis, so it does tell you households are are less miserable, so not so much misery,

but not entirely happy either. Carl Rickadonna, thank you so much for joining us, and I just want to say I'm on the terminal. The misery index is not just in the US. And I'm looking at the Brazil misery index right now and it's far and away near its highest levels ever, and they're right near in the in the middle of the political drama. So it doesn't it doesn't just work in the US, works internationally, carl Rickaddonna,

thank you very much, us well, Tracy. I really enjoyed our conversation about various ways of measuring societal mood and how happy and miserable people are. What did you what's your big takeaway from it? I mean, I thought it was a really good rundown of what people have been talking about already. One thing that I would like to

explore a bit more. It's this idea of the world getting slightly topsy turvy in the sense that, for instance, Janet Yellen could want the misery index to be more miserable because she wants inflation, or the idea that the general population could actually want a decline in financial asset prices just on the basis of pure schadenfreude, and the idea that they would like to see the financial elites

take a bit of a tumble. Something that I think about is, you know, we have all these measures to gauge, the economy, the unemployment. Right, there's a million, there's thousands of different measures, but ultimately what we want is for people to be happy. I mean ultimately growth, low unemployment,

stable prices. They don't they're not ends into themselves. The goal is that you want a happy people want to be happy, and so it feels like our tools for really understanding how well we're succeeding of that lauded best. But I think what we're getting to is a fundamental question of economics and philosophy, international relations, everything, pretty much, are people happy on the basis of absolute gains or

on relative gains? Like, if everyone's doing well absolutely, but one group of people is doing much better relatively, will the population be happy? I don't know. Do you think we could solve that in like the ten seconds we have right now? Or should we wrap it up? All right, let's wrap it up. Thank you for listening to Odd Lots. I'm Joseph Wisenthal. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. Thanks for listening.