Posted on 07/11/2009 7:33:35 AM PDT by SeekAndFind
We're coming up on the sixth-month anniversary of the Obama administration. The economy it inherited was a real mess. Things have gotten better to the extent that they aren't falling apart as quickly. But Obama's problem is that he was elected as a man of destiny who could quickly and effectively change the world. "Change" was his mandate. An eighth of his term is up, and what has really changed?
I'm going to argue that at least one really important thing has already changed, and changed for the better. And while I oppose the Obama administration in almost every sense, I'm willing to give credit where credit is due. Whatever else you may say about the economy, the Obama administration really has ended the banking crisis.
At the same time, I'm going to argue that the administration — and the Democratic-controlled Congress — has done just about everything wrong. Other than in the realm of banking, the only good thing I can say for them is that they've done so little. The risk is that in the future they will do more.
For investors, the conclusion is somewhat ambiguous. On the plus side, the economic backdrop has improved enormously with the conclusion of the banking crisis. On this basis alone, I believe that the recession and the bear market are over.
The problem is that everything else the administration has done will make the recovery slow and weak. So while the stock market probably doesn't have any serious downside at this point, it probably doesn't have any serious upside either.
So the art of investing for the next several years will probably consist of market timing — picking the tops and bottoms in a narrow and volatile trading range. Long-term investing may be obsolete.
Let's dig deeper into these ideas. First the kudos for the Obama administration for the way it has handled the banking crisis.
The first good thing Obama did was picking Tim Geithner to be Treasury secretary. Remember, I hailed his nomination when it was first made last November, citing his on-the-job training in bank crisis management.
That training paid off. Geithner found an ingenious way to save the banking system without spending a penny of the taxpayer's money.
Shortly after taking office in February, Geithner announced that the top U.S. banks would be subjected to a "stress test" to determine their health and solvency. That was smart — it gave the public confidence that, after a year of ad hoc panic whenever an individual bank got in trouble, the regulators were going to look carefully at all of them and once and for all figure out who was strong and who was weak.
What almost nobody appreciated at the time was a critical detail of Geithner's stress test program. He said that any bank that "failed" the test would be able to get a capital injection from the Treasury. But with an important difference from the capital injections that the banks got from the Treasury under Henry Paulson in October. This time, the capital would come in the form of preferred stock that could be converted into common stock. And the conversion price would be the bank's stock price on Feb. 9, the day before Geithner's announcement.
You probably don't see immediately why that detail is so important. I didn't either at first. But I've come to realize that it was absolutely ingenious. By being willing to convert preferred stock to common at a fixed price — the Feb. 9, 2009 price — Geithner was effectively saying that the Treasury would make sure that no bank stock could ever again trade lower than that price. Why would it? How could it? The Treasury stood ready to buy at that price, so who would sell below it?
What better way to support these stocks, which it seemed were all headed for zero? What better way to stop the speculative raids on these companies by short-sellers?
It didn't work at first. Geither was not effective in communicating the importance of his guarantee on stock prices. But a couple months later when the stress tests were completed, and the details became better known, the stocks of the banks soared well above the February 9 price, even though many of them "failed" the stress tests, in the sense that they were forced to raise new capital.
Was that brilliant, or what? Geithner didn't have to put a penny of taxpayer dollars into capital injections. He just offered a guarantee — and it turned out that what the market wanted wasn't capital, but the assurance of such a guarantee.
Now the brickbats. Compare Geithner's triumph to the abject failure of the stimulus bill enacted at about the same time. At some 950 pages, it's a sure thing that not a single senator or congressman who voted for it read it. Yet they voted for it, and spent $787 billion of your money for absolutely nothing.
For stimulus to work at all — and for it to be cost-effective — it has to be targeted at areas of the economy that are especially weak. Now much of the stimulus money was directed at such areas? Approximately none. How much of the stimulus money has even been spent, however unwisely? Approximately none.
But it was introduced by Obama with such fanfare. Hopes were so high (they were audacious, you might even say). And now with the unemployment rate ticking higher every month, the White House had to send Vice President Joe Biden out to admit that they didn't get it right. Listen to Biden painfully repeat himself on one of the political talk shows last week:
"The truth is, we and everyone else misread the economy."
"And so the truth is, there was a misreading of just how bad an economy we inherited."
"The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."
OK, nice to finally know what the "truth" is. I guess that means that all that other stuff they said about the stimulus plan was something other than the truth. Maybe, a lie?
With the stimulus bill such an expensive dud, we should be thankful that the Obama administration and the congress haven't been able to complete anything else on their agenda so far. No mortgage "cramdown." No unionization "card check." No "cap and trade" carbon tax. No health care "reform." No tax hikes for "the rich."
At least not yet. The truth — as Biden would say, or might be forced to say someday — is that all these things are terribly antigrowth, because they take incentives, dynamism and flexibility out of the economy. So far the economy hasn't been saddled with these things — and it's still having one hell of a time recovering. Imagine how hard it would be if some of these things actually came to pass.
They may yet. Cap-and-trade and health-care reform are very much live issues. Higher taxes are constantly being talked about. For investors, these are Swords of Damocles hanging over the stock market.
So I'm not a bear. I say buy the dips. Try to catch the bottom of the trading range. And thanks to the Obama administration for solving the banking crisis, so that the March bottom in stocks will likely hold.
But don't overstay your welcome. Sell the rallies. And blame the Obama administration for having to do that. If it weren't for the multiple threats to growth overhanging the market, you could actually become a long-term buy-and-hold investor again. Maybe someday.
- Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
There are a few more thing that Obammie’s Commies could do to destroy the US dollar immediately.
I don't doubt that they only are waiting for the right moment to turn the last screws in the coffin of the US economy.
There goes the middle class.
Oh right, the recession is over and as soon as the consumer spending, which is fully 2/3 of the entire economy picks up and consumer sentiment returns to positive, we'll see the proof it's over.
Oh, and it's nice to see he agrees Geitner is doing such a great job and the fact he thought he was the right guy for the job when he was picked doesn't bias his opinion, uh uh. WTF is this guy smokin'?
A good job of whistling as you walk past the graveyard.
I think more bad news will come in the fall. After that, we’ll have the worst Christmas sales in decades.
This thing isn’t over. We haven’t even begun to see it all.
Grade F.
They’ve done everything wrong, but things are better? They’ve done everything wrong, but fortunately haven’t done it on a large scale? Only a few trillion here and a few trillion there?
This guy is delusional. He sees the problem but can’t admit it.
Its difficult to get anyhing accomplished when you have mainstream media anchors and reporters sucking and slobbering all over you 24/7/365.
bookmark.
This guy is delusional. He sees the problem but can’t admit it.]
I suggest you re-read the article more carefully. As a money manager responsible for managing people's money I can say he hits the head on the nail.
Because of the heightened political risk, the ability to buy and hold is not available right now. The old, discarded Ben Graham philosophy of growth stock investing is exactly the way to go right now. This works best by focusing on the traditional large cap growth companies, like Coke, Pepsi, United Tech, IBM, etc.
Check the last five years P/E ratio of a stock annually
Throw out the high and low
Buy at the lower end of the P/E range and sell at the high end
You should be able to pick up a few 10-15% rallies each year for the next few years.
Until the political risks abate, which is most likely going to be a combination of Republican electoral wins in NJ and Virginia governorships this year, 2010 congressional races and Blue Dog Democrats continuing to resist, the markets are neither going to spike much higher or sell off much lower.
As he points out in the article, the downside risk WILL OCCUR if these radical influences are passed into law.
There is no sugar coating in this article, how you can read it as such is baffling to me.
The point about the banking sector is correct. There was a substantial risk of a ‘run on deposits’ from foreign investors and depositors. That has been stemmed.
If foreigners had pulled out of our banks, the bailout would have been at least another $3 trillion in capital needed or the banks would have been forced to call in an awful lot of existing debt, much less not making new loans as is now happening.
So I don’t need an abundant supply of seeds, gold, and ammo?
I'm going to make a point that Rush or one of the leading talk radio hosts made a couple of months ago. 0bama didn't INHERIT this mess. He campaigned and worked very hard to be given oversight over the country because he wanted to be in charge of the mess. It wasn't forced on him against his will.
Saying he inherited it makes it sound like he's a victim and has had no influence on the economy to date.
3% of your portfolio in gold!
I think that the recent polling numbers in Ohio of Obama’s performance are all you need to know to answer the seeds and ammo point.
Never underestimate the intelligence of the non-elite’s in our society to right a wrong!
Obama has already peaked and the downside is nowhere in sight.
Donald Luskin, September 2008.
I'd keep my powder dry, even if this einstein says the recession/bear market is over. Predictions of the macroeconomy don't appear to be his cup of tea.
It all comes down to how much damage they can do by 2010 and how many votes can ACORN manufacture.
Biden should be impeached for criminal stupidity based on this statement alone. Every analysis I saw of Porkulus slammed it for injecting virtually no money into the economy that would actually stimulate it. And here 'Plugs' is trying to deny the existence of all competent analysis. Too late, idiot. Way too late.
With all this high priced Democrat financial 'talent' suddenly realizing that their clubby cupidity was driving the world economy toward disaster, I doubt that Geithner was actually any sort of lone genius who plugged the dyke at the right time because he had an epiphany all by himself one morning. Geithner also has not been intelligent enough to avoid making some terribly foolish comments such as about neverending bailouts, which shows him more as a lackey than an innovator.
It's hard to deny that this article is heavily weighted content wise to building Geithner up and only in passing deals with what the author actually is critical about.
“The point about the banking sector is correct. There was a substantial risk of a ‘run on deposits’ from foreign investors and depositors. That has been stemmed.”
OK, granted that is true, and its importance can’t be over stated.
But banks are not lending, and that is really hurting where I work, at a law firm that represents lenders. Residential home purchases have come back, a little, from just about zero for a while. But commercial lending is dead, at least where I am, in Northern NJ.
I’m actually starting to get very scared, as Obama has really turned out to be at least as bad, maybe even worse than I thought he would be. I fear he is one of those fools who believes his own press clippings.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.