The Good News
The Obama economic team is excellent--a good blend of high intellect, experience and fresh faces. Prior to Friday's announcement of Geithner as Treasury Secretary, there appeared to be a leadership vacuum in Washington. Paulsen had folded up TARP. Bush was acting like a lame duck. Obama had been silent about his economic team.
Not only has Obama fleshed out and announced his team, he also has shown over the weekend that he understands the gravity of this country's economic situation and the necessity for injecting a huge dose of Keynesian fiscal stimulus ASAP to restore confidence in both the public and private sectors. He is showing a pragmatic side that is essential if our economy is going to emerge from this mess. This is not the time for ideology.
Our economy is experiencing a "liquidity trap", the severity of which has not been seen since the Thirties. Lenders are reluctant to lend and borrowers to borrow -- primarily due to lack of trust in our financial institutions and confidence in our economy's future. Monetary policy is ineffective in jump starting the economy --a phenomenon known as "pushing on a string" -- hence the need for massive fiscal stimulus.
Hopefully, the stimulus plan will address the decline in home prices, which got us into this mess in the first place. Mounting foreclosures are poison to the housing market. Furthermore, there should be no hint of protectionism. Such a path in the Thirties aggravated the downturn.
The Citicorp "rescue" plan is a de facto step toward nationalization under the guise of a "passive" investment. From my point of view, the action is constructive, but doesn't go far enough. What is needed to restore trust in banks is a secondary market for their toxic securities. Such a market would establish the clearing prices for them. At that point, the banks would know how much additional capital is needed to begin lending again; and that capital would either be raised privately or, if necessary, by the U.S. Treasury.
We have all heard the adage that "those who do not study history are doomed to repeat it". We have a Federal Reserve Chairman who is an expert on what happened in the Thirties. Let's hope that his and our study of that horrific time will prove sufficient to avoid the doom of repeating it.
The Possible Bad News
Last week the breaching of two interrelated, important trends occurred --the long-term upward price trend of the S&P 500 Index (the "Index") and the long-term rise in the consumer price index ex food and fuel. These breaches may be aberrations, but if not, are very significant because they would signal, respectively, a secular downtrend in the Index and deflation.
As you know, I have been closely watching the market's testing of the October 10 lows in order to discern whether that date constituted a major market bottom. Until last week, all tests were successful. Even now, the number of new 52 week lows and the consolidated daily volume haven't yet reached the October 10 levels. However, the Index last Thursday closed at 752. In past postings, I have said that the Index's price is the least important of the three criteria I had been observing. However, the Index at 752 is a special case because it is BELOW THE 2002 BEAR MARKET LOW OF 776. Since this secular bull market began in 1974, never has a succeeding bear market low been lower than a preceding one. This raises the specter of a secular downtrend in the Index.
The consumer price index ex food and fuel declined a tenth of one percent last month--a rare decline. Only during a few years since the Depression has modest deflation occurred, but that was nothing compared to the 5-10% annual deflation during the Thirties. If this decline persists, it may become embedded in the collective pysche of consumers--a truly dangerous development. Consumers would then expect prices to continue falling, so why buy now? The effects of lower prices and lower consumption on corporate earnings would be devastating. The Index earnings would enter into a secular downtrend, mirroring the possible secular downtrend in the Index's price alluded to above.
While this potential risk should be kept in mind, I believe "net-net" that the recent developments regarding Obama's economic team and stimulus program will trigger a very significant rally, perhaps to a level of 1100 to 1200 in the Index. At that point, I for one must decide whether or not the Index remains in a secular uptrend.
Subscribe to:
Post Comments (Atom)
2 comments:
Wondering if you have any strong concerns about the long-term ramification of a return to Keynesian economics? The U.S. Treasury is already deep in debt to the Chinese and Japanese (to put it crudely). Won't years of massive deficit spending exacerbate the situation and further risk U.S. economic security?
I've always found the Friedman followers to be more pragmatic and have been long empathetic to their message that getting government out of the economy helps expand the free market system, deflates socialistic tendencies and enhances democratic values (through encouraging a transparent system for property ownership and reduction of corruption).
Wondering what are your thoughts on this.
Just to add that I found your comments extremely insightful and pragmatic at this challenging time.
--
Steve Herman
New Delhi, India
I think it's time to figure out another economy. This style just seems to have too much inequality and chaos built into it. Wouldn't our planet do better with something that was a bit better managed, and given that we have amazing technological resources to manage data, couldn't we transition to something that was fairer and more solid over time? I don't see how propping up failing companies and relying on the stock market does anyone any good at this point.
Post a Comment