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Monday, February 23, 2009

President Obama Vs. the Stock Market III...Or Dow 5000

I have written two analyzing the effects of President Obama's policies on the stock market. The first I wrote in the summer time in which I predicted how his policies would have an adverse effect on the stock market. The second I wrote just the other day analyzing why the stock market has been hit so hard since he took over. I have written two because things have changed so much since the summer that it needed an update. Well, it appears that there is another update necessary.

It appears that soon my worst fears from the summer and my worst current fears will be combined and as such, I am predicting Dow 5000.

In the summer, I worried about three things more than anything regarding then candidate Obama's policies as the affected the stock market. The three policies were raising the top marginal tax rate, raising the capital gains tax, and creating a new "regulatory framework". Raising the top marginal tax rate, on those making $250,000 and more, would have a very serious and adverse effect on the stock market. That's because folks almost always use some or all of their discretionary money to invest. That means that they use all or some of the money left after necessary expenses to invest. Of course, raising taxes on the hyper wealthy means that much of the money levied in extra taxes would be removed directly from the stock market. Capital gains taxes punish long term investment in such things as the stock market. Finally, hyper regulations create an environment that is very unfriendly to business.

More recently, I pointed out that President Obama's talking down of the economy, Secretary Geithner's terrible performance, as well as the President's government intervention policies have all lead to the downturn in the stock market. These dynamics appear to be in place. We can only hope that Secretary Geithner performs better going forward, however, the President seems determined to talk down the economy. Also, he is determined to create a quasi socialist state.

So, here is the score. Without implementing any of the things that I feared this summer, President Obama has already lead the market down nearly 10% since inauguration. Now, we have this bit of news.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes continued spending on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is lower than the nearly $190 billion budgeted for Iraq and Afghanistan last year.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.


As such, President Obama plans on raising taxes on the top income earners and he plans on raising capital gains taxes. As if his current policies haven't crushed the stock market enough, he is about to implement another set of policies that will be sure to crush the market even more. Make no mistake, hyper regulation is coming soon as well, at least in financial services and in energy.

It's absolutely stunning that the President has decided on this course. The current environment is corrosive on its own for the stock market. It will have a rough ride even under the most market friendly policies. Yet, the President has insisted on the most market unfriendly policies to combine with a very bad economic environment. Given what the President has proposed and will propose, I predict Dow 5000 prior to November 2010.

10 comments:

Naftali2 said...

Hi Mike,

I really think that this is a matter of ideology. And when I say ideology I refer to the belief that a person, or President, may have, where "I am correct, it's reality that is wrong."

All he has to do is pick up the phone and talk to some Wall Street folks--what do you need to hear for those numbers to go up?--and then do what they say.

As it stands, I don't know how far the market will drop, but I can say that the poll that came out shortly after his election--that folks will give him two years to fix things--that number is down to three months.

But if the Republican party is still disorganized, both lacking strong candidates or real ideas, then it won't matter.

mike volpe said...

Good candidates, we'll wait and see. as for good ideas, I think their counter to the stimulus was solid. It was certainly a meaty idea that they can run on if the stimulus is viewed as failing.

Anonymous said...

Even some of your own voters would balk at a top tax rate of only 25%.

I also think that the last thing an American public who puts the blame on Wall Street derivatives trading for the economic collapse wants is a President who answers Wall Street's beck and call.

Make no mistake, gentlemen. The American people are seriously questioning the link between wall street and their living standards.

mike volpe said...

First, for over a hundred years all voters accepted a top rate of no more than zero. That's because the income tax is only about a hundred years old. So, please, spare me with the class warfare.

Second, the public blames a lot more than derivatives traders for the "crisis". More than that, Americans have money in the market and they don't want it crushed.

Anonymous said...

Raising taxes on he rich is the right thing to do.

He has to pay down the deficit left to him by Bush somehow. It's called fiscal responsibility.

Any other ideas about reducing the deficit Mike?

mike volpe said...

Yeah, there is all sorts of spending he could cut. Raising taxes on the super wealthy gets less than 100 billion in extra receipts. That is a drop in the bucket.

Rather than increasing spending, I would be cutting spending and lowering taxes. That's me though.

Anonymous said...

Mike,

What spending can be cut to make meaningful contributions to reducing the deficit right now?

Please give details.

mike volpe said...

I don't have a budget in front of me, however, there is waste all throughout the budget. Almost all departments could be cut back and still run with efficiency. The Department of Education, for instance, has more than doubled under the Bush administration.

I would cut the Federal Farm Bureau entirely. That is a program that is more than $100 billion. The Department of Transportation can be cut. there are wastes in the government all over the place.

HUD spends billions on all sorts of programs that merely harrass people on trumped up charges of discrimination.

There are all sorts of entitlement programs that I would cut back food stamps, welfare, etc. If you think that the government couldn't be cut, you are out of your mind.

Jerry T. said...

The problem with gov't spending is a LOT more than certain programs (including defense...not sure why defense is always left out of the equation, esp. when it takes 55-60% of the discretionary spending!)

The biggest problem are the future obligations of SS and Medicare.

There's no doubt fiscal spending will have to be cut dramatically AND taxes will have to go up, probably across-the-board.

Anonymous said...

I love looking at old atricles. Its a good thing that you are not paid based on the acuracy of your predictions. Lov'n my portfolio right now!!