The numbers are stunning. The Dow has dropped 31% since election day and 20% since the inauguration. Many political opponents and some market observers have pointed the finger for this drop directly at President Obama. The President's supporters counter that much of the move has to do with short term market dynamics and an economic downturn he inherited. So far, both the President and his supporters have ignored these short term trends.
So far, the President has cover. After all, he has only been in office for a month and a half. Whatever the movement, it is short term. At some point though, short term will turn into medium term and into long term.
Here is what should concern everyone in the administration, and in the investing community at large. Nothing over the next year will likely happen to change the dynamic of the market. The market has made two verdicts. It doesn't like the long term outlook of the economy. It also doesn't like the policy platform of the Obama administration. Now, defenders will quibble with the second statement, but how are we supposed to view the market tanking following every major policy initiative brought out by the administration.
Now, let's look at the landscape over the next year or so. Today, the employment numbers came out for February and the economy lost more than 600,000 jobs. Even the administration itself expects that the downturn will continue indefinitely. That means we can expect a steady stream of bad economic news for the indefinite future. At the same time, the administration will role out a plethora of new big government, quasi socialistic policies for the indefinite future. Furthermore, President Obama has taken a very anti business tone. If he isn't demonizing big business, he is presenting policies that will punish them with massive new regulations and taxes. Such a tone is not going to make the Dow move in the right direction anytime soon.
So, well have to ask. Are we really to believe that as we learn more about the mortgage bailout, the stimulus, TARP II, cap and trade, quasi bank nationalization, the budget, etc. that suddenly the markets will warm to them? Furthermore, it is clear that the market has lost all faith in Obama's Treasury Secretary Tim Geithner. So, yes, it's early, but why should anyone believe that anything will change anytime soon?
So, let's add up the math. If the market has dropped nearly thirty percent in five months due to a combination of a deteriorating economy and policies it rejects, what do you think will happen if the exact same thing happens for at least another year? At this pace, we may be at 5000 by the end of the year if not sooner. That would of course be devastating to the economy and all investors. It would also be devastating to Obama politically. Folks often point to his high approvals to point out that things like this are irrelevant. That is of course misleading. All presidents have high approvals immediately following inauguration. What do you think Obama's approval will be at the end of the year if it is Dow 5000?
The president and his supporters had better start to pay a lot more attention to the Dow Jones. That's because eventually the fate of the Dow and the president are one and the same. Never has there been a successful presidency, in modern times at least, with a weak Dow. The president and his supporters can continue their political posturing. They can continue to blame the falling Dow on his predecessor. For a while, it may work, but at some point, the Dow had better go up. If the president thinks that a current policy course will make that happen anytime soon, he is deluding himself.
The president has one last chance to change this all around. If he can present some sort of a plan to stabilize the banking system, the markets can and will recover. If he can present some sort of a plan that will once and for all deal with all the toxic assets on the balance sheets of the banks, the markets can and will recover. We can all hold out hope that this will happen, but so far there is no indication that it will.
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8 comments:
Unlike Bush, Obama plays the long game.
If the Dow had been going up in the short term, would you be praising Obama?
You sir are intellectually dishonest.
Well that comment allows me the opportunity to use several great cliches.
First, in the long term "we will all be dead" as a famous economist once said. So, the long game needs to have some sort of end. President Obama only has just under four years, so at some point it will have to be short term.
Furthermore, I don't where you get the idea that Bush played the "short game". Obama should be playing the long game however he should also be concerned that the market has so thoroughly condemned in the short term. That was my points.
As for your second point, as a late friend of mine used to say
"if if was a fifth we'd all be drunk".
I don't know what I would have done if the market had gone up because the market didn't go up but down. To call me dishonest based on a hypothetical is rather silly.
I think Obama's basic policies are right. The Dow will follow in good time.
The tax system of the past eight years has promoted a greed-driven environment fueled by those at the very top of the income ladder.
http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20080618/
The Economic Policy Institute has found that from 1989 to 2006, more than 90 percent of all income growth went to the top 10 percent; 59 percent of that growth to the top 1 percent; and 35 percent to the top one-tenth of 1 percent. Providing tax benefits to the wealthiest has undermined a sense of fairness in not only the tax structure but our economy in general. It's time for a major restructuring of our economy not just to rebuild but to end the disgraceful war on the middle class.
What do you say to this?
I say that tax systems don't promote greed. I don't know what this institute is and I don't care.
What I do know is that wealth was created in a major way all around all those years. I also know that 8 of those years the income tax was as high as Obama wants it now.
I also know that when the government attempts social engineering that is almost always a failure. you seem to think that it is the government's job to create equal outcomes. I disagree. I think the government should tax everyone as little as possible. You seem to think our tax policy should promote fairness.
More than that this debate should be held in another forum. Economic fairness is not going to make the Dow go up. I think your idea of economic fairness is loony but worse than that, it isn't going to do anything for the Dow.
It is not social engineeringat all.
Someone has to pay for the improvements to health and education. Given that the gap between rich and poor has been widening, of course the rich should pay more than the poor. The money has to come from somewhere.
If a family cannot afford adequate health care what would you do?
Maybe the markets are down because demand has dried up, because many of the nation’s biggest firms have imploded and because Americans are losing their jobs and their homes by the millions. Maybe a dose of reality is in order, as opposed to the childish desire to blame your political opponent.
That's a nice speech but it is still social engineering.
Last I checked, public education is free.
There are furthermore many ways to reduce health insurance rather than giving free health care to everyone that can't afford it.
We have increased education spending exponentially. So, while your bleeding heart liberal speech is nice, it is still social engineering.
Markets are the current value of future cash flows. What that means is that everything you said was factored into the market when President Obama was elected and took the oath of office.
Furthermore, the market was down nearly 30% since September when he was elected and even more when he was inaugurated.
Of course, the general weakness of the market plays a factor, however ignoring Obama's policies and their effect on the market is what is "childish". At some point that excuse stops and Obama must be held to account for his policies.
The market started at 7700 when he was inaugurated and that was down from a high of nearly 13000. The wealth that speak of being lost was factored into the price decrease. Since then, the market responded to new factors. The weakening economy was only one factor. The other factors have everything to do Obama's policies.
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