By Charles Biderman
Ever since Obama won eight days ago, stock prices are falling, down about 4% as this is being recorded. So stocks peaked September 14 - two months before the election - when the Federal Reserve announced the current version of quantitative easing and stocks held up pretty much right through an election day rally. But now that the election is over stocks are dropping with no bottom in sight. This is no accident given investors' fears of higher taxes and continued big spending, including higher taxes on capital gains, that inevitably will tank the economy. In fact, I believe we are headed for a recession.
It is important to remember that on election day, $19.3 trillion was the market value of all US stocks. That $19.3 trillion was not that far below the all time peak reached in 2007 but was also more than double the $9 trillion stock market capitalization at the March 2009 low.
To me that is a major reason why Obama won the election. Romney lost not because the real economy is doing anything good, but because lots of people who voted for Obama incorrectly assumed that the high stock prices were a strong indicator that the economy was on the road to recovery. They also ignored, or in many cases, didn't understand that the higher stock prices were actually the result of Fed manipulation. They also believed the highly suspect data from the BLS and other government agencies that the economy was improving.
But now the election is over and stocks are dropping as reality is setting in.
Everything I read and hear says to me and many other investors that the Obama administration is totally committed to raising income tax rates and maintaining virtually all current government spending. To me that guarantees that next year after-tax income will decline in the US by at least 2% if all the current tax increases happen. And, declining after tax income is my definition of a recession.
The realization by Wall Street that higher taxes are inevitable next year is forcing tax oriented year-end selling of lots of assets, including stocks. Ironically that will boost income tax collections early in 2013, but capital gains tax collections will certainly crater later in the year.
By the way, I don't care what GDP does. GDP is a joke. All that really matters is income. And that is why we track after tax income in real-time as best we can as soon as it is available from the U.S. Treasury.
I firmly believe that if the Obama Administration gets away with raising taxes and not cutting spending, that will crash stocks through next year. Lower stocks combined with declining take home pay will create a social mood that will not be perceived as pleasant.
In fact, that could be why Marc Faber said he wants a tank to deal with what is coming, not just guns.
Sooner or later the developed world will come to understand that governments are ineffective at providing services and if governments are not stopped they will bankrupt us