Self-Defeating Stimulus Packages: Retaining Short Bias for S&P 500

The Marshal Plan had highly specific economic and political objectives, grounded essentially in the devastation wreaked on Europe’s infrastructural, industrial and agricultural complexes during the Second World War. The spate of recent stimulus and rescue packages, expected to total nearly $8 trillion when all is said and done, have no parallel to the Marshall Plan at all. In fact, while Secretary George Marshall’s plan to reconstruct Europe set the stage for decades of American political and economic dominance over the rest of the world, Washington’s stimulus-cum-rescue agenda is creating the basis for state capitalism, a system which sees systemic risks behind every business failure.

The equity and bond markets have obviously built up a degree of underlying optimism on the prospects of (a) the retention or creation of 2.5 million jobs, (b) government investments in schools, bridges, roads and civic services, and (c) a restructuring the entire housing matrix. But will the Obama administration’s aggressive borrow-and-spend strategy actually create any sustainable shareholder value? Or, will the steady stream of negative data on the domestic and global fronts in forthcoming weeks and months destroy the assumptions contained in the stimulus programs altogether?

In thin trading conditions, the S&P 500 may well see new post-October highs through the holiday period. Each significant rally should be utilized to accumulate short positions (QQQQ, SPY) representing a bet on the real possibility that, regardless of the rhetoric from those in authority in Washington, the fundamental and overall economic picture will continue to worsen well into next year. Supporting the bet is the conclusion that significant problems inside the emerging market economies are still to fully unravel.

Advocates of a Marshall Plan-like approach to today’s crisis fail to mention that European countries who were part of the European Recovery Program (ERP) knew from the very outset that “counterpart funds” established in local currencies as part of the aid package would never have to be repaid; such funds were absorbed into national budgets and, with the passage of time, became simply irrelevant for accounting purposes. For that matter, as the Cold War scenario developed in the early 1950s, the Marshall Plan became more of a political than an economic weapon.

But most importantly, the Marshall Plan was conceived in circumstances where it was evident that the rebuilding of Europe was duly informed by pre-war economic realities. The building of roads, for example, immediately connected villages and small-market centres (where productivity was largely undamaged by conflict) to towns and cities. Urban construction projects, to take another example, were initiated in the knowledge that there was ready, verifiable demand for housing, offices and shops.

The Obama stimulus packages are lacking that foundation, and are predicated on the hope (or a flawed analysis) that more jobs will mean a rise in spending and in improved home prices. They do not encompass valuation impairments, compromised asset quality, growing consumer delinquencies and a breakdown in traditional American business models in the wake of seismic and unprecedented shifts within the global centres of agricultural and industrial production.

Finally, historians of the Great Depression are not yet pointing out that a significant proportion of the Marshall Plan aid was used to buy American goods. In contrast, the stimulus funds are likely be spent (in the Walmarts of America) on boosting the manufacturing sectors of China, India and Mexico.

Target the S&P 500 below 700 as early as the first quarter of 2009.

Disclosure: Author holds short position in SPY and QQQQ

Comments

[Prudent Man...:]

What we should learn from this is that leverage, though many investment bankers have encouraged their clients, corporate and private, to increase it, it is a double edged sword. The magnitude of the downside of debt is much greater than the upside because, as we have seen, it can lead to the complete annihilation of a business and a person's economic life.

Is the risk of destruction worth the possibility of gain? We must increase credit standards for everyone. Starting the the U.S. Government would be a great start. Margin requirements for everyone must be raised as it should have been in 1999. Unfortunately, the Obama Economic Team is loaded with Wall Street shills and enablers of financial idiocy.

2008 Dec 02 09:16 AM

[prudentinve...:]

Well said.

If the "stimulus" were a Marshall Plan for building needed infrastructure in public transport, high-speed rail, schools, hospitals, renewable energy, etc, then it would create useful jobs and produce a useful outcome that contributes to long-term prosperity.

So far, "stimulus" is being used as a hopeless attempt to perpetuate a bloated and mismanaged financial services industry, to subsidize irresponsible levels of consumption (of largely imported goods), and to subsidize people living in housing they can neither afford to pay for nor to heat.

As such, the stimulus so far has been destructive to our long-term prospects. The vast sums of money being used for stimulus have to come from somewhere, either taxpayers (if the money is real) or savers (if the money is created). Thus, these vast sums are a transfer of earned resources away from productive and efficient individuals and corporations, who are most capable of leading an economic resurgence. These resources are being wasted on mismanaged corporations and irresponsible individuals who shall dissipate them, just as before.

Until our policymakers recognize and face these basic realities, the long-term prospects do not look good.

2008 Dec 02 09:41 AM

[LightnRod:]

I agree...the govt solution is part of the problem....maybe the major part of it.

2008 Dec 02 11:45 AM

[Fredrik:]

'The equity and bond markets have obviously built up a degree of underlying optimism' - I'm curious to learn in which security prices you are seeing this? I can only see deflation being the overwhelming consensual position in the various securities markets I look at. That said, I think you are correct in being critical of the stimulus packasges being announced. However, the discussion whether it is 'right' or whether we can afford it is in my opinion irrelevant for the next couple of quarters because the cash is regardless being injected into the economy and it will reflate it. I would not be short during this period, better review the short case around the Q2 stage.

2008 Dec 02 11:50 AM