Some Washington lawmakers are now talking of a $1 trillion government spending package to kick-start the US economy; last week the figure was closer to $500 billion. But before any stimulus plan can save or create the first job, certain formative developments are likely to reduce the programme to build bridges, roads, schools and green projects to little more than a belated (and diminished) attempt to reshape rapidly deteriorating American family balance sheets.
It is quite obvious that a good proportion of institutional and retail investors purchasing shares at current levels are being driven by President-elect Barack Obama’s commitment to implement what will rate as the largest public works effort since the 1950s. In reality, when the facts are placed along a rational timeline, it is not too difficult to conclude that long S&P 500 trades even 10% below Friday’s close (876) are going to result in heavy losses by mid-2009.
Most analysts concur that Friday’s job report was grim. But the very nature of the methodology governing job statistics ensured that the picture painted barely reflected the grimmer reality. While US non-farm payrolls plunged by 533,000 in November, the number of people outside the workforce (people not looking for work) jumped by 637,000 and the number of part-time workers (counted as fully employed) rose by 621,000 to 7.3 million. So, before you enter or retain any bullish positions (SPY, QQQQ), bear in mind that a total of 1.9 million Americans lost their jobs over an 11-month period, that the Obama stimulus plan is targeting to save or create 2.5 million jobs, and, most importantly, that by the time the stimulus plan becomes a reality on the ground, at least 3.2 million Americans will be without jobs and roughly 10 million Americans will be desperately in need of better, full-time jobs.
Under those circumstances, it is inconceivable for the S&P 500 to be settling anywhere above 700 during the second half of 2009, as an increasing number of investors realize that the $1 trillion budget is having a minimal impact on the engines of the US economy.
In the final analysis, the Obama stimulus plan needs to actually improve the quality of family incomes (thus boosting consumer demand and home values) which continue to be threatened by a range of factors: health care and education costs, the cost of food and living essentials and, of course, the possibility that failing business models (e.g. Detroit) will throw more Americans out of work over the next few months.
Further pressuring President-elect Obama’s vision of America in 2010 (and beyond) is the uncertain fate of the emerging markets, and the volatility in oil prices given the prospects of a series of knee-jerk reactions by the OPEC cartel in forthcoming weeks.
As things stand, the $8 trillion (and growing) worth of government rescue schemes are sustaining asset, corporate and shareholder valuations within the framework of a highly leveraged environment. And a number of pro-Obama economists are rightly claiming that, to a significant extent, leverage will be countered by enhanced disposable incomes. But will the new $1 trillion stimulus package create the required seismic shift in the overall quantum of family balance sheets?
This writer is of the opinion that the sheer scope of today’s crisis is well beyond resolution (or containment) by the stimulus packages for three reasons. Firstly, Washington has totally ignored the pressing needs of the huge non-investment-grade segment of the American corporate spectrum. Secondly, and quite surprisingly, lawmakers and regulators have failed to examine the rapidly changing fundamentals of the domestic and international agricultural environment, fundamentals which are directly affecting American exports on one hand and the cost of imports on the other. Thirdly, nobody in authority appears to be particularly concerned with deficits, with the future value of the dollar and with the impending compromises in the “full faith and credit” of the US government.
Disclosure: Author holds short position in SPY, QQQQ
