Obamamania vs. Reality Bites: Tensions Establish Historic Short Window

It is important to remember that the $1 trillion stimulus package is not going to create an infrastructure which will almost immediately facilitate commerce and investment. Many of America’s roads, railways, bridges, schools, hospitals and sewage systems may be crumbling, but no historical parallels can be drawn to a decimated Europe at the end of the Second World War. And those drawing parallels between the Obama Plan and Franklin Roosevelt’s New Deal should remember that the results of the 1933-1937 stimulus legislations were highly dubious and, in any event, it was massive war spending in the following years which caused a doubling of the Gross National Product (the GDP’s precursor) and a sharp reduction in civilian unemployment (from 14% to 2%).

History does not provide any real contextual insight into the final economic impact of this intense effort to create or save 2.5 million jobs. But all the financial indicators suggest that the US economy is going nowhere in a hurry unless it undergoes a thorough across-the-board contraction. The tensions between the Obama-related optimism on one hand and the urgency of de-leveraging on the other have created an unprecedented (even historic) trading opportunity on the short side.

The case for contraction, domestically and globally, is solidly founded in the behaviour of several benchmarks in recent weeks. The cost of buying default coverage for non-investment grade corporate issuers everywhere has skyrocketed since September, with certain guiding indexes showing spreads of 1,500-plus basis points. Trading in emerging market sovereign debt has come to a virtual standstill in an environment where credit default swap spreads for even the favoured growth economies have breached 500 bps. And, is if to further highlight the risks (of deficits) inherent in the more than two dozen stimulus packages worldwide, 5-year sovereign spreads for the industrialized world have widened to historical levels today: e.g. Italy to 180 bps, UK to 115 bps, Austria to 150 bps, France to 65 bps and Germany to 45 bps. CDS spreads for US government risk are being quoted at 55-65 bps.

Then there are benchmarks applicable to international trade, which has already shrunk considerably since the credit crunch began. Political risk insurance and forfaiting (buying of trade paper on a non-recourse basis) premiums have reached unaffordable levels. Domestic exporter credit lines are largely unavailable, particularly in the developing world. And housing and credit card delinquency ratios are rising (to 25% in certain instances) in countries which were, just a few short months ago, touting exceptional (again, even historic), sustainable consumer demand trend lines well into the next decade.

Now, all that said, it is certain that the $1 trillion budget to build schools, bridges, railways, sewage systems, hospitals and roads will create jobs. But that number of 2.5 million, saved and created, is simply an estimate, subject to considerable variations depending upon the technology employed to complete hundreds of public works projects. Besides, even if 2.5 million jobs are actually created, as and when the projects hit the ground, the real influence over national family (disposable) incomes may be minimal; at least 10 million Americans will be looking for better paying, full-time jobs by mid-2009, apart form the 3.3-3.5 million Americans who will have no jobs at all.

In conclusion, this writer is reiterating the opinion that each “Obama bounce” should be used to build short positions (QQQQ, SPY) while lawmakers get on with the task of building America’s infrastructure in forthcoming months. Risk-averse investors should be seeking option-type positions today. But even outright shorts carry limited downside, as long as you are convinced that the “rubber will finally hit the road”, when its becomes clear that the signals which the market benchmarks are sending are simply not meaningless figures emanating from illiquid markets---remember that illiquidity itself is a contagion, a sign of the times for trading purposes.

Disclosure: Author holds short positions in SPY and QQQQ

Comments

[Prudent Man...:]

Obama said, during the election among a host of other promises he cannot ever deliver on, that he had all the answers and those who thought they were voting for Prom King bought it. Now the rubber is hitting the road and what does he say: "The economy will get worse!". Now that is leadership.

It is bad enough that the Congress and current Administration is crying wolf to get spend more of our grand kids money, but I want to remind everyone that yesterday's arrest of the Governor of Illinois proved: Money is power and power corrupts. The more money we give politicians the more corruption we will see (Read the DOJ's complaint). If an infrastructure repair to the Illinois Turnpike required a one-percent kickback, can you imagine what Obama's, a product of the Chicago political machine, infrastructure will provided in kickback revenues. That is redistribution of the wealth of the worst kind.

One would think that the country was coming apart. FDR was president for twelve years turning a recession into a depression and it took Hitler's invasion of Poland and our manufacturers providing war material to England that brought us out of the that depression and not his any of his programs that only broke the citizens pride. I wish all of the readers could have been be there, as I was, to see that the real depression was the depressed spirit FDR instilled in the Free Enterprise System and not what you read in the revisionist history book by historians with a Socialistic agenda..

I don't believe FDR reduxed is an answer to our economy. To allow the politicians and bureaucrats to chose winners and losers in the economy is a disaster waiting to happen that is as big as the toxic loans. Does anyone believe that thirty years ago that our auto industry was behind the curve and on the road to disaster?

Government get out of the way and provide security for our citizens and let the Free Enterprise System work.

How can Congress bail out investment banks in a week and not save Social Security in three decades?

2008 Dec 10 08:12 AM

[ArtfulDodger:]

Indeed, what if Obama pulls a bait and switch on infrastructure spending as Clinton did in 1992?

The Clintonites gave as part of the reason for their huge tax increase infrastructure spending, but nary a penny went toward it.

It's surely possible!

2008 Dec 10 08:52 AM

[investor88:]

Rakesh has given good reason for a bear market. Currently we are in a bear rally with the Dow up 20% from the recent lows. This successful bear rally may [but not certain] take the Dow up further till 20th jan 2009 when Obama becomes President; then we re-evaluate the market prospects from there.

2008 Dec 10 09:06 AM

[k9s-4-k8:]

Plenty of good points made about the FDR years, but don't attempt to persuade people who lived during those years. FDR was seen as a rock to hold onto as the waves of depression and WWII rolled over them. I sense that will be the same with this generation. Additionally they will be influenced by a powerful media that has already convinced the masses that Obama's America will be paved with gold. I suppose those that sound the warnings over the next few years will be viewed as ingrates & partisan deadbeats. I'm trying to add up what all this stimulus and infrastructure spending will add to the economy while adding greatly to our overall debt picture. Additionally, what are we getting when one remembers that the infrastructure jobs aren't permanent jobs. They will add and later subtract jobs from the economy. I suppose the hope is that by filling the pockets of employees even for a temporary period of time will multiply in the economy and create more jobs. Would it be fair to assume that when these temporary jobs disappear, they will bring down other jobs as well? Is this the right use of our resources?

2008 Dec 10 09:41 AM

[ken250:]

yes, what ever happened to bullet trains bill promised us.

2008 Dec 10 01:23 PM

[CLH:]

The gov. can not provide meaningful jobs. Roosevelt sent everyone out into the woods to rake leaves. In 1939 there was 20% unemployment. Few permanate jobs if any were created.

The only way to create jobs is to lower taxes esp on the rich who are the ones who create jobs.

Yes trickle down works--nothing trickles up to create jobs. The stupidity of the left never changes.

2008 Dec 10 06:30 PM

[Robert Nabloid:]

"But all the financial indicators suggest that the US economy is going nowhere in a hurry unless it undergoes a thorough across-the-board contraction"

Amen!

I must also concur with what CLH said.

BTW, how are these blue collar jobs supposed to help those white collar workers who now find themselves without a job? Or how are these blue collar jobs in road construction going to help any northern state in the winter?

These aren't permanent jobs and they add no economic value to the US in terms of economic output. It's just further spending money the country does not have in hopes that these same unemployed people spend their money and create jobs? Huh? This will be so spread out that no one community will be completely reinvigorated nor will it last anyways.

If consumer spending is 70% of GDP and it's eroding very fast and dramatically, how damn big would Obama have to make his stimulus programs to do anything? Would he have to double the US budget? (please no!)


Who pays for this again? We act like politicians, like Obama, are saviours when really they are only promising to spend our money for us... how quickly we forget where they get the money or who will end up paying it back.

So, Obama's bright idea is to take on more debt or print more dollars to build roads? Then when our states sell the roads to private companies and implement tolls, we'll see how many ways this stimulus can screw us in order to temporarily create a few jobs while giving politicians the appearance of "doing something" to "save us", neither of which they should be doing to begin with. We want someone to ride in and save us, and we'll get someone that will pretend to do just that. I thought Hollywood was in California - but maybe it's moved to Washington.

2008 Dec 10 07:31 PM

[Tony Petroski:]

First do no harm. The stimulus package will destroy 2 jobs for every one it creates. Mr. Obama: That means that you'll "save" no jobs, but you'll create as many as you want. Still, to be fair to President-elect Obama, I think he's trying to do his best--just like FDR did.

2008 Dec 10 10:53 PM

[unimpressed...:]

Obamamainia? More like Obamanation! The man is clueless and completely over his head. He is, as was mentioned in the campaign, an empty suit. His confusion as to "What do I do now that I'm President?" will be the impetus to drive the world into another Great Depression.

Obama proved his inadequacy in filling the role of President by appointing many, many Clintonistas to his administration. The 64 million idiots who voted him and the ignorant Democrats into office will never realize their error or their stupidity. It takes a logical and pragmatic person to admit the error of his ways and take corrective action. If these groupies had these qualifications, John McCain would have won in a landslide and many of the Democrat know-nothings in the Congress would be seeking employment in the private sector.

The coming economic catastrophe can be laid at the feet of those who vote emotionally and seek Nirvana (64 million of them). I doubt there is enough bailout money in the universe to right the Ship Of State and heal the economic crisis created by the Democrats (can you say sub-prime?). Add the socialist agenda of Obama, along with his huge tax program, and disaster is assured.

I wonder how the liberal media will justify their meddling and propaganda blitz of 2008 that had a significant part in the election of the clueless. Then the may not be around much longer. The bankruptcy of the Tribune organization is just the tip pf the iceberg as subscribers are voting with their feet. The New York Times is in desperate straits, also. In TV, MSNBC, CNN, and NBC are, also, teetering on the verge of collapse as their single dimensional programming is and cheerleading for Obama is catching up to them.

We may not make it as a free and democratic nation to the 2010 elections. But if we do, we had better be ready to toss the stumbling, fumbling, and bumbling Democrats out on their fat butts. In 2012, we must send the Marxist back for rework and elect a conservative to lead and heal the country. Otherwise, the Dark Ages will re-emerge in America.

2008 Dec 11 02:30 AM

[Tad Gage:]

Certainly Rakesh makes some interesting points. Much is uncertain, as we've never faced something quite like this. In this economic situation, I see few parallels to the Great Depression except for the fact that, like the depression, it was nurtured by a incompetent, do-nothing Republican administration filled with yes-men and yes-women who legislated where they shouldn't (Sarbanes Oxley) and failed to oversee what they should have been (corporate financiers, runaway derivatives, etc.). The comments surprise me, especially on this site. Wouldn't it be more productive to focus on what we can do no rather than complain and say "wait until 2012?"

2008 Dec 11 01:14 PM

[Robert Nabloid:]

"Wouldn't it be more productive to focus on what we can do no
> rather than complain and say "wait until 2012?""

You are correct. We should be worried about implementing a plan now for each of us - our own individual plans of what to do. Problem is, the people often look to their leader (Presidents) to implement any such plan. It wasn't always this way. America used to be full of great independent people that wouldn't wait around for their leader to save them or implement plans.

I guess there are still a few of us - those of us that plan ahead for many things. Plans are needed:
-retirement plan
-savings plan.
-health plan
-emergency survival plan (in case of natural disaster etc, ----- too bad more of those that went through Katrina didn't have a plan)
-food plans
-protection plans
-etc, etc

People should have been paying off their loans years ago instead of buying the latest electronic gadget or buying a new car when the one in the driveway is only 8 or 9 years old and in good shape. People should be starting small businesses that provide real goods and services. Too many people work in jobs that don't actually accomplish much.

As I stated in my comment above - Obama's plan to build roads won't really work out that well. I'm sure his intentions are good, but he's a politician. It is especially disheartening considering that many of the other roads we have built in this nation have, after we paid for their construction, been sold off to foreign private companies for a bargain who then erect toll booths. I'm really hoping that stops. (like Cintra)

Heres something to watch. Out of all the massive programs that get funded, watch how many of them later get sold off to private corporations that are controlled/owned by foreigners.

Many of the states in the union are having big financial problems and can't fund repairs on the public infrastructure they already have in place... watch for many to be sold off to private corporations controlled by foreigners who then erect tolls/fees. When you can no longer drive freely from one place to another within your own country without paying foreigners - then you know things are bad.

On Dec 11 01:14 PM Tad Gage wrote:

> Certainly Rakesh makes some interesting points. Much is uncertain,
> as we've never faced something quite like this. In this economic
> situation, I see few parallels to the Great Depression except for
> the fact that, like the depression, it was nurtured by a incompetent,
> do-nothing Republican administration filled with yes-men and yes-women
> who legislated where they shouldn't (Sarbanes Oxley) and failed to
> oversee what they should have been (corporate financiers, runaway
> derivatives, etc.). The comments surprise me, especially on this
> site. Wouldn't it be more productive to focus on what we can do no
> rather than complain and say "wait until 2012?"

2008 Dec 11 11:42 PM