A New Era, But Probably Not the One We Hoped for

Originally published on 1/23/09

With the inauguration of President Obama, the world feels that genuine change is in the air. All the policy and economic horrors of the previous administration are soon to be washed away. And before we know it, things will be back to "business as usual" and the great American Dream will soar onward and upward to unseen new heights.

Well, that's what most of the media and Obama's supporters are certainly hoping. But we disagree. The future will at best be less dark than it looked several months ago, and perhaps even that is a tad optimistic. History is not on Change-meister’s side:

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We personally have nothing against Obama -- in fact, he seems like a truly pleasant fellow -- but in his own charismatic style he's still adhering to the concept of state intervention on a massive scale.

The success of such intervention depends on our leaders actually knowing what they're doing and taking the correct actions to perceive and resolve major economic problems. Based on what we've seen so far, this isn't going to happen, although there are a few encouraging signs.

Lots Of Plans But
No Real Sea Changes

Although Treasury Secretary-designate Tim Geithner has promised to tighten the terms for companies receiving federal rescue packages, there are no specific ideas in place and his idea of "aggressive action to address the housing crisis and to get credit flowing again" would pretty much describe the failed measures already in place. Titanic and iceberg, anyone?

Supposedly he's going to deliver a plan to ensure the hundreds of billion still in the TARP will now be subject to "tough conditions to protect the taxpayer". He seeks to establish "the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering." (A great idea but we very cynically believe this will conveniently fall by the wayside like virtually every other government promise during this crisis.)

He's also promised to unwind the government's support for financial markets and banks as soon as possible, and to develop a plan to establish a sound fiscal base for the nation. We wonder if this includes ensuring that everyone pays their self-employment taxes in a timely fashion? (Seeing as how he himself conveniently "forgot" to do so until pressed to do so by his imminent appointment which includes overseeing the IRS?)

While some of these ideas are commendable – especially the ones about oversight and transparency – we'd like to remind him that a lot of the necessary legislation was already in place. However, it was simply ignored by regulatory agencies and financial institutions alike in the belief that the government would always bail them out no matter what. (Which has in fact happened but not until things ballooned so badly that it’s unlikely that even the U.S. Fed can raise the sinking Titanic.)

Banks Still In Crisis

At least he’s got this part right: “Many people believe the program has allowed too much upside for financial institutions, while doing too little for small business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners,” Mr. Geithner said. “We have to fundamentally reform this program to ensure that there is enough credit available to support recovery.”

Let’s look at how the banks and financial institutions have been doing since being the beneficiaries of this exceptional Fed and government largesse:

And over the longer term (the “today” referenced in this chart dates back three days):

From the longer chart, it should be obvious that the market “knew” the banks were in trouble long before the newspapers and TV channels began wailing about the crisis. And since that time, when the brown stuff hit the fan, all those billions going into the banks’ balance sheets did pretty much nothing but merely delay their continued slide. The tide of toxic debt washed over the gunwales like a tsunami. The legend of King Canute and the inexorable push of an incoming tide comes to mind.

Yes, there was a banking rally on Wednesday with KBW Bank (KBE) sector index rallying 14.6%, with Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) both jumping 31%. But a similar rally in late November quickly stalled and the index stagnated for a month before plunging once again at the need for yet more bailout funds.

In fact, was actually quite amusing that one of the reasons cited for the rally is the announcements by Bank of America and JP Morgan executives that they’d purchased some of their own troubled equity issues. After receiving billions from the government, doesn’t it strike you as the height of outrageousness to suddenly announce a grand total of $12.7 million in stock purchases? Receive a dollar, invest a penny?

Perhaps the government would like to lend us a few billion so we can buy a few million in stock!

Is Anything Going Up?

In the spirit of Obama-style optimism however, we’d like to close out this report by pointing out that Diversified Consumer Services (up 11.0%) and Power Production & Energy Traders (up 1.3%) have been up since election day. (Just don’t ask about the other 63 sectors, however.)

Certain individual stocks in the Energy, Materials, Consumer Staples, Health Care, Utilities and Consumer Discretionary sectors have fared well since that date, however. (Table courtesy of Bespoke Investment Group)

This would seem to confirm the growing idea that the only areas worth investing in are the areas which are basic, boring must-haves in day to day life. Consumer goods are not exactly the thing to get investors’ pulses racing, but if they’re losing less money than more exotic investment options, then these sectors are going to benefit from capital flows.

The problem with many of these consumer oriented companies, however, is that management knows they have what amounts to a sure thing and treats their investors accordingly. Don’t count on impressive dividends or shareholder relations from such companies.

Comments

[Jim Rich:]

Banks have a responsibility to its customers and shareholders. Many of the largest banks have totally neglected that obgligation by trying to move into essentially unsecured derivitives like a flock of lemmings. The banks need regulation to prevent their own greed and this from happening! Banks should make a modest profit and pay a modest dividend and otherwise be out of the picture and let any turmoil rage around them; something has to remain stable and reliable.

It is also obvious that the average price of houses can't cost more than the average family can afford to pay. Uncontrolled increase in housing prices are what fuelled this crisis and again it was banks or lenders approving people for loans they could not afford starting close to ten years ago that put things where they are today. Banking should have acted as a virtual cap for housing prices by not funding more than could be afforded and again since they did not do this themselves the types of allowed loans must also be regulated.

Banks that had already acted in a responsible manner will not notice these new regulations, and banks that ignored their fiduciary duty should conform or fail. The country and people in it should not be penalized for their selfish motivations.

Jan 27 08:37 AM

[Ferdinand E...:]

I talked with a colleague yesterday about the economic situation in the US - a full professor of economics and PhD from MIT. I don't think that I've ever heard such nonsense. Economic logic doesn't seem to mean anything any more, but what about common sense. What about remembering how to add and subtract.

Since I don't think much of the new president's energy team and plans, I have hesitated to endorse him - as 'they' were always saying before the election - but no more. It's time to give REAL intelligence a chance. I'm going to assume, and I think correctly, that if the president has made mistakes he is smart enough to recognize this early enough to correct them, and if they are corrected then why shouldn't we see a few miracles in the next four years. After all, his movement from the south side of Chicago to the White House was a miracle...

Jan 27 09:02 AM

[kelm:]

I agree wit the belief that if Obama sees that things are not working out the way his team predicted then he will make changes. However, I wonder if the team really does believe that this will work. There is really no hard evidence that says the form of fiscal spending that is planned will do anything. Indeed, there are numerous arguments from some very intelligent people that says the spending planned will do nothing substantive. Politically though they have got to do something and make it look good. To let events take their course without intervention is not politically acceptable. So this is probably just a hail Mary. But, we do have a president who can create a spirit in a wide swath of people diferent from anyone we have seen before. There is a small chance that the combination could work.

Jan 27 10:56 AM

[kcr357:]

On Jan 27 09:02 AM Ferdinand E. Banks wrote:

> I talked with a colleague yesterday about the economic situation
> in the US - a full professor of economics and PhD from MIT. I don't
> think that I've ever heard such nonsense. Economic logic doesn't
> seem to mean anything any more, but what about common sense. What
> about remembering how to add and subtract.
>
> Since I don't think much of the new president's energy team and plans,
> I have hesitated to endorse him - as 'they' were always saying before
> the election - but no more. It's time to give REAL intelligence a
> chance. I'm going to assume, and I think correctly, that if the president
> has made mistakes he is smart enough to recognize this early enough
> to correct them, and if they are corrected then why shouldn't we
> see a few miracles in the next four years. After all, his movement
> from the south side of Chicago to the White House was a miracle...

I have said for a long time we need to embrace common sense over all else. The previous white was filled with "moral, experienced, intelligent, etc"....people and look at the result. This country needs to find a way to return to a manufacturing economy and ditch the service oriented economy.
As a side note to the common sense issue, ponder this- GM thinks their saving grace will be the VOlt, an entirely electric car that can go 40 miles per charge, and costs 40000. Assuming only routine maintenance costs for 75000 years, a Honda CIvic will only take 4500~ from your wallet in fuel costs for 5 years(assuming 15000 mi a year at 35 mpg, $2 a gallon) I have been racking my brain trying to figure out why anyone would buy this vehicle over a high mpg gasoline engine? Novelty? Impressive the Green crowd?
Anyone have an idea?
GM will also lose money on the first gen VOlt if selling it at 40000.

Jan 27 05:09 PM

[Jose D. Roncal:]

We're now in the second week of the new Obama administration and his approval ratings are still hovering at a high 68%.

In spite of facing enormous challenges, or more likely because of them, he's hit the ground running and has set about to reverse some of the unpopular policies left from the previous administration. As promised, Obama has moved quickly to implement changes including his stimulus package, requirements for tighter Wall Street regulations and higher automobile pollution standards.

Obama and his carefully selected team are riding high and the country's hopes are riding high, but it remains to be seen how long the euphoria will last. People by nature have short memories and even though he has a lot of good will to expend in getting his agenda adopted by a Congress which now has Democratic majorities in both Houses, there are already questions regarding the viability of his proposed stimulus plan as well as opposition by advocacy groups related to other issues like stem cell research and family planning.

Some Republicans will vote no on the stimulus package because they believe it contains too much wasteful spending and doesn't do enough in the short term to create and save jobs. Others are calling for major rewrites and, as expected, Fox News has simply written it off as "socialism." But it appears that Obama has exerted a lot of effort in getting the Republicans' input in order to reach bi-partisan agreement, even attending a private dinner with ultra-right wing pundits, an act which simultaneously shocked, angered, and pleased his supporters.

The stimulus plan is likely to pass in the Democrat-dominated House, but it may run into some blocks in the Senate. It's possible that we'll know more as the week wears on and the disputes continue.

What can't be disputed is the fact that Middle-class America has rallied around him, that he is being hailed around the world as a figure that represents hope and change, and that just the fact that he was elected has already improved the country's image abroad.

It's going to be a long and painful process; an uphill battle all the way with many pressing issues that each call for immediate attention. In addition to the enormous economic mess, there are still the international problems to deal with—Iraq, Iran, Afghanistan, Israel, Hamas, Pakistan, and who knows what else is on the horizon?

Obama has proven his innate ability to mobilize people, to bring them together for a common cause, an asset in today's political environment. It's been said that the first 100 days are critical for any new president. It's seen as a window of opportunity during which he has to set the tone, establish an agenda and demonstrate that he can lead and move lawmakers in both parties to reach a consensus on his ideas, as well as convince his supporters that he can deliver on his promises.

It appears that he's well on his way to deliver, though he's made it clear that things are likely to get worse before they get better. He's making great strides to make his administration as transparent as possible, using technology to the fullest. His team has launched a website at recovery.gov where they will publicly track how funds to implement the economic stimulus package are spent after it becomes law.

In his own words, "Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made public, and informed by independent experts whenever possible. We will launch an unprecedented effort to root out waste, inefficiency, and unnecessary spending in our government." An oversight board will routinely update the site. That's an entirely new concept that truly speaks to change, and one we'll be keeping a close eye on.

Change does seem to be here, but there is so much that needs changing, turning things around will be like changing the course on a gigantic ocean-liner. There's still going to an extended period of forward momentum before we notice any meaningful shift in direction. It may be slow, but as long as it's steady, we can hope for the best.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...

Jan 29 03:25 PM