Dark Clouds Gather as Obama Presidency Spooks the Markets

The Dow Jones Industrial Average ended at 8000.86, down 148.15 points, or 1.82 per cent, off 0.95 per cent for the week and 8.84 per cent for the month. It was the worst January in its 113-year history [emphasis added] and the fifth consecutive month of declines. The 31 per cent decline over the five months was the sharpest since the five months ended December 1937. (Annalena Lobb, "January Was Dow's Worst in 113 Years", Wall Street Journal, 31 January 2009)

And things are not getting any better. On January 19 the Dow was 8205.30. On February 22 it was 7365.67, a fall of 10.23 per cent. It gets worse. Factory production fell by 2.5 per cent in January and capacity utilisation fell to 72 per cent, the lowest level since February 1983. Things are getting grimmer and Obama and his pack of economic and cultural vandals are going to make it worse.

It is self-evidently true that markets drop during recessions just as production does. But there is something else going on here. The straightforward link between recession and declining markets is not operating as it should. If one tracks recent market trends it seems to me that they correlate not with changes in the "real economy" but with the rise and election of Obama. In short, the markets are not signalling that recession is here: They are signalling that Obama's economic policy will damage the US economy. Never ever forget that markets always look to the future. And what the markets now see they don't like.

So what would the market have seen? Well they would know that Rep. Paul Ryan (R-WI) Requested that the Congressional Budget Office estimate the cost of making permanent 20 of the most 'acceptable' provisions of the stimulus package. The result? $3.27 trillion over 10 years. This is truly enormous and is bound to have serious economic consequences. (If anyone believes that any of the Democrats' provisions are meant to be temporary then they have been living in an alternative universe.)

No amount of blustering by Obama and his media groupies can alter the fact that the markets have publicly tried him for economic incompetence and found him guilty. And he has been president for little more than a month. His comments on spending, taxes, salaries and investment have rightly persuaded markets that he is a complete economic ignoramus. It can be argued - and rightly so - that this is par for the course when it comes to American presidents. But Obama is different in that he has successfully conveyed the impression that he either thinks economics is complete bunk or that he doesn't give a damn about economic laws. Either way, his attitude - unless he changes it - poses a grave threat to the economic welfare of the United States.

Share prices represent anticipated future earnings. This is why they fall in a recession and start rise once a recovery begins. By imposing on Americans the biggest pork barrel in their history Obama has driven share prices down lower than they would otherwise be. This is because markets capitalise the effects of government economic policies. Let us take an extreme example. What would happen if Obama implemented a 100 per cent profits tax? Share prices would collapse. Although he has no intention of implementing such a stupid proposal - or even contemplating it - his stimulus lowered share prices because it is believed it will lower economic performance and hence returns to business.

His pork barrel will require a massive amount of borrowing. This must eventually have a negative effect on investment. Economists call this "crowding out". Obama's spending proposals means that huge amounts of resources are going to be directed to consumption. And what is consumed cannot be invested. This means businesses trying to invest will be competing against his massive spending binge thereby killing off marginal investments. (In a situation like this we should expect interest rates to rise. However, if business is sufficiently depressed interest rates could stay low, meaning that the rate of interest does not always tell the whole story).

What this amounts to is that the markets believe that Obama's spending splurge will stuff up the economy.

Aggravating this situation is the environment of uncertainty and fear that Obama has recklessly created. He and his mates might think it is clever politics. It is not. It is stupid and it is politically dangerous. Bill Clinton is obviously aware of the political risks and that is why he warned Obama to stop being negative about the economy. I doubt if he will listen.

Obama's defenders can argue that uncertainty is part of life for businessmen. These people would be missing the point. Of course there is the uncertainty of the market place. It is the role of the entrepreneur to successfully deal with this. Then there is the uncertainty created by politicians. Business men are not going to invest if they believe they will be punished for their success. They are not going to invest if they believe some blustering thug like Pelosi, Schumer or Barney Frank is going to start telling them how to run their businesses.

When this kind of climate emerges - a climate that borders on intimidation - the wisest thing for business to do is batten down the hatches. And this is just what might be happening. The public thinks - thanks to America's one-party media - that bank lending has dried up. Not at all. During the last few months banks actually increased their lending. We shouldn't be surprised at this. After all, Bernanke caused the monetary base to explode, causing a massive build up in bank reserves.

The result is that since last September the money supply has been expanding at an annual rate of about 20 per cent. But business is not the one doing the borrowing. Most Americans are unaware of the fact that the nonbank credit market is massive. This market is not lending and its usual clients are not borrowing and there is nothing the thuggish Barney Frank, Chris Dodd, Chuck Schumer or Nancy Pelosi can do about it, apart from making a bad situation far, far worse.

This the political factor and only fools ignore it, which is why the media are still misreading the economic signs.

The markets are aware of how fast the money supply is expanding. From this they will have concluded that the US is heading for a nasty bout of inflation. They know it defies common sense to think that the Fed can expand the money supply at this rate without triggering inflation. They also know how damaging inflation can be. Combine this with Obama's fear-mongering, his criminal spending proposals and his contempt for sound economics and you find yourself with a toxic cocktail.

No wonder there has been a near vertical rise in gold prices since last November. Now what could have happened back then that would have triggered a gold rush?

Comments

[atlasman:]

Obama was not aware that the crises was this big a crises but he now understands we are in a crises and is working on a way to resolve the crises before the crises turns a huge recession in to a deep depression. All you have to do is believe in the crises and have trust that Obama will resolve the crises before the crises becomes to big to be managed by anyone. So, just vote yes to higher taxes, subsidies for the imprudent, punishment for the prudent, $13/week handouts, spending programs for the congressional leaders favorite pork projects, more borrowing from our children and chinese and unmeasurable future inflation and he promises that the crises he inhereted will be resolved. Otherwise it is your fault that we will still be in this crises.

Feb 23 07:23 AM

[jamesa40:]

The two biggest indicators of Obama's incompetence were 1) Letting Pelosi write the stimulus bill and 2) Sending Geithner out with a plan that really wasn't a plan, but a lot of generalities that got the market thinking these guys are shooting blanks. Now, with no clear leadership and people scared to death about whether or not banks, or for that matter a lot of other institutions, are going to get nationalize, we are in market free fall. Thank you Mr. President for setting us on a new path....straight to the bottom.

Feb 23 08:25 AM

[Amitabha Mu...:]

This is a time when all the Americans who are still productively employed or making money by business activities - just all of them should invest either in land or stocks or any other things that would appreciate in future. But not in gold as the rise in prices of gold is temporary and it will crash the moment the markets are stabilized. So in order to create a big defense against the future which right now appears to be uncertain, investments alone can create a solid future for individuals as well as corporates. Savings will not solve the problem as its value will certainly diminish at a rate faster than one can imagine. From all these investments of the individuals and corporate America will again turn around.

Feb 23 08:51 AM

[ACCOUNTANT:]

i didn't bother to read the whole article - the first 3 paragraphs told me this author is such a right wing wacko that he probably has nothing worth reading to say. Fact is - Bush and the republicans, with their $5 trillion of added indebtedness and their repulsion against regulation, put us into this fricking mess and it will take time to get out.

Feb 23 09:44 AM

[kelm:]

Your view that President Obama may be disregarding basic economic law or at worst be ignorant of it is, sadly, justified. We have had other presidents who have also been ignorant of it with bad results. The US markets are dropping for a vaiety of reasons. The poor plan from Treasury and the almost amateurish communication between the administration, congress, and the media over financial matters is not helping.

Having said that, a cursory look around the world shows that major markets everywhere are in serious trouble. The world is connected very tightly now. So to believe the Obama is the sole cause of our markets falling requires me to believe that world markets are falling because of him as well. This is ludicrous.

Are the policies his administration have put forward going to help? Nope. I do not believe they will. They will in fact prolong the problem. The focus on helping individuals vs helping the economy is misplaced and inefficient. But,...it may keep people from taking to the streets this summer which I think is the real motivation.

Feb 23 09:45 AM

[JK Corcoran:]

I find it interesting that when blame is shown to be in the politicians' laps, attacks on the character or politics of the author result. Everyone has seen in the press the blame, mostly accurate, on the investment banking industry, mortgage industry, but when the politicians such as Carter with the CRA Act, Frank and friends with the 50% CRA lending requirement, and now with Obama and Pelosi paying off their cronies (Acorn??) we see the people who bring this to light are dismissed as "right wing wackos" or "self serving banksters". Ironic, especially when the government owns enough of the big banks now that they are dictating bank practices.

Feb 23 11:20 AM

[ain't no fo...:]

Right on "accountant" - you nailed the cause. Amazing how the arrogance of the republikaans shows thru as they still try to put the blame on Obama after his entire 33 days in office while they spent 12 years (or as some might say, 25 years) robbing the US Treasury and the US taxpayers blind, sending our deficits through the roof with obscene earmarks and totally unnecessary wars.... yet their only solution to this crime they perpetrated against the American people is to play the blame game and try to tear down every single initiative the new administration takes before its even out the door... what a despicable bunch of cretins.

I'm sure I'll get all kinds of thumbs down on this post as the right wing whack jobs and RNC stooges whine and wail and shake their impotent fists at us "libs" and "dems" and socialists - have at it you cretins, everyone knows the truth and your time is rapidly coming to a close... it will not be long before the republikaan party ceases to exist as a functioning or credible organization.


On Feb 23 09:44 AM accountant wrote:

> i didn't bother to read the whole article - the first 3 paragraphs
> told me this author is such a right wing wacko that he probably has
> nothing worth reading to say. Fact is - Bush and the republicans,
> with their $5 trillion of added indebtedness and their repulsion
> against regulation, put us into this fricking mess and it will take
> time to get out.

Feb 23 12:06 PM

[sether:]

Really? Who wrote this, Rush Limbaugh?
C'mon this is infantile. Major financial players and institutions were like teenagers allowed to have a non-stop unchaperoned party for years on end. The venue was Wall Street. Republicans provided the booze, pot, meth, coke and porn while democrats mostly looked the other way. The party has ended, the players have exhausted themselves, lying on the floor in puddles of filth, drying puke and blood crusted around their noses and mouths. A few are dead, the survivors clamoring for one more hit. The house is trashed, condemned. Repulican guardians are unwilling to take any responsibility, so the surviving delinquents must become wards of the state. It's going to suck, yes, but maybe a few can be rehabilitated. In any case they will not be trusted ever again. Adults have to take responsibility.

Feb 23 12:27 PM

[tc1:]

In further response to this one-sided, demented analysis of the present state of affairs, let's not forget the $4.5 trillion that Reagan and Poppy Bush racked up with gargantuan "corporate welfare" mainly in the form of outlandish defense contracts (not to mention insane agribusiness and fossil fuel subsidies, etc. etc.) in the 1980s to early 90s, when the CIA fully knew that the old USSR was already crumbling and in an advanced state of decay and no longer a threat to the free world.

The L.A Times in the early 1980s in a long series of articles about this defense spending pointed out (in an analysis that has been re-affirmed in the late 1990s by retired Pentagon brass at the Center for Defense Information) that for every $1bn spent by the Fed govt on defense, one creates around 5k - 7k jobs; whereas for every $1bn spent on peacetime technology one creates about 7k to 9k jobs; and for every $1bn spent on a more labor-intensive sector (like education or environmental preservation) one creates fully 10k to12k jobs.

So the rightwingers have been slowly destroying capitalism itself by squandering money on projects guaranteed by their lack of relevance to the real economy (e.g., when was the last time you personally needed a cruise missile or a B2 bomber?) to "unemploy" and "underemploy" millions of Americans, who then can no longer afford to purchase/consume the products and services produced by the free enterprise capitalist system. Duh!!

Add to that a cruelly draconian and Scrooge-like GOP policy of holding down wages on mid- and lower-end workers for the last nearly 30 years, and you have a recipe for economic disaster.

And now you know why millions of Americans could not amass any savings to be able to afford the upward-resetting ARMs and are now in foreclosure or facing this threat!

And we haven't even begun to discuss here the insatiable greed, willful ignorance, criminal complicity and horrific lack of regulatory spirit (thank you Ronnie, Poppy, Bill and W.!!) in that great "chain" of Wall Street insiders who were <I>demanding<... more and more of these vulnerable loans so they could slice and dice and repackage them and then leverage them LasVegas-style into "profitable" financial products so toxic that when they finally (inevitably) exploded, they took down the world economy into the present ruination.

God help us and save us from ourselves!

Feb 23 12:28 PM

[James H. Wang:]

He may be spooking the markets, but you seem to be under the impression that somehow we would be in a "normal recession" (like the 2002 one, you would believe, no doubt) if it wasn't for Obama.

This is assuming that there are no real economic factors behind the current economic disaster making this worse than a "normal recession."

Let me name a few:

1) Lax lending standards for years, to the point where borrowers for mortgages need to provide no documentation at all that they can repay.

2) Credit default swaps that caused a domino effect among financial institutions

3) A massive increase in leverage of both the American consumer and the financial institutions

4) Creation of "illusionary" assets that we are now seeing evaporate in front of us, causing a massive fall


Everyone always likes to say that "it's different this time."
I'm not saying that. I'm just saying that it isn't like 2002.

Feb 23 01:41 PM

[Steve in Gr...:]

Great article. Thanks for putting this so clearly. It's been obvious since 1Q08 that the markets have been depressed over the leftist takeover of the U.S. government, establishing a temporary bottom in November 2008.

Now we seen that Obama actually meant the nonsense that he spoke during the campaign, with the Stimulus and Mortgage bills. And he announces plans to raise the top marginal income tax rates and fix entitlements, no doubt by raising taxes too.

I don't think anybody knows how far down this can go.

To all you cranky leftists that post on this board. Please put your money where your mouth is and by U.S. equities and 30 year U.S. Treasuries. We need to get all the stupid money out into the market.

Feb 23 02:57 PM

[Chris B:]

"By imposing on Americans the biggest pork barrel in their history Obama has driven share prices down lower than they would otherwise be."
----------------------...
And plummeting corporate earnings had nothing to do with it? The current average PE is about 13, which is in line with long-term averages in normal times. Are you saying investors would be paying PE's of 20 if McCain had been elected? OK, then tell me why. Also, did the collapse of all the newly deregulated investment banks have any effect? None?


"Obama's spending proposals means that huge amounts of resources are going to be directed to consumption. And what is consumed cannot be invested."
----------------------...
Um... actually consumption spending is declining and the savings rate is increasing. I don't think it's valid to blame a politician you don't like for consumers not saving negative 1% of their income or running up credit card debt any more. Looks more like reversion to the mean to me. We're returning to a 10% national average savings rate after a housing-related binge.


"The public thinks - thanks to America's one-party media - that bank lending has dried up."
----------------------...
Do you mean the one-party media of Fox News, the Wall Street Journal, or the Washington Post? Does Rupert Murdoch know about your theory? I'm flipping through all the right-wing televangelist channels to see if I can find out. Perhaps Drudge has something?


"The markets are aware of how fast the money supply is expanding. From this they will have concluded that the US is heading for a nasty bout of inflation."
----------------------...
So that's why 10 year treasuries are yielding less than 3%!

I'm all for rants, but at least make sense.

Feb 23 03:16 PM

[fireball:]

i don't blame everything on the obamy whammy. i would go all the way back to fdr at least to spread the blame on socialist party a (the dumbocrats) and socialist party b (the reprobates). the left whines the right rants and both are to stupid to see they are complaining to the mirror
buy some gold and silver, buy some oil too. get ready to pay the piper even though the rats are still in washington.
liberty has been eroding since the signing of the constitution. government cannot help itself. it is the nature of the beast.
get ready to help your friends, family, loved ones and maybe a few neighbors.
democracy is 2 wolves and a lamb voting on what's for supper.
in a republic the lamb has a good semi-automatic rifle.
i hope some saw this rising pox of socialism and made what preperations they could. raise taxes, spend more, print more, i doubt it will help. as for me i have set things to side-step this runaway train. i don't think i will need to worry about the ridiculous, immoral taxation for a few years. God only asks for 10%.
besides the standard is set-perjury is o.k.. tax evasion is o.k.too. is it o.k. for everyone or just the federalis?
must be drive by leftist day on seeking alpha. yes lefties i'm a righty but don't think i am a reprobate nor a conservative dumbocrat.

Feb 23 05:01 PM

[Jason Rines...:]

The real power is in the House of Representatives. But the President can certainly add to the damage by being obtuse (like President Bush) or inexperienced and radical like President Obama.

President Obama's best idea is to open up the idea and actionable plan strategy to the public and take McCain's advice to set-up a B group of economic fundamentalists outside of Washington. Boston would be the best of breed of entrepenuarship and fundamentalists in my opinion. The technology required would be a bit of a problem with government contracts and of course, if it's Internet based would cost hundreds of millions and the site/mechanisms would either not function or be so slow as to be the same as not working. That is why I and some others are doing just that, the old fashioned starving entrepenuar way. It's quite an interesting collaberation already.

Feb 23 06:51 PM

[Old Trader:]

Upthread, I believe, someone mentioned the faux pas of sending Geitner out with "the plan that wasn't". My guess is that Obama is still operating in the mode of "must be seen doing SOMETHING!" I'd remind both Obama and Geitner (both educated men) of something the Bard wrote, to the effect, "Tis better to remain silent and thought a fool, than speak and remove all doubt".

Feb 23 10:03 PM

[GSlusher:]

"Well they would know that Rep. Paul Ryan (R-WI) Requested that the Congressional Budget Office estimate the cost of making permanent 20 of the most 'acceptable' provisions of the stimulus package."

That shows what an idiot Rep Ryan (and the author) is. Obama has never said anything about making any of the provisions of the stimulus package permanent. It was Bush and the Republicans who wanted to make the tax cuts permanent. Taxes are going up, folks, at least on the wealthy who got the largest windfall from the Bush tax cuts. Perhaps we should look at the early 1950s, a time of strong growth, when the top marginal rate was something like 75%. Heck, I'd even settle for going back to the tax rates Reagan set.

Feb 24 01:53 AM

[sether:]

Yes, taxes are going up on those that can afford it and who have been getting a free ride for years. Take your medicine agreeably folks. Better to lose some skin now that your whole hide later. We know where you live. Blackwater can't protect you all.


On Feb 24 01:53 AM GSlusher wrote:

> "Well they would know that Rep. Paul Ryan (R-WI) Requested that the
> Congressional Budget Office estimate the cost of making permanent
> 20 of the most 'acceptable' provisions of the stimulus package."
>
>
> That shows what an idiot Rep Ryan (and the author) is. Obama has
> never said anything about making any of the provisions of the stimulus
> package permanent. It was Bush and the Republicans who wanted to
> make the tax cuts permanent. Taxes are going up, folks, at least
> on the wealthy who got the largest windfall from the Bush tax cuts.
> Perhaps we should look at the early 1950s, a time of strong growth,
> when the top marginal rate was something like 75%. Heck, I'd even
> settle for going back to the tax rates Reagan set.

Feb 24 12:20 PM

[Ah Contrare:]

Exactly right on with this article. Everybody with dollars and sense is scared to death of this mongrel, and what he will do. Every time he opens his trap it gets worse.

Feb 24 06:10 PM

[sether:]

People with dollars and sense are just scared, period. For those of us with sense but without dollars (mongrels, I suppose), it is gratifying to hear the petulant piggies squeal. Please realize though, as you are herded into the abattoir of your own making, that screaming and crying will not engender mercy, only further debasement. Bacon is on the menu. We are very hungry.

On Feb 24 06:10 PM Ah Contrare wrote:

> Exactly right on with this article. Everybody with dollars and sense
> is scared to death of this mongrel, and what he will do. Every time
> he opens his trap it gets worse.

Feb 24 09:57 PM

[Panus Skept...:]

Let's see. Wall Streeters believe in Ronald Reagan, Milton Friedman, and lower taxes on themselves. Of course they're upset, everything they believed in is OVER! DONE WITH! TOAST!

And Mr. Butler is about as useless as a 1923 calendar.

Mar 04 04:14 PM