How You Can Profit from the Obama Economy

Barack Obama is defending his economic policies while reminding Americans that he inherited a $1.3 Trillion dollar deficit. Unemployment is slowing, yet high. Projected deficits are astronomical. The stock market is rallying. So - who is to blame?

Let's start by dividing economic performance into three time periods - the 2003-2007 boom period (as the stock market hit historic highs and official unemployment hit historic lows), the 2007-2009 bust period, and the 2009 onward recovery period. Now, remember this- the market is a leading indicator, pricing in projections of future economic performance. So, what did the market price in in these periods?

2003-2007: Lower interest rates, lower taxes, productivity improvements through technology, loose regulation, and globalization of all these leading to a larger, lower cost, labor pool.

2007-2009: Higher interest rates (as the Fed inverted the yield curve to combat "top-heavy, unsustainable" growth), higher taxes, more regulation, higher labor and energy costs, and specter of protectionism and more welfare. These are fundamental tenets of Obamanomics, their likelihood increasing from the Democratic Congress of 2007 through Obama's inauguration in January of 2009.

2009 onward: Lower interest rates as the Fed not only slashes short term rates but buys down longer term rates, uncertain taxes, uncertain labor and energy costs, and uncertain protectionism and welfare.

In other words, the market just may be improving because public support for Obamanomics (and the idea that slower economic growth has some advantages) wanes. Global cooling and increasing skepticism for viability of alternative energy in the short term have put cap and trade on deathwatch. With widespread understanding of the role of Smoot-Hawley in the Great Depression, Obama reversed course on NAFTA to get elected. And a new healthcare entitlement increasingly looks like a long shot.

So, what does this mean for individual stocks? For one, a return to the story of American leadership in globalization, with big deals, big technology, and global expansion of a middle class. This would be good for companies such as Procter and Gamble (PG), Boeing (BA), McDonald's (MCD), Coke (KO), HP (HPQ), Citi (C), and GE, along with companies such as Emcore (EMKR) that have leading technology (while handling solar is a problem short term, there's no doubt that it will be key long term) and fertilizer stocks that should do well fueling the vast increase in food production required.

And second, a return to dollar devaluation as the Fed maintains strong growth environment. Inflation will be key- thus, offsetting this with lower labor costs and technology substitution for commodities. Companies that specialize in getting greater efficiencies using technology should do well.

In short, I'm hopeful that the economic US and global outlooks are bright. Three billion people are living in near poverty, and there is ample idle productivity to make a significant dent in this. The US economy can resume strong GDP growth as it resumes global economic leadership. And, for this, Obama will not be to blame.

Disclosure: No positions

Comments

[epeon:]

Going long on debt is probably a good idea. You can pay back with inflated dollars latter on. Buying a house now with a 30 year not is probably a very good idea.

Aug 07 02:48 PM

[chap08:]

1. Oh yeh wasn't 2003-2007 such a wonderful time? Nothing going wrong at all (we'll be paying for that period for quite a long time).

2. The Fed didn't invert the yield curve. They admitted their frustration that it didn't respond as intended to their actions at the front end.

3. You seem to believe that foreign demand will pull the US out of recession. The only time this ever happened before was when the major powers were gearing up for a world war.

Aug 07 02:52 PM

[Tony Petroski:]

Mr. McCoy. Get someone to check your copy.

"2007-2009: Higher interest rates"

Huh?

Aug 07 07:20 PM

[Spartacuss:]

I see a trend developing of treasuries selling off again. This trend is being battled with by virtue of the fed purchasing the T's, quantative easing. And more to come to keep those effective rates down.

But how long can this play last? At some point the chickens have to come home to roost...a big negative for the markets along with a plethora of other fundamental negatives. Ah, but the band marches on. The market now is strictly momentum with anticipation of coming reflation...the mantra of the day...will it last...well, no.

Watch the Baltic Dry Index, it tells all.

Aug 08 10:25 AM

[The Geoffster:]

"I think when you spread the wealth around it's good for everybody."
-Barack Obama

Aug 08 11:25 AM

[MarkitWacha:]

Long: put options on TLT

I'm waiting on a clear trend before buying DBC and put options on SPY. Friday's performance for SPY was overdone, and doesn't match the fundamentals.

The facts are that the unemployment situation got worse last month. Period. We'll see 11% unemployment before it improves. Obama's 10-yr budget presupposed a 6% unemployment rate and a constant 3-4% GDP growth. Ridiculous. Instead, there are 9.4 million people without work, and about to lose emergency benefits.

In Dallas, I feel surrounded by out-of-state vehicles from the coastal states. You know, Bush said that to solve the overwhelming immigration problem the Mexicans should go back to Mexico to fix their own government. I can say the SAME thing about all these %#!* CALIFORNIANS surrounding me. GO BACK! FIX YOUR OWN PROBLEM!! VOTE for FREEDOM for a change. I hope the 115 degree heat crushes them.

2012 is the crux. If there aren't new technologies available by then for electric cars/Natural Gas cars and electricity generation, the economy will crumble under the prices of energy commodities if legislation doesn't kill it first. I think that's the year the interest on the federal debt will outweigh the tax receipts. Will unemployment get better by next year? of course. Watch out for 2012.

Aug 08 12:56 PM

[Kunst:]

Maybe we should have saved a bit of that wonderfulness during the 2003-2007 "boom". A 1% or 2% tax surcharge would have slowed things down a bit while putting money in the bank for a rainy day. Keep in mind that Bush inherited a long-term surplus and passed on a devastating structural deficit, in the process doubling the national debt in two terms. Of course, his father and Reagan quadrupled it in 12 years, so he's actually weakened the tradition.

Aug 09 05:07 PM

[Dirk McCoy:]

Thanks for the comments.

As for interest rates, my point was that the economic slowdown of 2007-2009 was in part precipitated by higher short term interest rates. If you're a homeowner who bought a house in 2003-2005 based on 2, 3, or 4% short term rates, as you watched your ARM potentially resetting at 6, 7, or 8% you cut back your spending (if you were rational, which many people are).

And if you're a small business trying to get a loan, bear in mind that since banks not only want debt payment but 2X cashflow coverage on that, you just had to increase your cashflow to service debt- again, having a chilling effect on debt.

By the time interest rates were reduced in 2008, the economy was on the ropes. The lower interest rates of 2008 and 2009 are definitely helping with this recovery. I'm hopeful that some people have learned their lesson about overworrying about growth, and will allow the Fed to keep easy policy longer rather than shorter. Some inflation will be the cost, but the US is not Zimbabwe by any stretch of the imagination.

Aug 09 11:49 PM

[ClarenceBeeks:]

BUY GOLD, NO, BUY ALOT OF GOLD

Sep 22 02:15 PM