Daily State Of The Markets: A Very Important Decision

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 |  Includes: DIA, SPY
by: David Moenning

Good morning. To be honest, I am not a terribly political person and I try my best to keep my political views out of my writing. I generally vote for the presidential candidate that I believe is best for the country. As such, I will admit to having voted for both teams over the years. However, since there about a zillion places to get biased political commentary, I figure the world doesn't need one more. So, rest assured that I am NOT going to change my position on this and start railing for one candidate or the other this morning. Yet at the same time, I do believe that this election represents an important decision from an economic and stock market perspective.

The topic for this morning's missive evolved from a discussion I had over the weekend with my oldest daughter, who is pursuing her PhD, is 26 years old and is married-filing-jointly. If you know my Amy, you know that she is passionate about everything she does. She also "lives" in the world of academia and spends her days on a college campus. Therefore, it probably won't surprise you that she prides herself on being a "woman for Obama."

In what turned out to be a rather spirited debate with my daughter, her primary point was that she is voting for her ideals and that she will be casting her vote for "different reasons" than I am. My daughter is focused on women's rights issues, science, education etc. And on the completely opposite end of the ideological spectrum, I am focused solely right now on the state of the economy.

My primary point that I attempted to make to my eldest was that there are lots and lots of issues that you can take sides on in a presidential election year. However, THIS time there is really only one issue that matters - the economy. I have been voting since 1980 and never before in my lifetime have I felt that the decision on how best to steer the economy was so vital.

Sure, things were tough in the 1980 election. But at that time, the issue was inflation and not a debt load that is currently more than $16 Trillion (and growing at more than $1 Trillion each year - with apparently no end in sight). While both sides acknowledge that the debt is too high, politicians have done little more than pay lip service to what, in my opinion, is an enormous problem for our country.

Let's say that we, as a country, decide to come to our senses and commit to paying off this $16 trillion in the future. But since focusing too much on debt repayment in the near-term would undoubtedly impact economic growth, let's assume that we're going to get rid of this massive debt load over the next 20 years. According to my Excel spreadsheet, this means that the government will need to set aside $2.19 billion to put toward debt repayment. But here's the catch ... that $2.19 billion needs to be set aside each and every DAY of the year for the next 20 years. (Oh and that doesn't include the interest payments we are currently making on the debt load.)

To put this into perspective, that's $800 billion a year. And if you will recall, Congress threw a hissy fit when Hank Paulson said he needed that amount to put a stop to the credit crisis in 2008. And then $800 billion is also pretty close to the amount of money that the administration decided it needed to stimulate the economy when they took office in 2009. My point is that both decisions to spend $800 billion were monumental in the beltway at the time. So, do we really think that the children in Washington D.C. have the political will to commit to spending that much money each and every year for the next 20 years?

Now let's factor in that the administration is currently spending in excess of $1 Trillion more than it brings in - and has done so for four consecutive years. This means that if we, as a country, decided to start paying down our $16 Trillion in debt, we'd first need to stop spending money we don't have. And by using my fingers and toes to do the math, this means that we'd need to find about $1.8 Trillion a year if we wanted to be debt free in 20 years.

Depressing, right? No way in heck this is ever gonna happen, right? Right. However, there is another way to go here. It's called growth. If your family was facing huge credit card bills and not enough income to pay for everything, what would you do? Well, you would start by cutting costs. And once you've cut all the costs you could, you would then likely look at how to increase the amount of income coming in.

The key here is the concept of growth. The best and fastest way to cut deficit spending and to start chipping away at that massive pile of debt is to make the economy grow. One party believes that "taxing the rich" will accomplish this. And while this may be politically expedient and make for excellent campaign sound bites, the bottom line is there just aren't enough rich people in this country to have much of impact. Don't believe me? Google it and do the math yourself, I have.

Then there is the simple economic fact that raising taxes doesn't lead to growth - almost any Econ 101 textbook will state as much. You want the economy to grow? Then you need to provide stimulative measures and/or incentives for companies to spend money and hire people. (Let's not forget that Corporate America is sitting on record amounts of cash at the present time - but you simply can't force companies to spend that cash.) You want companies to spend more money on expanding their plants and hiring more people? Unfortunately, telling them their taxes are going to go up and their costs are going to go up isn't the way to get it done.

From an unemotional, objective point of view, the key then is economic growth. The U.S. GDP in 2011 was $15.075 Trillion dollars. But currently the economy is barely growing at a pace of +1.3% annually. This means that the government's revenues aren't growing much either (but the pace of spending continues to go up each year.) However, if you can get it to grow at what would be considered a normal pace for this point in the economic cycle, you'd be looking at something more like a 5% growth rate - which, of course, means that you've got more revenue coming into the government.

Getting back to the discussion with my daughter, I told her that the issues she finds important are all well and good. But for THIS election, the economy is the one and only issue that matters. If you kick the can of debt and deficit spending down the road, the economy is going to go right back into recession in the first quarter of 2013. And with the entire world now anti-debt, there isn't going to be any trillion dollar stimulus package coming from the government. So, my point is that unless you want to see the U.S. enter into a Japan-like 20-year cycle of deflation (something that Ben Bernanke is doing EVERYTHING he can think of to try and avoid), the economy needs to start growing right here, right now.

Will either political party get it right in terms of the deficit, the debt, and economic growth? Not likely. Will mistakes be made? Count on it. The key though is to recognize how important this particular election decision is. Thus, I would encourage everyone in America to focus on the issue of the economy and to vote for the candidate that they feel will best guide the country toward economic growth. It's your decision.

Turning to this morning ... Stocks are following Europe higher in the early going ahead of some important data this morning. We will also note that it's an options expiration week and that stocks are currently oversold.

On the Economic front ... We'll get reports on Empire Manufacturing, Retail Sales and Business Inventories this morning.
Thought for the day ... It is better to look ahead and prepare than to look back and regret. -Jackie Joyner-Kersee
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
  • Major Foreign Markets:
    • Shanghai: +0.10%
    • Hong Kong: +0.65%
    • Japan: -0.15%
    • France: -0.11%
    • Germany: -0.12%
    • Italy: -0.05%
    • Spain: +0.34%
    • London: -0.13%
  • Crude Oil Futures: +$0.18 to $92.25
  • Gold: -$0.90 to $1769.70
  • Dollar: lower against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.683%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +5.56
    • Dow Jones Industrial Average: +41
    • NASDAQ Composite: +5.14
Positions in stocks mentioned: none