Dirk McCoy's  Instablog

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 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 Proctor and Gamble, Boeing, McDonald's, Coke, HP, Citi, and GE, along with companies such as Emcore 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.

Pennsylvania governor Ed Rendell announced last week that Pennsylvania will triple its solar capacity with nearly $23 million in new grants and loans, including a 135 acre solar park to power 1450 homes, and a $1M grant towards a $5.1 million project to install a 695-kilowatt rooftop solar system on a ShopRite Supermarket to help preserve 283 jobs.

A recent commercial promised the entire US could be powered by a 100 mile by 100 mile swath of land in Nevada.  But using the density of the Pennsylvania project as a guide, this area is understated by 45%.  And there are dozens of stories about solar panel prices moving below $2/Watt- so why is the ShopRite system costing over $8/watt?  And one last question- if electricity is going for $.02/kwh on the wholesale market, why is Pennsylvania spending $23 million, at what looks to be above market rates, to create power that will likely cost significantly more?

While solar, wind, tidal, geothermal, nuclear, and other energy sources will be required some day to offset declining fossil fuel stocks, investing in those alternatives today in uneconomic fashion doesn't work unless government subsidies come into play.  But government subsidies detract from other economic uses of those funds, which could include additional research and development in a variety of areas that could provide a greater improvement in living conditions.

While current political winds blow in support of government subsidies, a change in these winds could just as easily interrupt these subsidies, creating a replay of the ethanol saga of bankruptcies and loss.  And when solar irradiance in Arizona and Nevada is 3X that in Pennsylvania, one must truly wonder what kind of sustainable economic analysis is in the pervue of government. 

A Reuters report today (http://www.reuters.com/article/domesticNews/idUSTRE56C0T120090713) focuses on the trend more people working for free in this current job market.  While the official unemployment rate nationwide approaches 9%, the unofficial unemployment rate is estimated at 20%.  Teen unemployment above 24% is nearing record proportion.  As a black market in labor is developing (not to say anything of the uncompensated efforts of bloggers, gamers, and mySpace designers everywhere), it seems reasonable to question labor price controls- and how the solution will likely involve inflation and increase in equity prices.

Some 90% of economists agree that a minimum wage increases unemployment.  Detroit increased its minimum wage in 2006, and it's labor market has eroded significantly since then.  Congress voted for an increase in the Federal minimum wage that goes into effect the end of this week- forward pricing this development has certainly not helped with job creation.

Higher unemployment and price controls have three dimensions, especially damaging in the current debt-ridden position- loss of initiative, loss of income, and loss of industrial base.

As fewer entry level jobs are created, and as fewer manufacturing and teleservice business compete without outsourcing jobs to lower cost countries, fewer support positions are required.  Supervision, maintenance, and production engineering positions are also lost.  Over time, as equipment and engineering are moved to low cost countries, the impetus for invention is lost to these overseas locations as well.

It only makes sense, then, that the glut of labor unleashed via globalization should negatively impact labor rates.  And a relatively higher rate of compensation for skilled and educated workers is required to provide incentivization for education and training.

As unemployment (and a black market for labor) grows, pressure will build for these price controls to be mitigated, if not lifted altogether.  Given the reality of political support, it will be easier to affect this change via inflation and renewed weakening of the dollar.  Reinflation will steal purchasing power from laborers, but allow more US laborers to participate in the international labor market- increasing output, and eventually, living standards.  Additional money and reduced relative labor prices will have the effect of raising equity prices as more money is created.  Oil and other commodities that can't be easily substituted will increase in value as well. 

Look for the Fed to maintain low short term interest rates, and perhaps quantitative easing, for years.  When a large pool of workers is prepared to work for under minimum wage (as evidenced by the growing black market of laborers willing to work for free), cost-push inflation isn't that close.

Disclosure: No positions