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Obama's mistake! Will Dorothea Lange come back?

|Includes: SPY, iShares 20+ Year Treasury Bond ETF (TLT)
Obama's mistake! Will Dorothea Lange come back?
8 September 2010     
 
 
 
First off, a little self-promotion, which I allow myself; after all, this daily note is anything but expensive. -:)
Maybe it will show those who are not already aware of all the efforts I make to bring you the keys to decrypt the evolving macroeconomic situation at this time of the greatest uncertainty.
 
I thus had the pleasure yesterday evening of including in my Linkedin network a certain Paul Davidson, ‘Holly Chair of Excellence in Political Economy, Emeritus of the University of Tennessee and the celebrated author of The Keynes Solution: The Path to Global Economic Prosperity.
 
-              (For those clients who are still not members of my network, feel free to join (LinkedIn Profile): you will be in good company. And sorry to those I have not contacted personally, but it is hardly by chance that some kindly refer to me as the "invisible broker". I am not exactly the most aggressive salesman).
 
Mr Davidson is above all the co-publisher and founder of the prestigious Journal of Post Keynesian Economics, which has been trying for decades to disseminate ideas that break from the orthodox mould defined by the lovers of the now discredited Efficient Markets Hypothesis.
 
I suggest you take a look at his prophetic article, published at the beginning of 2008, which is all the more interesting given what has occurred since then, including the Flash market crash of 6 May. The article illustrates the up-date-analysis of Mr Davidson, a self-described product of the Great Depression, because born a year after the crash of October 1929; 
 
 
 
Given this topic, allow me to put on my Post-Keynesian béret and speak of today's headline story of the real economy: Obama's mistake!
 
 
This headline will undoubtedly surprise many in view of our oft-stated belief the US government would need to go through a second round of stimulus spending (at least), even if it prefers to call it by another name, given the need to appeal to popular opinion (or populism?).
As we have stated, given that the economy has been performing well below its growth potential (and employment potential), it is the government's role to prop um aggregate demand, when the private sector is in the midst of a major deleveraging phase.
 
 
Unfortunately, the initial outline of Obama's plan does not appear at all to confront efficiently the problems confronting the United States today.
 
v     Obviously, the usual extension (all presidents do it) of tax breaks for research and development investment is a good move. We cannot repeat enough that the key to balancing future retirement funds must above all entail a hike in productivity, and investment in R&D is absolutely necessary to achieving this task.
 
v     Investment in infrastructure (‘Bridge to Nowhere?’), however, would have surely been better spent on improving energy efficiency, one of the achilles heals of US foreign trade.
 
v     But, above all, why the emphasis on tax credits on the purchase of capital goods by allowing 100% depreciation of the cost of these investments from the very first year? Moreover, the measure does not even target SMBs, the biggest job creators in the States!
Why did he not put more emphasis on the idea of a payroll tax holiday, which goes to heart of today's problem, unemployment, by reducing the cost of employment and by favouring relocations within the US?
In contrast, the investment tax credit will increase the importation of machine tools or fax machines from Germany, Japan or China, among others.
And what is the point of helping companies invest in equipment when production utilisation capacity, which is still only 74.8 after falling to as low as 68.50 in June 2009, remains at the lowest levels of the 2002 recession!
Why should American business executives invest in capital equipment under such conditions or until they see a rebound in aggregate demand?
 
 
Imagine the impact that a payroll tax holiday would have had on the rebalancing of the world economy, especially if it were accompanied by a European-style VAT and a TIPP (although that obviously depends on the political strength of the Tea Party)?
This would fit into my idea of a Social VAT for which I have been arguing since 2004 and which Germany intelligently set up in 2007 !
 
What a waste…
 
However, a look at the graph, below, illustrates what should be the American government's priorities .
 
 
Unemployment rate and length of unemployment in the US
Not seen in the States since…The Grapes of Wrath!
 
 
 
 
Have a good day.
 
 
 
Asset allocation biases and advised option strategies 
 
 
·        Our Bund target remains around 2.40-50% for the 10-year GGR, i.e. 130 on December Bund and 2800-2900 on the Eurostoxx 50. 
With the market's nearly three-point decline, we are not really very far, and advised last Friday to strongly reduce all the downward bets.
The 
Bund call and put ratios set up are working correctly (a bit less on the puts for the time being, given velocity), between the decline in volatility and the Bund's down leg.
 
·        And 2800/2900 on the Eurostoxx 50.
   The Eurostoxx call ladders are working perfectly, given the hike in the spot price and the passage of time.
We have even suggested and set up for certain clients outright call purchases on the Eurostoxx on September and October, hoping for a little velocity and benefiting from affordable implied volatility.
 
Feel free to contact me about details for strikes and maturities.
 


Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds, Long Eurostoxx50 ETF