Stock Market Prediction: Down, Down, Down

The Dow closed at 12,231.11 yesterday, and we've just been through one of the best months for that index in quite some time.  Buoyed by news from Europe that they've taken action to help the new "Sick Man of Europe (Greece)", investors seem to be riding a wave of enthusiasm that will--I'm sorry to say, come crashing down on them in the next month.  Here's a prediction:  on December 15th, the Dow will be under 11,000.

Why so glum?  I'm not glum, I'm practical.  I've written about this before--when the Dow was at 14,000 in October of 2007, it was weighed up by the ridiculous fiction that was the balance sheets of financial stocks.  When it was at 6500 in March of 2009, it was weighed down by people who had lost sight of the basic value of many of the industrials.  I said in March 2009 that the Dow had been overvalued by 25% at its high, and so its natural place was somewhere around 10,500, a figure that reflected the basic value of "the rest" of the market.

Here we are, two and a half years later.  Nothing has really changed in the basic fundamentals of the economy.  Unemployment is up a bit (from 8.6% in Mar 09 to 9.1% now).  No fundamental changes have occurred in 1) how we as a nation are addressing debt 2) how we as a nation are addressing financial regulation and reform and 3) how we as a nation are addressing revenue.  We are in the midst of a mini-bubble, caused by 1) a misplaced sense that the political agreements made in the Spring and Summer on the budget and the debt ceiling have had salutary impacts on the economy and 2) Europe's news.  It is all about to end.

In the next few weeks, nothing will dominate the headlines like the activities of the Congressional Super-committee.  Meeting largely behind closed doors (which I am ok with--see, Philadelphia, 1787), the Super-committee is meeting in order to come to agreement on how to deal with trillions of dollars in debt.  The "gun" to their head (and the rest of ours, presumably) is that if they DON'T come to some agreement, Defense gets cut by $650B and other discretionary spending gets cut by $650B.  If you thought our political system looked amateurish trying to deal with the debt ceiling, you ain't seen nothin' yet.

The prospect of a Presidential Election a year away provides both sides with incentives not to do a damn thing.  Positions are hardening on both sides, and the "gun" held to the head of the Congress was PUT THERE by Congress--it can be dropped at any time.  So we are left with the following scenario:  the Supercommittee is supposed to report out its "bill" to the Congress in three weeks.  They will not do so, as they will not have reached agreement on anything.  If they do, the bill will not be able to pass both chambers.  And so, the Congress will have to "extend" the mandate of the committee, or it will have to "drop the gun", both of which will ensure for the investing world a picture of continuing dysfunction in the American political system.  What's next?  Well, another credit downgrade, for one thing.  Any of the ratings agencies which have not yet dropped the US rating will HAVE to in order to continue to be taken seriously.  The dollar--the world's favorite reserve currency--will come under additional pressure, as what has been its bulwarks for 70 years--America's economy and its stable political system--will both be besieged.

Is the end near?  No, not really.  It's just that the present situation is not reality.  If you've got some profits to take--take 'em.  Because things will look differently in six weeks.

Robert Samuelson Nails It

I do enjoy reading Mr. Samuelson's work, including this ditty from the morning WaPost in which he eviscerates both sides of the same coin--the increasingly marginal Grover Norquist who would take the country down in pursuit of the perfect and liberal Center for Budget and Policy Priorities which has never seen an entitlement it doesn't like. 

As long as we live in a Democracy folks, in order to get things done we have to make compromises.  Yes, I realize it is untidy and it makes things harder, but let's face it; ultimately, it is what separates us from the Chinese.  As far as I'm concerned, the grander the bargain, the better.  A slight course change only delays the trip into shoal water; we need to get back in the center of the channel, where the water is deep and wide.  This is going to hurt--and the more people it hurts (as in, more KINDS of people), the better.

Klein v Ryan On The Economy

Lefty blogger Ezra Klein probes up-and-coming Republican star Rep. Paul Ryan on the economy. A good, civil exchange between two policy wonks at completely different ends of the political spectrum.

Here's the link. Go for the interview, stay for the always-entertaining comments at the end.

If the Republicans take the House in 2010, I think Paul Ryan may find himself on the top of several VP short lists in 2012.

Goldwater's Ghost's Financial Adviser Has News For Us

....and it isn't good.

HT: Instapundit

WaPost Giddy At Prospect Of Tax Increase

Gotta love the Bought and Paid For Media--including the newspaper of record here in our nation's capital. In this editorial, the Post views Barack Obama's recent prevarication on his pledge not to raise taxes on "the middle class" (those households making less than $250K a year--a pledge he has since broken several times, including his support for mandatory health insurance which is of course, a tax on the middle class) with glee. Calling the President's campaign pledge a "...foolish..." promise, the Post is like a puppy thumping its tail on the rug at the prospect of a broad-based tax hike. Here's the Post:

"Given the size of the government he wants to run, and given the size of the debt and existing obligations that he inherited, hewing to this position is untenable. But we heard -- at least we thought we heard -- the glimmerings of an opening in Mr. Obama's interview last week with CNBC's John Harwood, and the president's comments are worth revisiting as the commission prepares to hold its first meeting today."

Shall we look parse this statement a bit? First of all, the "size" of the government he wants to run is not a given--it can be restrained, it can be reduced. Secondly, the "size of the debt and existing obligations that he inherited" while substantial, pales in comparison to his additions thereto and their amplified additions in the years to come.

In the military, we have a canard about the Air Force that goes something like this--when they get the money from Congress to build a new Air Force base, they get enough to build the gyms, the schools, the housing, the hobby shops, the car wash, etc, then go back to Congress and complain they don't have enough for the runways and hangars. It sorta works that way with the Obama Administration; create a $900M stimulus that doesn't stimulate anything but community activist organizations, add a $1T health care plan and throw some student loans on top of it and pretty soon, you find yourself saying "we don't have enough coming in to pay for all this". So you seat a commission that you pack with folks you know will support what you wanted all along--and that is, more revenue to do more things. The non-virtuous cycle repeats itself, and our fiscal future is undermined.

This is what passes for Democratic solutions to tough fiscal problems.

Samuelson on Obama's Coming Budget Crisis

Wonderful piece here by one of the best, Robert Samuelson. There is so much lying, so much trickery, so much obfuscation, in this bill. Samuelson helps cut through the BS. Bottom line here: this was a bill designed to do two things: 1) increase government control over more of our lives and 2) provide healthcare to a greater number of uninsured. It was not and has never been about controlling costs. Individual premiums will rise, and the national debt will skyrocket. This is legislative malpractice.

As Goes WalMart...

Uh oh. This isn't encouraging: "Walmart suffers first US sales decline"

Lazy Book Review: Henry Paulson's "On The Brink"

I just finished reading Bush Administration Treasury Secretary Hank Paulson's new book "On the Brink: Inside the Collapse of the Global Financial System". Coupled with "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street", I now have two views of the 2008 melt-down of global liquidity. I've just started "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves", and so I figure by the time I've finished these three books, I'll be a damn sight smarter on what happened than I was when I was living through it.

Paulson's book is a readable, diary form overview of his actions, decisions and insights throughout the crisis. Seeing the fall of Bear Stearns from the viewpoint of Bear insiders (House of Cards), and now seeing Paulson's side--I was gratified to see that pretty much everyone seemed to believe that there were legitimate, no joke systemic crises underway. Folks inside industry and the government were fearful for a worldwide calamity--and it was this perception that drove Paulson (and President Bush) to pursue TARP--which as I've said before--is the ONLY THING government has done since this crisis started that has actually made things better.

Paulson is to be congratulated for his service to the country. He, Ben Bernanke, and Tim Geithner (then President of the NY Fed) worked like field hands for months at a time to try and put this country back on firm footing. The maturity of those at the top was gratifying.

Paulson cites Barney Frank as being particularly effective and helpful during the crisis--something that I must honestly admit to being astonished about. I never doubted Frank's intellect, just his ability to transcend ideological blinders--and from Paulson's view, he can.

Why No Job Growth? Why is The Dow Wheezing?

Tigerhawk and Glenn Reynolds at Instapundit team up in this post to give a pretty fair overview. Businesses aren't going to hire if they're waiting for the next shoe to drop.

Could Obama Be Losing the Sage of Omaha?

Tigerhawk links to a CNBS Squawkbox segment including an interview with Warren Buffet, talking about the new series of "bank taxes" being proposed by the Obama Administration. Warren's right, of course. What was done in the Fall of 2008 (by the Bush Administration, let us not forget) was done to save THE ECONOMY, not the "banks". The US economy was in free-fall, and the most efficient, most effective way to staunch the bleeding was to provid instant liquidity to the system through the banks. Those banks are now paying back that money WITH INTEREST (as it was intended from the beginning to be--let's also not forget that little fact). Warren's also right that the Obama Administration's tax is wrong--just plain wrong.

So Warren--how's that Faustian bargain feel now?

The President and The Fatcats

President Obama had the heads of the Five Famil...whoops, the heads of the largest banks over to the White House yesterday for a chat, a few hours after calling them "fatcats" in a 60 minutes interview. Ever the populist (puke), the President has firmly affixed blame for our fiscal crisis on these men, and then takes great pleasure in criticizing their bonus structure and other aspects of their compensation. A few thoughts.

Firstly, I suppose I wouldn't make a very good Fortune 500 CEO, because if this President ever hauled me in for a chat, I have a feeling that I might not actually be a very pliant guest. Over at Tigerhawk, there's a great post on what someone WISHED Jamie Dimon (of JP Morgan Chase--and by the way Jamie--how about getting that stock price up a bit?) had told the President. My favorite part:

"Also, you sent a clear, unspoken message today that you'll put a big surtax on my bonus if I resist your putting in a new federal bank consumer protection agency -- why don't you just call this new agency ACORN and be done with it? I spent years putting up with Sandy Weill. I already have my "fuck you" money. You may be President, but you aren't President for Life."

Next, it strikes me as impolitic to have call a bunch of people fatcats on one night and then try to persuade them to save your bacon domestically by loosening their loan practices to small business.

Moving on, I am struck by the moral dimension being applied here--which goes something like this. "You got the taxpayers into this mess and they bailed you out. Now you have a moral obligation to loosen your credit rules in order to fund small business loans and help get this economy out of dire straits." Where to begin, where to begin....

First of all, yes, Wall Street has blame in where we are. They saw an opportunity to make money, they failed to accurately and adequately assess risk, and they ignored for too long signals that now appear obvious that their business model was flawed. And secondly, yes, the Federal Government did intervene to shore up the nation's banking system in an effort to stave off systemic failure.

But where we are today is far more complicated than just "burn the bankers". How about John Q. Public's role? You know, the lady we covered here just yesterday, who blatantly speculated in real estate and then decided to simply walk away from their obligations? What about the politicians (on both sides, mind you!) who sought to curry favor with their constituencies by trumpeting "home-ownership" as if it were a human right, only to create a market of people who never should have been mortgage holders to begin with?

Furthermore, this suggestion that "the taxpayers" bailed out Wall Street is way overdone--especially when one remembers that four in ten workers PAY NO FEDERAL INCOME TAXES, and more to the point, it is far more likely that CHINESE TAXPAYERS ought to be thanked for the money, as it is they who bought our debt like it was coming back in style....

Finally, let's say for the sake of argument that everything the President says here is right. That STILL does not levy a moral mandate on the bankers to do anything except PAY THEIR OBLIGATION TO THE GOVERNMENT BACK. That is the most moral thing they could do, and it is to be honest--exactly what they are doing. Are we setting a new precedent here? Is there a suggestion that when someone obtains a $10,000 credit consolidation loan from a bank--that they are somehow MORALLY obligated to do business with that bank EVEN AFTER THE LOAN IS PAID BACK? Because at some level of abstraction, that's what we're saying to the bankers. Worse, the President is criticizing them primarily for failing to do exactly what it is that put us into the place we are--and that is make risky loans. Does anyone really think that these "fatcats" would avoid making a buck if there were a buck to make? Does the President have no sense that his business unfriendly policies are at least as responsible for small businesses not growing as any lack of capital there may be?

When Does It Become Obama's Economy?

The President gave another speech today about the economy, and once again, he pointed his finger at his Republican predecessor for the economy he inherited. Ok, he's right. There was a Republican before him, things sucked when he took over--we get it, we get it.

When will someone in our vaunted, Republic defending press corps, ask the President straight up when he no longer gets to blame the last guy? When will a reporter look the President in the eye and ask, "Sir, you've been in office for almost a year. If the economy is not yours now, if the state of the economy we are currently in is not your fault, when do you estimate that it will be?"

Don't hold your breath.

Portrait of TARP-Man

I've said several times in this blog that the only thing that government did (Bush or Obama) in the midst of the financial melt-down that actually had ANYTHING concrete to do with the current recovery was the bank bail-out--otherwise known as TARP. Moving to ensure liquidity and keep the system from imploding upon itself set the basis for the slow unwinding of the markets we've seen since March. House Republicans walking away from the initial version of it was a dark day for the party.

In this WaPost portrait--Neel Kashkari--the man Hank Paulson called upon to devise and administer TARP--is featured. This is the story of a man who worked his ass off for the good of the country, only to be savaged by the preening ponies of the Congress. Kashkari has dropped out of site to the woods of Northern California to rebuild himself, his marriage, and his life. This is a man who deserves praise for a job well-done.

On the New Job Numbers

The incomparable Keith Hennessey on today's job numbers.

Some advice for conservatives in Congress:
1. These numbers are good news. Don't try to make them bad.
2. This is the time to LAUD American business for persevering in a rough economy in the face of staggering uncertainty--what costs will Cap and Trade impose? What new taxes will healthcare impose on them?
3. Responsibility should be placed on the President for allowing the unemployment rate to get this high in the first place--his stimulus didn't stimulate, and his policies have created doubt and slowed the recovery.