A recent Investment News survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’m yet to hear any one plan which I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts. Obama believes creating jobs through state-government mandated infrastructure projects will jump start consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan and marginal tax rates will ultimately increase to balance future budgets and service debt. I am somewhat intrigued by the idea of government assistance for past-due mortgage payments and renegotiations of mortgage rates and terms. This concept would at least chip away at the housing problems which are at the heart of the financial crisis. I also think eliminating mark-to-market accounting is crucial along with restoring the uptick rule. A real concerted effort is needed right now to mitigate the economic problems and restore some badly needed consumer confidence.
My concern with Obama’s plan is that the stimulus will be temporary. One scenario could be that we ultimately create three million jobs rather than four million, and the new trend of saving rather than spending will decrease the effect of the stimulus dramatically. Stats show that lower income Americans tend to spend the large majority of their earnings but I think that may be changing in the foreseeable future. The Obama plan may succeed in giving the Dow a temporary bounce, perhaps up to 9,000 or so. It would seem impossible that nearly a trillion dollars of stimulus doesn’t improve our economic stats for a few months. But once the dust settles and we start to ponder paying back the trillions of dollars we spent jump-starting the economy and bailing out the banks, then what happens? We raise taxes on the rich and on small businesses, lose more jobs as a result, and hope that Bernanke and his crew are right about their ability to contain inflation. If not, we get this inflationary deep recession which could easily push the Dow below 7,000.
As for the housing crisis, I firmly believe that 80% of the solution will happen naturally. Any attempt to ‘float’ home prices or spend money to keep people in homes which they can’t afford is absurd. If prices drop another 10% or so, new buyers will likely venture back into the market and scoop up deals. If prices drop back to 2000-2001 levels, the historical chart of national home price appreciation will start making sense again. As for areas with high rates of foreclosure and abandoned homes, I agree with the response given by the Feds lately that allowing regional clumps of foreclosures can be viral and ultimately reduce the property value of broader neighborhoods. We don’t need to be as concerned about foreclosures rates on a national basis: it’s the individual regions which require additional oversight to prevent the scenario of spiraling price declines.
In terms of dealing with the bleeding stock market, I think we have to at least temporarily eliminate mark-to-market accounting. These onerous requirements, designed to improve transparency and fairness for investors, have caused financial stocks to fall apart. In testimony Wednesday, Ben Bernanke first defended mark-to-market by saying it’s logical that investors should have the right to see the actual market value of assets rather than fake ‘book values’ and other bogus valuations designed to dress up balance sheets.
He went on to say that the large number of complex financial instruments we have here in the US along with many illiquid assets make it very difficult to implement a ‘real-time’ valuation. Bernanke said he supports the efforts to further analyze mark-to-market accounting and would like to especially improve the illiquid side of the market.
Similar comments were made with respect to the uptick rule. Bernanke wouldn’t comment too closely on the issue because it’s ultimately the responsibility of the SEC, but he did say they are giving careful consideration to its implications going forward. He certainly left the window open for restoring it. It doesn’t take a genius to realize short-selling by hedge funds and other market-moving investors have exacerbated the downtrend of financial stocks over the past six months.
If we can swiftly address all of the issues above in some kind of organized fashion, I genuinely believe our economy will come out better a couple years down the road. At this point we desperately need some confidence boosting to lift stocks and give ordinary citizens something positive to talk about.
Please e-mail me with any questions or comments here.
Russell Bailyn
—
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.