War Of The Worlds! Obamanomics vs Reality


The stock market has taken investors on a wild ride lately, and every day brings new thrills and spills. I will be posting random thoughts in this post during the next day or so.

The Skinny: The Market Has Rejected A Bogus Recovery

Forget the S&P downgrade, the debt ceiling fracas, the perennial posturing of Congress and all the rest. These have a role in our situation, but the intensity of the recent correction is quite simple. Earlier this year the market was rising on expectations of recovery, albeit a modest one. As the spring and summer unfolded, we witnessed a succession of disappointing economic news – a spurt in energy prices, food inflation, depressing job numbers and depressing housing numbers. Once the debt ceiling issue was solved, investors began to focus attention on the fundamentals of the economy, which are awful. The stock market is the pricing mechanism by which those expectations are expressed. The rest is history.

The Debt Ceiling Resolution Was The Spark, Not The Fuel

While the conditions were ripe for a correction, the debt ceiling drama encouraged a quick conflagration instead of a slow burn. When it ended, it was clear that:

1) the political class as currently constituted can not cut spending in a meaningful way, period. They have no will to fix a government budget dynamic that borrows 40 cents for every dollar it spends.

2) a significant and depressing portion of the political class is still attracted to the illusion of new taxes as a quick fix.

3) The downgrade by S&P focused attention on the deteriorating fundamentals of the US economy and the abysmal failure of stimulus spending. It joined weak economic fundamentals to drive investor psychology in a decisively negative direction. Paradoxically, it has hardly affected the government bond market. Indeed, interest rates on Treasury securities are FALLING, a result of the “flight to safety” that generally occurs during equity market corrections. (Treasuries are, after all, still AA+ per S&P- very, VERY investment grade.)

Volatility- We Are Having Ben’s Baby. Again.

While Obama’s economic policies are the main culprit, let us not forget the banking gurus. Yesterday Ben Bernanke signaled a determination to keep rates at their current rock-bottom levels until 2013. The easy money of Quantitative Easing is transferring savers’ wealth to the banks, who are able to fund themselves at incredibly low short term rates and lend or invest at much higher yields, pocketing the difference. Meanhwile, while consumer and small business credit is tight and expensive, the big financial players have access to abundant capital at very cheap rates. So they can deploy enormous quantities of cash in search for the next hot return, creating a succession of asset bubbles which do nothing to generate real wealth and employment.


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Career financial professional with 30+ years in treasury management. American Airlines retiree. Lifelong Republican with center-right views. Host of Italian Tomatoes radio show on Blog Talk Radio. Managing Editor- www.jetamore.com, a travel and aviation blog.

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Lady Penguin
August 10, 2011 7:13 pm

Two and a half years ago, when TARP was on the table, I honestly believed that the economy was sound and that we could withstand the economic turmoil. To this day, I believe that some of the crisis was manipulated to achieve political ends. Fast forward to today, I do not believe that the fundamentals of our economy are sound, too many machinations have created an unhealthy foundation that is not stable. Never thought I’d see the day when the economic infrastructure of our nation was this fragile. And this has nothing to do with whether it is a recession,… Read more »

August 10, 2011 9:25 pm

It is quite simple, the truth of the markets are showing what should have been shown years ago that it is all fluff that the QE crap and the Fed and the ratings agencies and the federal government have all been propping each other up and the reality is, we have been BROKE for far too long on spending that is and always WAS unsustainable!