By the time you read this article Barack Obama will be the 44th President of the United States elect, Democrats will control enough of Congress to pass his key legislation and a torrent of sense and sensibilities will be in full cry as Republicans come face to face with the reality that change has at last come to America.
As the leader of the free world, America’s choice of its new leader has ramifications far beyond its borders. The economic and fiscal colossus that is America stands astride the global economy in even more prominence than its military dominance. Heightened international interest in this election reflects that in a real sense the new President has the opportunity to finally fulfil the promise that so many of America’s friends have longed for.
As an Australian living on the other side of the world where your day is my night and your summer my winter, you may ask what business it is of mine what happens in US and what choices its people make. The answer is literally life and death. Australians live under America’s global shield. Our defence equipment (the part of it that actually works) is supplied by US. Our armed forces train to coordinate with US forces and serve along side them in Iraq and Afghanistan. Our treaties rely on US as our last line of defence. In the world where my children will live, push may come to shove one day, so what happens in US is of vital and legitimate interest to me.
With the advent of cable TV (provided by the monopoly satellite controller Aussie Rupert Murdoch) I have enjoyed 24 hour coverage of USA from CNN, CNBC and the ubiquitous Fox. Together with global access to America’s great newspapers I have followed the tortuous path of this epic Presidential campaign as closely as any pundit, and am well versed in the issues both spoken and still rippling beneath the surface. Additionally, living in a country that has much of what will be new to US I can tell you that there is nothing to fear and everything to be excited about.
Obama has two overwhelming properties that will surprise many of you. The banal nature of TV coverage, the overarching conveyor of the candidates, highlights the ideological schism splitting US today. The war cries of “conservatives” and “liberals” has got keener and more shrill as the dénouement approaches. In truth much of the change that will be ascribed to Obama has already happened. You just haven’t noticed. Other change that he will bring will be more obvious and uncomfortable for some. But that’s all it will be-uncomfortable.
The immensity of Obama’s potential is that he is truly a giant intellect, and has a mind like a steel trap. You will be surprised at his strength and how quickly he will bend Congress and the nation to his will. Conservatives don’t know it but Reaganomics has been dead for a while. This is Wiki’s definition:
Reaganomics (a portmanteau of "Reagan" and "economics") refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to: reduce the growth of government spending, reduce marginal tax rates on income from labor and capital, reduce government regulation of the economy, control the money supply to reduce inflation.
I suppose one could argue that marginal tax rates for the 2% of the wealthiest citizens have been reduced under Bush and there is no doubt that government regulation of the economy was not only reduced but completely abandoned at least on Wall Street, but in the end, Bush-Cheney have overseen not only the greatest growth of government spending in US history but the greatest intrusion of government into business ever. US Treasury is now the de fact owner of the nations greatest banks and insurers and no doubt there are more to come.
A detached observer would note that strange things happen in politics and whilst it is an old political axiom that countries get the government they deserve, that is not always the government that they need. For US there are historic parallels between the end of the Reagan era and now. During Reagan’s Presidency, there was a massive increase in Cold War related defense spending that caused large budget deficits, the U.S. trade deficit expanded dramatically, and contributed to the Savings and Loan crisis, as well as the stock market crash of 1987. In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation, Reagan described the new debt as the "greatest disappointment" of his presidency.
Strangely GOP strategists casting around for a scapegoat came up with this summary: “Theories of what went wrong this year are varied and often contradictory. Some say the party embraced conservatism too tightly, while others say the party has not been conservative enough. One popular argument among GOP partisans is that the party strayed from its principles of limited government; another is that it has lost its appeal to suburban voters over social issues and the environment. Many say Republicans could not escape the shadow of Iraq and George W. Bush, the least popular GOP chief executive since Richard M. Nixon.”
Exit polls put the number one concern of registered voters as the state of the economy and both campaigns have been thin on the specifics of what steps need to be taken. One of the priorities of governments both for policy and fiscal purposes is to provide and protect jobs. My feeling is that Treasury policy so far has been to put out bush fires and plug the holes. No cohesive plan for recovery has been advanced by the Bush administration and the ad hoc nature of battling the threatened tsunami of financial sector businesses is caught nicely by these comments fromThe Times:
Having been handed vast authority and almost no restrictions in the bailout law that Congress passed a month ago, a committee of five little-known government officials, aided by a bare-bones staff of 40, is picking winners and losers among thousands of banks, savings and loans, insurers and other institutions.
It is new and unfamiliar terrain for the officials, who are making monumental decisions — a form of industrial policy, some critics say — that contradict the free market philosophy they usually espouse. Predictably, the process is stirring alarm from Capitol Hill to Wall Street.
Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, its precise goals opaque. Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick.
Industry sources said that banks, after filing a two-page application, are assigned a ranking from 1 to 5 — with 1 or 2 essentially guaranteeing that they are eligible, and 5 insuring they are not — by their regulator. The five officials then make what can be a life-or-death decision, with a thumbs-down generally interpreted to mean that a bank was not healthy enough to survive on its own.
“There is a real urgency to deploy this money quickly and effectively,” said James H. Lambright, who took a leave three weeks ago as the president of the Export-Import Bank of the United States to become the interim chief investment officer of the rescue effort.
A trim, self-confident former investment banker, Mr. Lambright, 38, is the chairman of a committee of relatively young officials — all are in their 30s or 40s — with backgrounds in law, banking or regulation. None of them could have expected this kind of responsibility; Mr. Lambright himself was a last-minute substitute after a previous appointee was kept in his old job.
With more than $80 billion left to spend, and hundreds of banks in line for it, the days, nights and weekends of the overworked, sleep-deprived Treasury staff members are a blur of meetings and conference calls, and constant pressure.
“This is a four-ring circus,” said Tim Ryan, a former director of the Office of Thrift Supervision, who helped run the savings and loan cleanup in the 1980s and 1990s.
Clearly nobody is at the wheel and the lack of direction has allowed musings of ever more Treasury bailouts. Reuters reports that the U.S. Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success.
In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co's GE Capital unit, CIT Group Inc and others.
Treasury may also scrap part of its early plan of purchasing assets through an auction process and instead purchase some distressed assets directly. “We are looking at many ideas for strengthening the financial system and for restoring lending," Treasury spokeswoman Jennifer Zuccarelli said. "We are weighing ideas and have made no decisions."
Without an overall plan and direction, ideas by junior Treasury officials are dangerous. The effects of the banking sector insolvencies have yet to work fully into real economies. Much more is yet to be revealed as Treasury tries to become everyone’s favourite uncle backstopping not just profligate banks but insurance companies and big business in the commercial paper market. Where it ends we know not!
But enough. We know what bought us to our present plight; I have chronicled what would be and what has arrived in a series of articles for Financial Sense stretching back to last year. As we now endure the hiatus as the Obama team plan the US and therefore the world recovery we can put a line under most of this episode and adopt these words from Australian Business:
They were old enough to have known better. Though this financial crisis is the biggest since the 1930s and involves new-fangled devices such as mortgage-backed securities, what brought the system to its knees was something we see in almost every cycle: people trying to keep the boom going and profits rising by resorting to excessive borrowing, with lenders dropping their credit standards for the same reason. In this case, matters were made worse by one regulator in particular, former US Federal Reserve chairman Alan Greenspan, who in his efforts to keep the share market happy and postpone the evil hour held US interest rates too low for too long, thereby encouraging profligate borrowing and lending.
Greenspan has admitted he "made a mistake in presuming that the self-interests of organisations, specifically banks, were such as that they were best capable of protecting their own shareholders and their equity in the firms".
That is, he assumed the players in financial markets would always act rationally, making markets self-regulating. And he assumed this despite the boundless evidence to the contrary over his long career. Talk about naive. The problem has been too many econocrats in the developed world with too much faith in the simple neoclassical model and its offspring, the efficient market hypothesis. We've had too many grown men happy to assume that all growth is good growth and all credit is good credit.
Greenspan failed to heed the mantra of his mentor Ayn Rand who asserted that rational businessmen always act in their own best interests. With few exceptions, those who played the game have walked away with the loot. That’s how the incentives were structured. Obama’s belief that American’s can not have a healthy Wall Street and a sick Main Street may be his most prescient observation.
Obama’s promise to bring Warren Buffett onto his advisory team is a game changer. Buffett’s overwhelming common sense quite apart from his fiscal savvy would have thwarted most of the scoundrels who have gamed the system to taxpayers regret.
For ordinary Americans, the credit crisis comes down to their 401k. With losses of 30%-40% in most portfolios, they no longer look for growth; they just want their losses made whole. Of course investors always assume that the high water mark is rightfully theirs and any derogation is loss. A generation of investors is just now coming to the realisation that after a decade of no gain in the Dow and S&P, the simple buy and hold strategy beloved of brokers and advisers who simply are incapable of offering more, may not be the retirement panacea they planned.
This may be the biggest challenge for the incoming team.
Almost all equity markets have found significant lows at or near their Danielcode black lines which have been published on Financial Sense for some time. The S&P index scrupulously avoided a weekly close below the which would have signaled much lower prices, and instead found support on an intra week basis at the next Daniel sequence number.
The Dow mimicked the low with a dive to 7884.80 just two points from its weekly Daniel support number but also avoided a weekly close below the black line, the last level of DC support for the major swing. Dow has already recovered 44% of the minor swing as it ticks off the Danielcode retracement numbers.
WD Gann in his later writings stated that “fast moves correct markets”. Bulls will be hoping that Gann’s words ring true for these major indices but I doubt it. The speed of the capitulation in these markets means that they have outrun the reporting cycle and investors now need time to focus on what damage has been done to the real economy.
We have seen that those industries almost entirely dependant on debt such as housing and autos are in the process of correcting to long term sustainable levels. For housing that means somewhere in the 3.5 to 4 times average income price range and that is still a way off. For autos, the market is sustained not only by credit but also by tax breaks. That is a market that is going to get urgent attention.
The S&P banking Index made its low back in July and it too tested the DC black line at 138.80 but was careful not to close below it on either a monthly or weekly basis. So far it’s rally has been muted but it is determinedly clinging above the black line of destiny and that is enough for now.
Comex Gold remains hostage to the fortune of the US Dollar but it is holding at the next degree above the DC black line:
Traders relish change, and the uncertainties of what is now to unfold will create untold market opportunities. As usual, those closest to the markets will benefit the most and at the Danielcode we are constantly appraising Gold, equities, forex and commodity markets for trading opportunities. I invite you to visit the Danielcode website to join us. You will find the free Gold Trend Charts which continue to keep Financial Sense readers on the right side of the trade as well as a number of videos ranging from our weekly Gold Bulletin, to equities and forex.
Risk is a part of God's game, alike for men and nations. - Warren Buffett
Copyright © 2008 John Needham