Barack Obama’s awful, no good, very bad day

Barack Obama has had a bad day. His bad day actually started last Friday when the stock market dropped 500 points on news of Europe’s failure to deal with its own debt crisis. After the close of markets that day, Standard and Poors, one of the rating agencies for financial bonds, made a long feared announcement that it was downgrading the credit rating of the United States. To make matters worse, the U.S. federal debt was revealed to have reached 100 percent of GDP a few days earlier, a milestone not seen since 1947.

Over the weekend, investors and ordinary Americans (who are one and the same if they have a pension, an IRA, or a 401k) contemplated how the downgrade would affect Wall Street and Main Street. To add to the somber mood, on Saturday, August 6, an Afghan insurgent shot down a U.S. Army CH-47 Chinook transport helicopter killing thirty Americans, including members of a U.S. Navy SEAL team. Seven Afghan soldiers and a civilian interpreter were also killed.

There was much speculation as to what would happen when the financial markets around the world opened today, the first trading day after the announcement of the downgrade. What happened was what some observers called a financial “bloodbath.” The stock market crashed for the second time in two trading days. The Dow Jones Industrial Average fell 635 points to a level that erased almost ten months of gains. Financial markets around the world were hit.

At this point, many economists are warning that the United States is likely entering a second recession. In a Dick Morris column, James Fitzgibbon, director of the Highland Fund called today “the second phase of the meltdown.” Fitzgibbon believes that “stocks, real estate will collapse and keep falling into 2013. The lows of 2009 will be easily taken out on the downside.” Chillingly, Fitzgibbon believes that the worst is yet to come: “The real horror will be later in the year when the U.S. Treasury Bond goes into a freefall. Then a depression is possible. Soaring interest rates. Collapsing asset values. Contracting economic activity. Surging unemployment. And business closures.”

This is a particularly bad day for Barack Obama for several reasons. ABC News notes that the selloff sharpened after the president spoke in the afternoon and called for more taxes. This shows that investors have lost faith in President Obama’s vision for the nation. They realize that the fiscal problems of the United States are too great to be fixed by raising taxes on the wealthy. The only solution to the problem of overspending and deficit reduction is to cut spending, a prescription that President Obama and the Democrats have steadfastly resisted.

The second reason that today was a bad day for President Obama is that he must realize that the new crisis is his fault. This is not a crisis that he inherited from George Bush. This one is purely of his own making. The debt crisis is due to the fact that President Obama’s Keynesian stimulus projects have failed miserably while increasing the federal debt by a third. President Obama has no serious plan to repay any of the money that he has borrowed in the name of the American people.

The president must also realize that, as the U.S. economy sinks into another recession, his hopes for re-election also diminish. Voters generally vote their wallets. If times are good economically, they vote for the incumbent. If times are hard, they vote against the incumbent. In a Gallup poll taken before the recent stock market crashes, President Obama’s approval rating was down to 43 percent (with 48 percent disapproving). With the bad economic news, his approval rating will only fall further.

This is not altogether unfair. The current carnage in the world’s financial markets is the logical end result of his policies. His administration has been an unending saga of new regulations on business, not the least of which is Obamacare, that stifle job growth. His solution to the first economic crisis was to borrow money and spend it on pet projects. An additional attempt to resolve the crisis was to print more money through the Federal Reserve’s quantitative easing programs. As a result, the United States has the highest unemployment in recent history, a downgraded credit rating, and a devalued dollar, all due to President Obama.

In Georgia, the unemployment rate is even higher than the national average. According to the Georgia Department of Labor, Georgia’s unemployment rate is at 9.9 percent while the national rate is 9.2 percent. Three years after the initial crash of 2008, Georgia’s foreclosure rate remains the sixth highest in the nation according to the Atlanta Business Chronicle. This has led to falling tax revenues for the state and local governments, which has in turn led to massive layoffs of government workers and teachers. Untold numbers of Georgia businesses have failed. Georgians have watched their retirement plans dwindle year after year. After the events of the past few days, it seems that all of this will get worse. Barack Obama lost Georgia by five percent of the vote in 2008. He will likely lose by much more in 2012.

The last bad thing that happened to Barack Obama today is that Timothy Geithner informed the president that he would not resign as secretary of the treasury. As one of President Obama’s most trusted economic advisors, Geithner bears much of the responsibility for the current economic fiasco. Federal Reserve Chairman Ben Bernanke and Austan Goolsbee, chairman of the president’s Council of Economic Advisors, are also reportedly not resigning.

It is a bad day for President Obama. Unless he reverses his economic course, a change that he is most likely incapable of making, he will go down in history as a latter-day Herbert Hoover. He will be the president who spent the United States into an economic calamity, the likes of which has not been seen in eighty years. That is bad for President Obama, but worse for the rest of us.

If you disagree with the analysis presented in this article, please read “Serious questions for liberals, Democrats, and other Obama supporters.” If you can answer the questions presented, the author would welcome your response, either through email at thorntondavid@yahoo.com or as a comment.

Photo credit:  Elizabeth Cromwell/Wikimedia

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Investing in the Obama Economy

Whether we voted for him or not, we must realize that Barack Obama is going to change the face of the United States and its economy. Radical changes in numerous areas of our economy are causing upheaval in the stock market and investment portfolios. To make the best investment choices, we should look at what Obama plans to do and the likely effects of his policies.

A big question on the minds of most investors is whether to ride out the crashing market or to try and salvage what remains of their portfolios. Since the financial crisis began in September 2008, the Dow Jones Industrial Average has fallen from a high above 13,000 to below 6,800 in trading today (3/2/09). If you are still in the market, you have probably seen a loss of approximately half the value of your portfolio.

A good strategy depends on the length of time that you have to recoup your losses. Historically, the stock market always shows a profit over time. Even in the stock market crash of 1929, when the Dow fell from 380 to 42 as the US entered the Great Depression, the stocks eventually regained their value. The down side is that this takes time. The market did not recover to its pre-1929 values until the late 1950s.

President Obama is following a set of policies that is very similar to those enacted by President Roosevelt in the 1930s and the government of Japan in the 1990s. In both cases, the increased government spending, higher taxes, and increased regulation led to a deeper recession and a slow recovery that took in excess of ten years. What we can learn from this is that, in all likelihood, we may not recover our past losses until 2030.

President Obama’s stimulus and bailouts have not stopped Wall Street’s freefall. With every new bailout and nationalization, the market falls further. Since there is no end in sight to government dabbling in the economy, there is also no bottom in sight to market losses.

If you are someone who needs your investment money in the short term, up to ten years from now, my recommendation is that you consider cutting your losses and get out of the stock market. Your current losses will become permanent, but you will preserve what you have left.

On the other hand, if you will not need your money for twenty to thirty years and are somewhat risk tolerant, you should consider staying in the market. The economy is cyclical and, in spite of everything that we can throw against it, it will recover in time. If a substantial change in government policy occurs over the next few years, the recovery might be sooner and sharper than anyone imagines.

For investors with a middle range outlook, from ten to twenty years, you should talk with your investment advisor about moving at least part of your portfolio to more conservative, less risky investments. You will lock in some losses, but you will also preserve more of your cash in the event of a long recovery.

The next question is what does constitute a safe and conservative investment in this economic climate. To answer this, we should look at what President Obama has announced as his intentions as well as what he has already done in his first six weeks in office. His banking polices, including government purchases of bank stock, have caused the value of bank stocks to crash. Auto stocks have fallen amid government bailouts and increased government control of the industry. Obama’s cap-and-trade energy tax will likely hurt traditional energy companies as well as the many businesses whose operations require energy to produce and transport their products. Health care is likely to be a target for nationalization or price controls in the near future. All of these sectors are likely to be poor investments for the next few years.

In past recessions, investors were able to invest in foreign markets when the domestic economy slowed. The current crisis, however, is worldwide. In spite of the poor performance of the US economy, it still leads that of most of other nations. Russia, Venezuela, and other oil producers have been hit hard by the collapse of oil prices. European nations have banking problems similar to ours and many are constructing their own bailout plans. Countries that depend heavily on US imports, such as China, are suffering from diminished US consumer demand.

On the other hand, a slowing economy does offer some opportunities. As more Americans make do with less, discount retailers are likely to do well. Family Dollar (FDO) is currently trading near its 52 week high, as is Dollar Tree (DLTR). McDonalds (MCD) is another company that has thus far done well in the crisis as people forgo expensive restaurants for the dollar menu.

Another likely growth sector is green energy. Obama’s energy policy will be to force a change from traditional sources of energy to new ones such as wind and solar. Carbon based energy, such as coal and oil, will be targeted by the federal government. During the campaign, Obama himself predicted that his policies would bankrupt companies that try to operate coal power plants. Similarly, companies that focus on ethanol, fuel cells, and hybrid technologies will be good bets. Even if they are not profitable on their own terms, they will be likely to receive substantial government subsidies and contracts.

To make wise investment choices, we must also consider the likelihood of either deflation or inflation. Currently, with a backlog of production, rising unemployment, and flagging consumer confidence, deflation is a threat. Increased government spending can also cause deflation since the government is competing with the private sector for money and, in effect, reducing the money supply.

Deflation occurs when people stop spending, causing the value of goods and services to decline. This may seem like a good thing when prices start to decline until you realize that the value of your property and your savings is declining as well. As goods pile up, companies cut production and lay off workers. Since consumers have less money to spend, they buy even less and more goods pile up. The cycle is a vicious one that can be hard to break. Deflation plagued both the US under the New Deal and Japan in the 1990s.

If the economy does slide into deflation, the values of almost all investments will decline. In a deflationary economy, real estate, commodities, stocks, and bonds are all poor investments. The best investment choice for a deflationary economy is to hold on to your cash.

On the other hand, inflation occurs when prices rise. Many economists believe that inflation is likely in the long term due to large government spending programs funded by debt. To service the interest on this massive debt, the government is likely to have problems generating enough revenue from the sale of government bonds. Other countries, such as China, that buy our debt have their own financial problems. Likewise, US citizens are also saddled with debt and have little left over to invest. If the government cannot raise cash through the sale of bonds, they will be left with little choice but to print more money or default on their loans.

When the government prints more money, basic economics tells us that as the money supply increases, the price (value) of the dollar will decrease. A dollar will buy less and the price of goods will increase. In our recent history, the 1970s was a time of rising inflation and, due to the high cost of capital, stagnant growth. The combination was referred to as “stagflation.” Inflation and unemployment figures were combined into a “misery index” that topped 20% by the time President Carter left office.

While deflation is likely in the short term, it is likely that we will face inflation in the long term. While an inflated dollar might make it easier to repay loans, it also erodes the value of savings and investments. People on fixed incomes are also hurt because their cash flow stream may not be indexed for the real rate of inflation.

In times of inflation, since prices tend to rise, the best investment strategy is to buy things. This strategy works from household items to real estate and commodities. For example, if you know that prices are going to rise and you know that your children will need new clothes and shoes for school next year, you would be better off to buy now before the price rises. Similarly, buying a house at the onset of an inflationary period will see an increase in the value of the house due to the inflationary decline of the dollar.

Commodities, particularly gold, are a traditional refuge during times of inflation. Gold is touted as a hedge against inflation, but because it is a high profile commodity often carries an extra expense. The price of gold is also sometimes manipulated by governments because it is often seen as a referendum on the economy.

Oil is another commodity that traditionally does well during times of inflation. Oil is currently trading at $44 per barrel, down from a high of nearly $150 per barrel in the summer of 2008. A big part of oil’s collapse was due to declining demand as the world’s economy began grinding to a halt. As the recovery eventually begins, demand will increase and the price of oil will recover. Regardless of Obama’s push for alternate energy, most of the world will run on oil for a long time to come.

One final consideration for investing during Obama’s tenure is taxes. Obama has been open about his plans to raise taxes on upper-income taxpayers and it is extremely likely that middle-income families will soon face an increased tax burden as well. Investors should take this into account. Individual Retirement Accounts (IRAs) offer a common means of deferring taxes. Investors should also keep in mind that there are likely to be drastic changes to the tax code. Many tax shelters and deductions are likely to be eliminated as the government tries to increase revenue.

Regardless of how the economy performs, one smart use of your money is to get yourself out of debt. With fewer monthly obligations to meet, you will have more disposable income with which to handle whatever life throws at you. Instead of paying interest to a lender, you’ll either be able to collect interest on investments or buy goods that will appreciate in value. In a time of uncertainty, preparation and savings is the smartest investment.

Disclaimer: I am not a licensed financial advisor. Consult your professional financial advisor before making changes to your portfolio.

Sources:
www.Inflationdata.com

3/2/09
Newark NJ