Tuesday, August 9, 2011

The Summer Of Maximum Confusion

With yesterday’s 600-point drop in the Dow stock average, and an even more severe drop in the NASDAQ stock average, we see a predictable consequence of the previous Friday’s after the-close-of-the-market announcement of Standard and Poor’s downgrade of U.S government bonds. Over time, the stock market usually reflects realistically the near and intermediate term prospects of the economy, but in the wake of dramatic economic news, the market often reflects the fears and confusion of investors, particularly small investors. So-called “panic selling” frequently occurs, and the price of most stocks decline beyond a “fair and reasonable” level. Sophisticated traders, and experienced investors usually wait until the small investor’s emotions are exhausted, and then begin to acquire stocks they believe to be below what they are worth. The “bottom” usually occurs at a point of maximum fear, and this stock market phenomenon is called “capitulation.”

We don’t know yet if capitulation has already occurred, or if the market has more decline in it, but after more than 50 years of personal stock market investing, I suspect we are close to it. Nevertheless, current economic conditions have an unprecedented character, and the traditional rules may not apply. I warned recently that the debt ceiling “crisis” was a political contrivance of the liberal Obama administration engaged in a life-or-death struggle with conservatives over revenues (taxes) and spending (federal entitlements). The real warning sign, I said, was the potential for a a downgrade of U.S. securities. Congressional Republicans blinked in the details of their agreement with President Obama, raising the debt ceiling while cutting only a small amount of spending. They won a long-term victory in preventing tax increases and changing the debate from “how much an increase” to “how much can we cut,” but that was too little for Standard & Poor’s concern about U.S. debt and deficits.

President Obama is now exposed as a man who has no real idea of what is going on in the economy and what to do about it. Although Republican conservatives do know what is going on, and what should be done, they control only one house in Congress, and are overly fearful of being blamed for our prolonged economic distress. I did applaud Speaker Boehner for what he did accomplish in his debt limit “deal” with President Obama, but, like many who are worried about the direction of U.S. economic policy, I am concerned that the “deal” was too little and, possibly, too late. Obviously, Standard & Poor’s thought it was too little and too late.

Panic occurs in confusion. With an administration that wants to prolong the mistakes of the past (including growing deficits, untenable unfunded liabilities, and unrealistic and unsound attitudes about raising revenues), investors are not only confused, but without a positive light at the end of our economic tunnel, their confusion becomes compounded. Small and inexperienced investors traditionally over-react, but what happens if more sophisticated investors, many of whom have large cash positions, do not intervene as they traditionally do? Anything can happen in “maximum confusion.”

The more stubborn Mr. Obama is, the more that the investment community in the U.S. and worldwide, will downgrade the prospects of the U.S. economy. The coterie around Mr. Obama apparently has no will or stomach to tell him the economic truth; many of his aging allies in the Congress even share his outmoded economic views.

Last January I wrote that Mr. Obama might not run for re-election. My comment was received with incredulity, even by some conservatives. The fact that the Republican field of presidential candidates seemed “weak” or lacking in so-called “charisma” encouraged Democrats and their media supporters to think he would actually win re-election. It was as if the 2010 election had not really occurred. Obamacare, huge deficits, growing unfunded liabilities, demagogic calls for “taxing the rich,” and new spending programs went forward as if nothing were amiss.

One year before the 2010 elections, I openly predicted the results. The electoral disaster for the Democrats, as I saw it, was inevitable. I will now say that if Mr. Obama and his allies do not make a dramatic turn in their economic policies, and soon, 2012 will be the greatest electoral catastrophe a political party will have suffered in modern times. Voters, conservatives and independents, are worried and confused. It’s only a matter of time before liberals will come to share their concerns. The federal government is failing to respond to the crisis which grows day by day. Governors in individual states (including at least one Democrat in a major state) are putting new and prudent policies in effect, and by the summer of 2012, they will be seen as successful, and that will magnify the dimensions of the Democrats’ defeat in November if Mr. Obama does not begin to embrace their reforms.

The stock market between now and then will go up and down. The American economy is much bigger than any group of politicians, but if there is a perception of no relief from government policies, it will go down much more than it will go up. This is not a true “recession,” but more like a “contraction” of the economy, and thus in spite of bail-outs and government spending, unemployment persists at very high levels, and business confidence remains low.

The summer of 2011 is becoming the summer of maximum confusion. It will not likely remain in that state very long. If the Democrats cannot get their house in order, the Republicans will find the right candidate, someone who will not blink in the face of liberal blame-gamesmanship or a fear of completing the political transformation already begun. Forget the polls of today and conventional “wisdom.”

In November, 2012, some real change will be demanded by the American people, tired of bad news, confusion and failure.

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