What the Obama Economic Changes Mean for Investors
It is normal for a Presidential Administration to have leadership turnover at the two-year mark. The change in people often reflects a change in policy as well.
Does this mean anything for investors, or is it just business as usual?
There is a relentless criticism of an overt political nature. This is to be expected as a normal part of the electoral process. Feel free to join me in voting as we wish; as investors we need to make careful distinctions between rhetoric and reality.
The macro perspective is presented nicely by Bob McTeer, one of my favorite sources. He is a solid, conservative Republican. He is also a pragmatist. I very much enjoyed his article about a speaking invitation he recently received. Here is his description:
I was recently invited to speak on the topic of “Whether the Obama
Administration’s policies are making the recession worse” and asked to
recommend someone to appear with me who would take the opposite position
from mine. The interesting thing to me is what do they think my
position is on that topic. I’m not sure myself.
He goes on to analyze various Administration policies with typically strong comments — well worth reading. In his conclusion he struck one of my favorite themes as "A Dash, " writing as follows:
The stimulus program and other spending obviously contributed greatly to
the deficit and the debt, but, to be evenhanded in our consideration of
counter-factuals, we must acknowledge that the fiscal deficits might
conceivably have been worse without the spending. Spending adds to
deficits, but so do tax revenue losses resulting from declining economic
activity and increased unemployment. The debate would sound more
respectable if it discussed degrees rather than absolutes—dials rather
In my own work I have described this as "light switch" thinking. One of the best things you can learn from the study of economics is to think in terms of distributions of results rather than black and white. Unfortunately, the public debate is not so sophisticated. (There is a nice summary of the topic here.)
Mark Thoma uses strong evidence to present a specific example. He takes up the problem of small business. It is popular rhetoric to say that small business is unwilling to expand because of uncertainty and fear of regulations. Prof. Thoma produces the evidence:
If you actually ask small businesses what they are worried about instead of
asserting what's politically convenient, and do so consistently over time so you
can detect where big swings occur, it's clear that small business believe that
lack of demand is the biggest problem they face right now…
Read the entire article to see the survey results emphasizing lack of demand — followed by several other factors.
My Own Conclusions
Like everyone else, I am disappointed in Obama's failure to address issues that I regard as most important — a subject for a different article.
Meanwhile, what can we conclude from the current signals?
- No new policies will be called "stimulus" since the symbolic debate has been lost on that front.
- The new investment programs have some merit, but are mostly political. They are too small to turn the tide, and are chosen to embarrass the GOP.
- The Bush tax cut extension is also a bargaining position. It will be difficult to pass a partial extension, the current Obama position, and no one wants the responsibility for a passive tax increase.
Finally, I am amazed at the glib commentary celebrating the potential for gridlock. None of the problems we face can be solved by inaction. None of the policies already passed can be reversed or repealed by a split government.
What is needed is bipartisan cooperation, negotiation, and compromise. This has been in short supply for the last two years. It will not be an instant result from this fall's election.
It is a sad commentary on the times in the investment blogosphere that every publisher wants immediate, actionable advice from every article. I guess it has something to do with page views and revenue.
Meanwhile, consider the following two ideas:
Maybe you do too much trading, thrashing around in search of the next thing.
Maybe you need to spend more time learning — getting ready to act at the right time.
In this case, it may mean watching for signs of cooperation. My own test is whether it happens before the election.