Thursday, September 22, 2011

No Encouragement on the Horizon --- Stocks Get Hammered

On September 2nd I posted some thoughts about areas of concern for the US and global economies (see "Some Random Thoughts About Who We Can Trust and Other Stuff").  It's time to update some of those observations given what has transpired over the past three weeks, namely:  President Obama's address to the joint session of Congress on September 8th re: jobs creation ("the American Jobs Act"); the President's announcement several days later as to how to pay for the jobs legislation he proposed; the President's deficit-reduction proposal that he put on the table a couple of days ago; the Republicans' reactions to those proposals; the Federal Reserve's actions of yesterday ("Operation Twist"); the continuing drama with respect to the Eurozone debt crisis; and various economic numbers re: the US and global economies.

The American Jobs Act, Deficit Reduction and Republicans' Reactions - The cost of the proposed jobs legislation would be about $447 billion.  Perhaps 1/2 of this (maybe more) would not create new jobs --- rather, it would effectively provide cash flows to various groups that would maintain current spending levels and, thereby, not cause economic deterioration and further job losses.  (This is certainly important to assure that the economic softness that we are already experiencing is not exacerbated.)  The other half would be split between creating new jobs (e.g., infrastructure spending) and providing businesses with greater cash flow (e.g., lower payroll taxes).  The problem with this latter issue is whether businesses will spend the increased cash flow in creating new jobs or let it accumulate along with the trillions of cash that already resides on corporate balance sheets.  Overall, I'm not convinced that the American Jobs Act is a bold and imaginative enough program to stimulate the US economy to growth.  Moreover, I don't believe businesses will create new jobs before there is increased demand for their products --- and I don't think the American Jobs Act (even if enacted in its entirely) will stimulate very much increased product demand.

With respect to the President's deficit reduction proposal, the concepts are fine: entitlement reform, tax reform, reduced spending --- but the devil will be in the details and the whole proposal has been effectively kicked over to the Congressional Deficit-Reduction Super Committee.  I still lack confidence that the Super Commitee can reach bi-partisan compromise on the details of any deficit-reduction program.

And then we have the Republicans' (and some Democrats') reactions to the Jobs Act and Deficit-Reduction proposals.  The Rs don't want any tax revenue increases and the Ds don't want any significant entitlement reform.  This is an equation for continuing partisan gridlock, with no end in sight.

Finally, my overall reaction to the Obama job and deficit-reduction proposals and the Rs' responses is this --- it's all about campaign politics and not about advancing meaningful policy proposals designed to effect bi-partisan solutions in the next few months to enhance the lackluster US economic recovery.

Eurozone and China - The problems in the Eurozone continue and no resolution is on the horizon.  Further, recent economic data for the Eurozone economy have provided evidence of further slow-down or contraction.  Moreover, it appears China's economy is also slowing more than anticipated.  Bottom line --- the global recovery is in trouble.

The Federal Reserve – Yesterday's actions to implement Operation Twist suggest the Fed is limited in helping the economy by the tools remaining in its monetary toolbox.  Further, the Fed commented "there are significant downside risks to the economic outlook, including strains in global financial markets."  Not very encouraging.

Republicans in Congress - In my post of September 2nd I raised the question of whether we can trust the House and Senate to agree to anything that looks like it will give Obama new life for the 2012 election process.  How can we trust the Republican caucus to agree to meaningful fiscal stimulus to salvage the US recovery and lower unemployment levels before the election?  Based on recent rhetoric, the answer is "we can't" --- and the subtext is "and let the American people be damned" for another 13 months until the 2012 election.

And, in large measure, because of all these issues - Today US and global stocks get hammered.