Although we have great respect for President Obama's intelligence and eloquence, solving the current financial and economic problems may well be beyond the capability of anyone to solve. At Tuesday's prime-time press conference the President used the word "persistence", and this happens to be one of our favorite words. However, we think he will really have to be incredibly persistent in order to accomplish his goals. Although, for the good of the country and the world we wish him success, it is likely that he inherited a much worse financial mess than he could ever imagine and that his intellect and persistence will not be enough. In fact, after the election we wrote two reports about how President Obama will ask for a recount of the vote when he understands just how bad the mess is.
The onerous problems we have in this country and the answers he gave to the press are at odds with reality. One of the questions was, "With a national debt of around $11 trillion and a budget deficit of $1.3 trillion this year, how do we bring down the deficit to half of the present deficit by the end of your first term?" And even if we do, the main point that the Republicans make is that they expect the government debt to double in 5 years and triple in 10 years. They expect the interest on the debt to rise from $180 billion presently to $800 billion in 10 years. The largest discrepancy in the estimates is in the "out-years" or years 6 through 10 where the administration's growth estimates are stronger.
The President stated that the reason he shows less deficits after this year and next is because of the growth assumptions that he is using. He, as well as many "blue chip" economists, are factoring in average annual long-term economic growth of 2.6% while the CBO is assuming only 2.2%. We are convinced that, as smart as the President is, he doesn't seem to understand that these "blue chip" economic forecasters are as clueless about the future as they were in 2005, 2006, 2007, and 2008. During those years, they were predicting strong future growth despite the housing bubble, high valuations in the stock market, and total debt that doubled from 2000 to 2008 (from $26 trillion to $52 trillion), while the GDP grew by less than $5 trillion.
It is our opinion the deleveraging of the global economy as well as the above mentioned $52 trillion in debt makes anything the present administration does, including the stimulus package, TARP, PPIP, and even quantitative easing (QE) to be much more difficult than they think. The only advanced country in modern times that came close to having the debt problems we have presently was Japan from 1989 to present. They tried enormous stimulus packages as well as QE and nothing worked as their debt deleveraging offset anything the government attempted.
We think it is admirable for the new administration to also try to correct the major problems we have in this country such as health-care, education, and energy. However, attempting to correct these problems (while trying to clear up the toxic debt on the banks balance sheets as well as the housing bubble) is almost unimaginable. Please don't get us wrong, we sure hope that Obama will be successful-we just don't see how he can be successful over the next 18 months at least.
As far as the Public Private Investment Program (PPIP) that was announced this past Monday (causing a 500 point rally in the DJIA) is concerned, we find it hard to believe Bill Gross's comment, "this is perhaps the first win-win-win policy to be put on the table and it should be welcomed enthusiastically". How could any investment in something called a "toxic asset" not be highly risky? It seems clear that if you have $10 billion and meet the other criteria for being a "private" investor in this program, it does have very little risk. However, if the private entities are investing large sums of money without much risk who is left with all the risks? It has to be the taxpayers. Also, if the "private investors" are protected against almost all losses why wouldn't they pay up for the "toxic assets"? How can you reach the goal of realistic prices for the toxic assets if the buyer has such little risk? And where does that leave the taxpayer?
If we are wrong about the difficulty the new administration will have in turning the economy around, stocks will tell the story ahead of the turn in the economy. As we stated in last week's comment we believe that the market did not make a significant low in early March, but instead is experiencing an oversold bear market rally that could meet resistance in the 838-to-878 area on the S&P 500, before resuming the secular bear market.