Tuesday, February 24, 2009

Quick thoughts on Obama's speech tonight

The general thrust of the speech was to claim for government the mantle of progress: e.g., we are a great country today because our ancestors built roads. Going forward, with government's help we can cure cancer, get everyone educated, give everyone healthcare, save the planet from climate destruction and ensure (Obama's favorite word) that everyone who wants it has access to credit for whatever it is he wants, especially cars and more college education—which by the way everyone should do. In Obama's worldview, government is the source of all progress. I think he mentioned the word "entrepreneur" once.

Following Rahm's lead, Obama tried quite unsuccessfully to explain why it is that the roots of the current crisis lie in our failure to develop renewable energy and provide college education and free healthcare to everyone, and our willingess to allow the richest to just get richer thanks to lower tax rates.

Executives of major corporations will be presumed guilty of malfeasance if they fly in private jets. (Obama will claim the mantel of frugality by declining the offer of $11 billion worth of new Lockheed Martin helicopters to replace Marine One, but he will make profligate use of Air Force One.) Banks will be drawn and quartered if they don't use government assistance to expand their lending (but wasn't willy-nilly lending one of the major causes of the housing crisis?).

Rich people who cash out of the corporate rat-race and give all their money to their employees will be lionized. We enter a new age of enforced charity and sacrifice and community service.

After last week imploring Congress to pass without scrutiny a bill that will add trillions of dollars to future deficits, now Obama says he will go to the ends of the earth to "ensure" that the bill will not be wasteful. And he also promises to bring the deficit back down from the lofty heights it is soon to reach, to somewhere just above where he inherited it. (I'm figuring that the deficit as a % of GDP will rocket from about 6% of GDP today to almost 12%, and maybe, if all the stars are aligned perfectly, descend in 3-4 years back down to 7% of GDP.) It would be a miracle if the deficit by the end of Obama's first term is back down to the highest level of the deficit (as a % of GDP) of the Reagan administration.

He will bring the deficit down by "ensuring" that wasteful and unnecessary spending will be dutifully eliminated, and also by ensuring that those making more than $250,000 a year pick up the tab for everything else. Class warfare is so easy once you realize that the vast majority of voters make less than $250,000 a year.

Stephen Green did a great job of drunkblogging Obama's address, by the way.

How he will reconcile his assertion that we can't walk away from the auto industry, but that it must be fully competitive in the global environment was not exactly clear.

To summarize, I don't see anything that holds out the promise of making a significant difference. Sadly but fortunately, that is not new news. I think the market is already priced to no help from an Obama administration. If this is economy is going to recover, it will do so in spite of Obama's supposed ministrations. That's why I will continue to focus on the real-time, market-based indicators of where the economy is moving on the margin.

22 comments:

The Lab-Rat said...

Wooo hooo go Scott http://www.bloomberg.com/apps/news?pid=20601103&sid=a85Xk5Zss2AM&refer=us

John said...

I believe the current climate is not a supply/demand imbalance with less demand. I believe that this is a credit flow freeze-frozen asset backed securitization-so that people who qualify cannot get mtgs because the secondary market for ABS's is not liquid. There is a lack of trust on the part of buyers in ABS ratings. Thanks to S&P and Moodys.

Jon S. said...

The president's speech can be divided into those parts that demonstrated his massive economic ignorance and his hostility to free markets, and those where he demonstrated his skills as an accomplished bullsh***er and hypocrite.

The entire package is a thinly veiled conceit designed to expand the size and scope of government intervention across the board for generations to come, and to reward the politically connected at the expense of the politically unconnected (to paraphrase Instapundit). Odds are great that it will derail the self-correcting market, encourage many US companies to move overseas, and damage the entrepreneurial spirit in ways that will reduce output and jobs.

After this speech, and the mountains of uncertainty (in some areas; in others, we already know what's coming in the form of awful legislation) it brings to the world of finance, I despair of finding a good place to invest for the next few years.

Paul said...

Scott,

How'd you enjoy this line:
“Not because I believe in bigger government – I don’t.”

CDLIC said...

Scott,

What do you think of the picture Gerald Celente paints? He states the following: "In 2009 were going to see the worst economic collapse ever, the Greatest Depression, says Gerald Celente, U.S. trend forecaster. He believes its going to be very violent in the U.S., including there being a tax revolt. [See the interview of Gerald Celente at http://www.youtube.com/watch?v=9nJ7LM3iyNg&NR=1 and his Trend Research Institute website at http://www.trendsresearch.com/ ]

I take with a grain of salt the predictions of doomsdayers, however, Celente is said to have a most excellent track record in predicting future trends.

Thanks

Dave C said...

Great analysis of the alternative universe where fundamentals of economics are assumed to bend to the will of politicians.

Scott, I've been enjoying your insights for the last couple of months and now know why they ring so true: my approach to economics was shaped by John Rutledge when he was a young professor at CMC (where I was an economics major). His lectures were dominated by explanations of the absurdity of government actions and taught us how to critically apply unchangeable principles of economics from a monetarist-free market perspective. Your blogs offer the same refreshing clarity.

This approach to understanding the economy has twice caused me to be 100% in cash before a market collapse and heavy into stocks near the bottom. Your blog has become an oasis of sanity in an irrationally pessimistic world, and a reminder that my contrarian free-market approach will work this time just like it did in the last cycle. Thank you!

Scott Grannis said...

Jon: I share your despair, and it makes me very fearful of the future. But then I remember that the market has already priced in a dreadful future. The main justification for today's prices is fear that Obama's policies will run wild and result in a double depression. I keep thinking that things won't be quite so bad.

Bernard said...

How anyone can think that propping up failed parts of our economy for the next 5 - 10 years, and expanding already wasteful and unproven sectors of our government for at least the next 3.5 years, will somehow create economic prosperity. This is becoming silly.

Cut my taxes and I will show you hope!!!

B

Scott Grannis said...

I also think that the more people reflect on how absurd Obama's prescriptions are, the better the chance that they are repudiated. It was really amazing to see him purport to have revenue sources for all the gazillions of dollars he plans to spend. It's pure fantasy. Obama is undoubtedly smart and well-meaning, but he is woefully ignorant of how the world works. He may be able to fool some of the old codgers in Congress, but he can't fool the market.

Scott Grannis said...

Lab-Rat: It was funny reading that article after all the discussions (over the past month) with the writer. I seem to come off as a guy who made a bundle but is still not satisfied. On the contrary, I feel strongly that Apple is in good shape with or without Jobs.

Scott Grannis said...

CDLIC: I sincerely hope this guy is right about a tax revolt. That would be terrific! I am impressed by all the Tea Parties that are being organized across the country. We need more of this. I don't this is a crazy forecast at all.

Scott Grannis said...

Dave C: Small world! I learned a lot from John Rutledge and consider him to be my first economic mentor. Jude Wanniski was another, and Art Laffer and Larry Kudlow.

Next time you get the urge to sell everything, please let me know!

d said...

WOW Scott!! great Bloomberg article about you. that is awesome.

STaggart said...

One problem with the current environment is that everyone --- the Obama Administration, the media, the public, etc. --- assumes that we a stuck with the cards we have today.

Maybe it is time to add some new ones to the deck.

We are fixated by today's credit meltdown, lack of government revenue, tightening resources, etc.

What if we had access to a new frontier, currently untapped or settled?

What if we could drastically slash the limits we face with respect to energy, metals and living space?

In the 19th Century, when Americans lacked opportunities they moved West to untamed territory to launch a new life.

Three days away we have such a place -- the Moon. It's soil is oxygen, iron and titanium. There are probably significant deposits of platinum metals left by meteorite strikes. The land area is the size of Africa. And, it is utterly undeveloped.

The best path to get beyond oil is fuel cells in vehicles burning hydrogen (creating water as a waste product). The constraint is platinum. The moon has been bombarded for billions of years by asteroids & meteors, a significant portion of which are platinum-rich. Because of low gravity, most should have survived intact. This high-value metal could propel a lunar economy.

Imagine much of our industrial production moved off-planet, easing the pressure on the Earth.

Envision stepping beyond the current constraints of land & materials that come from our planet's growing population. Crops could be grown in the low gravity environment. Cities could be established.

Our economy could be utterly transferred by new technologies, new resources and unimagined opportunities. Prosperity propelled by the shift of our civilization into space could simply step beyond the constraints of health care and future social security obligations. Widespread prosperity could bring along the peoples of the less developed world and, hopefully, diminish conflicts driven by resource constraints.

I know this sounds fantastic. But, all it takes is a commitment and vision.

Government's role should be similar to the expansion of the railroads, canals and roads in the past: Encourage the development of transportation systems. It also will need to create a legal system that creates appropriate incentives (maybe any lunar activity is tax-free for 10 years) and a protective legal structure (perhaps modeled on the Homestead Act?).

I know this sounds pie in the sky. But, the events of the past few months have convinced me that we must change the game.

America (and the world) needs a focus that is hopeful and forward looking. Opening a new frontier would do just that.

Scott Grannis said...

STaggart: Where do you get all the hydrogen for the fuel cells? What would really be fanatastic would be the commercial development of fusion reactors to produce electricity.

STaggart said...

Hydrogen can be made applying electricity to water. That splits it into hydrogen & oxygen. Ironically, water is also the waste product.

The basic science was developed as part of the space program. Fuel cells were used to power the Apollo space craft and the space shuttle.

The technology is not quite complete but a commercially-viable system is rapidly coming into sight. According many analyst, the constraint will be availability of platinum. Simply put, the known reserves are to small.

Here is a link that outlines the technology: http://www.howstuffworks.com/fuel-cell.htm

STaggart said...

Scott --

Your comment is dead-on.

But, technological innovation tends to come from unexpected directions.

Much of the discussion of nuclear power is large, multi-billion dollar plants.

What if the future is not big but ultra-small nuclear units?

I am really fascinated by the work of a company called Hyperion in New Mexico.

They have developed a miniature nuclear power plant (about the size of a hot tub). It would generate enough power for 20,000 homes.

The amazing part is that the unit has no moving parts, cannot melt down or otherwise compromise the environment, and has a single output --- steam. Because of the nature of the nuclear materials and how it is integrated in the unit, terrorists or others seeking to use it for mischief would be thwarted.

The unit is designed to be buried under a concrete pad. Above ground, a turbine is attached to generate power.

These units are transportable by truck.

The cost is $25 million for about 7 years of power or an amazing $1250 per household (imagine paying that for enough power for 7 years).

You can find out more here: http://www.hyperionpowergeneration.com

STaggart said...

Still another thought --

I think we often make a mistake in forgetting how far we've come as a civilization.

My grandfather was born early in the 20th Century. Then, most Americans lived on a farm, enduring back-breaking labor. Today, farmers are a small part of our population and much of the work is automated.

My parents were born in the 1930s. The average lifespan of the average American was in the 40s. Today it has about doubled.

When I was growing up in the 1970s, news magazines and tv broadcasts were filled with stories of starvation around the globe. Thanks to the Green Revolution, China and India virtually feed themselves and have the wealth to import what they cannot. Starvation today is not because of inability to produce food. It occurs when conflicts arise or political leaders choose to inflict on people.

We are communicating on a blog --- something virtually unknown just a few years ago. We are using the Internet, a system that was a creature of the defense establishment and universities less than 20 years ago. Our kids use MySpace and Facebook. Grandparents post videos on YouTube. Workers are distracted by instant messaging and bids on E-bay.

Because we are in the midst of the changes, we neglect to recognize the pace and the power of what is happening around us.

Scott Grannis said...

My question about the hydrogen was really meant to say that before you can use those fuel cells you have to have a cheap source of energy with which to make hydrogen. If you have a cheap source of energy then all sorts of things are possible, including fuel cells. That is really the holy grail--cheap, non-polluting energy.

Scott Grannis said...

Too bad that progress hasn't come to our politicians' understanding of how economies work.

Thom said...

Obummer struck another blow! This guy is slowly killing our country whith his idiot ideas.

Thom said...

Another idiot in the white house!