Financial Market Conditions at Mid-Year

As one of the large number of Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat majorities in the House and Senate with considerable concern.

But more than the usual number of my fellow businesspeople and investors supported them, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change anyone else. If they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.

Obama took them in totally with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for their base, not a program for governing.

This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than was expected.

Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered little real economic stimulus, but a shocking grab bag of packages to traditional Democrat constituencies and not the merest nod to the rights or concerns of the minority.

We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners’ property rights are provisional and expendable; that the ideological attachment of our rulers’ to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the full extent that they can get away with.

So far, so bad. But then something interesting happened — we had a dramatic bounce in stock markets from March through early May. Some of this is probably pricing out the possibility of a 1929-37 depression; some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.

But some of the bounce is almost certainly due to the business and investment interest of this country re-assessing President Obama’s grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that he has expressed extreme initial positions as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. On this view, one way or another, the entire Obama agenda can be resisted.

After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration’s apparent readiness to overturn our carbon energy-based economy and radical intentions toward the 15% of the economy that health care represents. But the overarching sentiment problem comes from a second reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress wastes unimaginable sums of money on projects lacking any other point beside paying off their friends and allies. In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends.

At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, and seek for growth in Chinese stocks.

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