Smick on WaPo

If you are familiar at all with Smick's thinking, he is suspicious of populism/protectionism. He might be right here.

Smick lives in the land of geniuses, and doesn't seem comfortable integrating the sources of populism and protectionism. Namely: voters/constituents. It's hard to fault Americans who want to see financial institutions held accountable for their misdeeds. I would qualify Smick's article by adding that Obama needs time to build the case that either a) the banks are solvent; or b) the banks are insolvent. The former needs time to see if markets will rebound in the face of continued uncertainty. The latter requires investigation into the counterparty risk and maximum toxic exposure of the big banks. If the banks are truly insolvent, and Obama has to get all Swedish on 'em, there can't be allegations that he's a commie. Hence the plans to report all findings on the Treasury's website. If the banks are broken beyond repair, and taxpayers are going to take a bath, there must be nearly unanimous support for the necessary actions to place the banks into receivership and pay out all their obligations to bond holders (on top of whatever amount FDIC has to cough up for depositors).

So, please, take your time, Mr. President. Keep it all transparent.

Oops, No New China Stimulus

Something is not right here:

China targets 8% growth despite crisis: (courtesy of FT) Apparently China will not increase its deficit spending. Wen says that China will meet its 8% growth target based on the previous stimulus initiatives. Plus, the Chinese are sending peaceful overtures to Taiwan, while significantly increasing military spending.

What am I not seeing? I know the world leaders have been waiting on Obama to save the American economy, remembering the countless times the American industrial/financial machine has buoyed the world economy. Yet, at the same time, how could anyone see the Recovery Act as a sign of improvement? Plus, Geithner and Bernanke are warning of further catastrophe, even though the banking industry has shown increased signs of stability.

I think back to Spring 2007 when the housing market began its collapse, and the regulators and financial industry leaders thought everything would be contained. Contagion spread as the derivatives house of cards collapsed, and now the economy is in a mild depression. Worldwide, the problems are more severe as half of Europe faces national defaults. Russia is not even a country any more (well, maybe that's a little harsh, but it is certainly teetering on the brink of dissolution). China increasingly relies on its military army and its army of police to tamp down unrest. Et cetera.

I guess I just don't understand how the leaders of China, Canada, France, and Germany are failing to see the urgency to take action rather than wait for America to get straightened out. Maybe I'm wrong and Rome isn't burning. Yet, somehow, it would not surprise me at all to learn that the world is led by a coterie of Neros.

Back to China. Much of their allocated spending will be directed internally. Building schools and supporting local industry. In my estimation, this is exactly what China should be doing right now. It corrects global imbalances while putting inland Chinese to work. But is it enough? Maybe the question, and the answer, is whether China can do more.

Cramer versus Obama

I tend to agree with Cramer here. The Recovery Act is full of junk and lacks vision. Obama let others craft a plan portrayed as a strategy to stimulate the economy, but which is instead a debt creation initiative to be paid down by future generations. Of course, a worse (and more likely) scenario is that future generations will see today's balance inflated away.

Obama is capable of something more. The country is changing; the whole world is changing. By letting Congress choose the direction of federal outlays, Obama deferred to the status quo, which we all know is broken.

As I predicted, China would gauge the winds before deploying their own stimulus. They have done so, and the initial reaction by the investor class is positive. I'm going to look at some of the details before lending my own opinion, but I would suspect that people who are long on oil will find something to smile about. Of course, a China stimulus repairs the status quo, it does not project the world economy into the future.

Sadly, there will be more breakage in the economy before things will get set right. Obama missed his chance to be the architect of the future economy. Rather, he sowed the seeds for the inevitable breakup of the Union of Fifty States. More on that subject some other time.

The Bottom

I'll be laughed at, probably, but the bottom of the market is here. We will still see a lot of volatility, and an upward trend won't be discernible for another 9 months at least. But, now would be a good time to go in for a low cost, domestic index fund. I'd do it myself except that my liabilities (college debt) grow at a greater rate than any asset would appreciate. So, like the banks, I'm still deleveraging.

The TALF will freeze toxic asset prices as institutions swap CDOs and other junk for Fed money. This should jump start the securitization market beyond what Freddie and Fannie have been ordered to do.

But there's still systemic problems requiring a lot of time and anguish (and legislation) to resolve. Beware anything remotely resembling a bubble: energy, biotech, green stuff, discount retail, etc.

10 year plan?

I have been puzzled all day on the timing of Obama's 10 year spending plan. Is Obama being moralistic in telling us up front about the higher taxes and reduced defense spending that is due to follow? Or did Jindal's failure to offer a significant rejoinder the other night give Obama the clout to dump all the softballs out onto the green, knowing full well that the GOP lacks a slugger?

Or maybe it's politics of another variety. This morning I was pondering what would trigger ratings agencies to downgrade the US. I still don't know the answer to that particular question, but maybe Obama's plan hints at it. There's really no other reason to lay down the reality of fiscal responsibility in this time. Yes, we're that close to the brink. The president is telling the bond analysts and CDS spread geeks not to worry about the country's future ability to pay its obligations. I wonder if the dollar will rally or sink in light of this?

The anti-globalism rhetoric is heating up, as I predicted it would. The next fallout will be as governments fail to make a difference, populist anti-government anger will increase. Any and every country will have to watch out for its very own Timothy McVeigh.

In Europe, labor markets will become less fluid as foreigners are blamed for stealing the remaining jobs. That will not end well.

Here in the U.S., the housing bubble is still not deflated all the way. Obama will put America's real estate market on life support, much to the annoyance of those of us who acted responsibly by NOT buying a house during the bubble. Quite frankly, unless Obama can take the bull by the horns and rework the system itself, the country is sunk (as in the 70s, rather than Bolshevism). I hate to sound so dire, but that is where we are at here.

The anti-government crowd is going to get bigger and louder unless Obama can do most of the following:

• Quickly and aggressively place all zombie banks into receivership.
• Allow Detroit to fail.
• Provide an unemployment benefits backstop for the workers who lose their jobs.
• Maintain a tax structure that creates incentives for innovation and hiring; and
• Catch Osama bin Laden.

The current path, which coddles obstructionist Republicans and gives Pelosicrats too much power, will only lead to failure. Obama's desire to create unity is the right approach for another era. Right now, the country needs leadership and vision, which is what we thought when we went to the polls in November.

Nadir or Abyss?

I thought we were entering into the nadir of the financial crisis, but reading Geithner's proposal makes me think we're still on the edge of an abyss. Great.