State Of The Union
The President will deliver the State of the Union address Tuesday night. He will probably offer a laundry list of programs that he’d like to spend more money on and the Republicans will respond with a laundry list of reasons why the President’s list is a bad idea. The President will say that he intends to concentrate like a laser on job creation and then spend most of the speech talking about things that will have a negligible impact on the unemployment rate. The Republicans will offer a response by Marco Rubio that will emphasize the Republican party’s desperate need to appeal to someone other than old straight white guys so they can keep the only jobs they really care about – their own. Meanwhile, the average American will need all his/her willpower to keep from throwing heavy objects at their TV.
The State of the Union? Economically speaking, not so great if you ask me. Regardless of which party got us here – and I think it was a truly bipartisan effort – neither party is offering a solution that would right the ship of state. Both parties are captive to the corporate and other organized interests that fund their campaigns. The signature accomplishments of Obama’s first term – Obamacare and Dodd-Frank – are marvels of opaque corporatism. Obamacare was sold as a way to control healthcare costs and provide universal coverage, two mutually exclusive goals. The big winners are the insurance companies who have spent the last two years jacking up rates in anticipation of efforts to accomplish goal 1 so they can maximize the profit opportunity of realizing goal 2. Dodd Frank was intended to take care of the Too Big To Fail problem and the natural outcome, of course, is that it benefits the large banks it was supposed to contain. Regulatory complexity – and Dodd-Frank is about as complex as they come – increases the cost of compliance, effectively discouraging new competition for the big firms who caused the problems that made Dodd-Frank necessary.
Of course the problems created by concentrating too much power in DC are not new or about to change so it is probably not worth my time pining for something better. I’ll watch the speech Tuesday night, shake my head and get back to my job of trying to figure out how to navigate a market and economy constantly distorted by politicians and central bankers. Right now the central bankers have the rudder because neither party is able to enact much of anything too harmful or helpful. The Fed’s QE infinity is having the desired effect I guess; stock and home prices are rising. Unfortunately, there isn’t much in the way of fundamentals to support either move. Earnings aren’t growing nearly fast enough to support mid teens P/Es and real incomes aren’t growing fast enough to keep house prices rising. The Fed believes that rising house and stock prices will create their own fundamentals through the wealth effect but so far that is a theory in search of evidence.
Markets are said to be discounting mechanisms but they aren’t infallible and I have a hard time finding economic justification for a continued rise in stock prices. The economy isn’t awful but neither is it booming and I am skeptical that it can without major changes in economic and regulatory policies. Without a higher pace of growth, earnings expectations are probably way too high. The economic stats so far this year has been okay but it is December data. Over the next couple of weeks we’ll start to get January numbers and I would just remind everyone that we got a tax hike on January 1. Personal incomes are already squeezed and the payroll tax hikes won’t improve that situation. Unless there is something to offset the impact – and I don’t know of anything – private sector growth will almost certainly be negatively affected.
What effect would a growth scare have on stock prices right now? Obviously that is impossible to predict but there is a paucity of bulls right now and the shorts have been squeezed out of the market. There has been a lot of talk recently about a great rotation from bonds to stocks but I’m far from confident that the recent mutual fund buyers will have the guts to buy a dip. More likely they’ll go back to their previous behavior of steady redemptions. Or worse, with the market near its all time high, a dip might just turn into a cascade as investors figure this is close enough to break even and scramble to get out before prices go lower. Where will they go? With everyone hating on bonds right now, my guess would be right back to Treasuries.
The State of the Union and the State of the Market are inevitably entwined. The speech Tuesday night will be wishful thinking and little of what the President proposes will ever see the light of day. The status quo has produced a weak economy and inflated asset prices. How long those two can continue to coexist is anyone’s guess but eventually one of them has to end. With no hope for pro-growth economic policies anytime soon, it seems more likely that the latter will be the first to go.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: email@example.com or 786-249-3773.
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