What role does Govt. have in the economy and in keeping the asset markets strong. While we
continue to hear Alan Greenspan talk of how the Stock market can help pull the economy back
out of the unemployment woes it is mired in, the wherewithal to fight for the homeowner on
Main Street is rapidly dying within the Democratic Party.
This week we saw Barney Frank cave in. Unfortunately it did not end there. Mr. Mustard Seeds
threw in the towel. With Tim Geithner sounding more independent and Republican and move
more towards a centrist position and the threat of a Bloomberg Run looming dangerously, we
are seeing the Obama White House scramble for position and look to find a voice that sounds
more centrist.
Well, Mr. Obama, watch out! The Bush White House was quick to create TARP and provide capital to Corporate America. Using Freddie and Fannie, a clear derisking cycle assumed the risk of deflation in the Housing Market. Today, in a low interest rate environment, foreclosures
have slowed and the economy turned around to produce several quarters of rising GDP. This
has come through a Federal Deficit that is a 9.1% of GDP. There is little doubt that stimulus has
provided a floor to the economy AND the stock market. Pull the plug on deficit spending and the
economy will proportionately tank. Today, there is limited export opportunities for the US. Import replacement remains the only growth opportunity. Falling oil prices imply that deflation
is around the corner. P/E s on Wall Street have fallen sharper than the 30 year. What this
means is that as demand drops and revenues tank, US companies are going to be opting for
more layoffs to push bottomlines up in declining revenue environment. And the deflation cycle
will turn into a deflationary recession. That is the hard landing.
With Republicans pushing for an extension on the Bush tax cut, and Bernanke talking with
nothing more than a smoking gun, and jitters everywhere, this is not a time for inaction. A
broad and sweeping proposal for spending the rest of the stimulus available in short order is
called for. Rebuilding New Orleans, driving new exploration in Montana and pushing a Wind &
Solar Grid and a Nuclear Cycle could provide the kind of impetus for longer term development.
The electric car when it arrives will start to require a full grid.
Pushing more infrastructure is clearly the road towards recovery - be it Maglev or electric
cars. 18 months down, the private sector will be able to take over, but not today. It does not
have the wherewithal to borrow and spend and importantly create jobs. Only a second trillion
dollar stimulus aimed squarely at energy infrastructure can pull this economy out of recession.
Just as Reagan spent on Defence, the Obama presidency should spend on Energy. While the
Reagan Whitehouse faced high interest rates, the present environment is the best time to
refi Federal Debt. And no one is worried about crowding out as any inflation is welcome! - Deflation is the big threat now!
Meridith Whitney's opinion that CMOs and CDOs are gone and will not come back anytime soon needs to be taken more seriously. Bill Gross too is saying much the same thing. The time has
come for either Freddie and Fannie to start becoming players in the rental market or for the
Federal Govt. to reconsider its commitment to Ownership Society.
Kudlow's prescriptions will not work and he knows it. Pull the plug on housing is hardly a
prescription - its a cop out. And even he does not believe that the Fed can create work.
All Presidents are tested and they must find their true conviction.
So President Obama, take a deep breath and request the Democrats for another Trillion and
keep the plane of Hope from a hard landing!!! More Stimulus now will prevent larger bailouts later.
