Alphabet Soup Spells Blah

I'm getting lost. There's old programs like the FDIC insurance program to protect bank depositors. There's the new Obama Stimulus Package. And then there's TARP, TALF, EIEIO (no, wait, that's a song from kindergarten), along with seemingly dozens of other new catchy-named programs emanating from the nation's capital. All are intended to reverse the economy from its current downward death spiral.

 

Yesterday, Warren Buffett was pontificating on CNBC that the economy had "fallen off a cliff" but would eventually recover. Well, duh ... yeah, even Jimmy Buffett could have said that.

 

There's universal agreement that the stock market is a leading economic indicator. It almost always starts its recovery six months prior to economic upturns. So the question that I would have liked Warren to answer is "When will the recovery take place?". Once we know that magic date, a monkey could throw darts at the stock market listings and pick winners, just as long as he tosses those darts six months earlier.

 

An old stock market adage is: "They don't ring a bell at the bottom (or top)". This is really too bad; it would make things a whole lot easier. As I write this, the stock market has just rallied for the first time in weeks. Is this the bottom or just a "dead cat bounce"? Who knows? Check back in several years and we'll be able to figure it out.

 

So what's the average investor to do? Just listen to the experts and when you think that enough of them agree on a common course of action, immediately do the opposite.

 

Failing that sure-fire piece of advice, it seems to me that the Obama Administration and Congress can help jump-start the economy and the stock market with one simple action above all others. Reduce or eliminate the taxes on dividends and long term capital gains. This single action will pump huge amounts of cash into start-ups and the stock market, revitalizing the economy and creating jobs.  Obama is scaring the bejesus out of potential investors worldwide because he's talking about raising these taxes instead of lowering them.

 

One other thing. It might be a good idea to hold gold or some other hard assets in your portfolio. While I know that the current concern is deflation, at some point, the massive creation of money is going to set off a jumbo-sized round of inflation.

 

No! I don't have any idea when that magic date will occur. I sure wish I did.

 

Perils of Paulson

I bet that most Americans know that Henry Paulson is the Secretary of the Treasury. I also bet that they had no clue who he was two weeks ago. I also guess that most Americans have no idea what the Treasury's role is in our system of government, but I'm pretty sure that they know that Paulson is the man behind the $700 billion government bailout. This is one heck of an expensive cram course in civics for Mr. Average Taxpayer. Even Stanford wouldn't have the cajones to charge this much.

Something like 90% of the population consider Paulson's plan to be a bailout of Wall Street. But, as discussed in the previous post, the cause of the crisis that is gripping the financial system is not just Wall Street's doing. There's plenty of blame to go around. It's now Paulson's job (along with all the political leaders) to sell the plan that has emerged this weekend as a bailout of the nation's economy, not just a bailout for the fat cats on Wall Street. This will not be easy. It's far simpler to scapegoat the unpopular rich guys. Both Obama and McCain did just that in their first debate two days ago.

Paulson's plan was two and one half pages long when he presented it to the President and Congress. After a week of work, the Washington politicos have renamed it the ‘‘Emergency Economic Stabilization Act of 2008’’. It has grown just a bit (by Washington standards) to over 100 pages of legalese gibberish. And it doesn't even cover the details of how the government will determine the price of the toxic assets it will be buying from the private sector.

Congress is set to vote on this bill this week. It appears that both political parties have come to understand the risk of inaction and are likely to pass the proposed legislation on to the White House. I wonder if they'll have the usual signing ceremony. Will Bush sign it using a bunch of pens which he will then hand to the smiling politicians who will be in the signing photo, or will it be done in the dead of night, with no one wanting any part of the whole mess? It should be fun to see which one happens.

As a free market guy, I'm pretty dismayed that the government is doing this. Sure, I like French food, but I don't sure don't like French economics. However, when I see Bush and both political parties agreeing on something smack in the middle of an election campaign, it must be darn necessary. So you can reluctantly count me in. Although it's not like anyone asked you or me.