A SELF-FULFILLING PROPHECY and PRESIDENTIAL IMPACT

A SELF-FULFILLING PROPHECY 10-17-2008

If someone had come to me two years ago asking how often the DOW would swing more than 500 points in any one day - from opening, to low, to high, to close - I might have responded, rarely… not very often. If the question had come only a year ago, I’d have likely suggested that it happens, but only a few times a year - seldom enough to be an event when it does. Were I to be asked that same question today, I’d have to stop, look at the DOW for that very day, and then suggest it could happen on any given day and today is one of those days. At this writing, the low to high differential on the DOW, forget including the open to close, is over 560 points. This is the stuff of amusement park rides and nightmares - not of rational markets.

In recent days, there’s been much made of whether or not the Treasury and Federal Reserve acted swiftly enough to avoid aggravating an already weakening economy; and once again, the Washington ‘blame game’ is being played out in the national press. In truth, the actions of the Federal Reserve and Treasury have likely come late enough as to not stem the flow of red ink in the domestic and global credit, debt, and equities markets, but how could they have come any time sooner? Had Paulson and Bernanke brought enough liquidity to the economy a year ago to stem the tide of what we’re now suffering, the public outcry and political confrontation would have been enormous. Forget that they’d have needed prophetic vision to have seen just how deeply this would run, and how widespread an effect the credit crisis would have.

The reality is that the volatile markets we’re enduring are a byproduct of credit market forces emanating from years of loose credit and possibly unsustainable economic growth, fueled by credit. Today, it’s all too clear to see the trail and where it has led us; that’s the beauty of hindsight. Where this will take our economy tomorrow is far less certain.

What is most concerning to many of us today is what may be labeled as a self-fulfilling prophecy. The emotion and fear exhibited by some over the last several months regarding a much heralded recession has unreasonably constrained capital investment, job creation, corporate and personal borrowing, and consumer spending. So much so, that we are now likely experiencing the very recession that most already supposed us to be in, though we were not! Their very suppositions and reactions have now almost certainly caused what they feared was already upon them.

GDP figures for all but the 4th Quarter of 2007 have not only been positive, but in most cases higher than expected. Early indications of 3rd Quarter 2008 GDP growth follow the same trend. But 4th Quarter 2008 and 1st Quarter 2009 will almost certainly reflect negative GDP growth, and that makes a recession. We haven’t seen a recession stemming from fear or a lack of confidence since 1907, and those that had been experienced previous to that time were relatively brief in duration, but admittedly occurred in economic times that bear little resemblance to the complex, fast moving, and globally connected economy we have today.


PRESIDENTIAL IMPACT

With little more than two weeks to go before the US Presidential election, it appears increasing likely that Senator Obama will be the next POTUS. Many are elated, others are frustrated, and some just don’t care. Regardless, it’s important to understand some of the impact that may come from an Obama presidency, and in contrast (allowing for equal time and opportunity), what a McCain administration might otherwise offer.

Under an Obama presidency, in all likelihood, there will be an immediate sense of increasing confidence in the electorate. Persuasive and confidence-inspiring rhetoric, an attractive Obama trait, may help calm fears and heal some open wounds. The import of which is not to be taken lightly.

The federal deficit may decrease, not as a byproduct of decreased spending, but due to an increase in personal and corporate tax rates of varying types, not just the obvious federal income tax. There will likely be continued pressure to keep interest rates low, possibly at the risk of a weaker dollar and even greater risk of inflationary pressures. Job creation at the low end of the wage scale may improve as employers are pressured to keep jobs in the US, and increases in federal minimum wage levels are almost certain. The term ‘pro business’ may become as caustic as ‘lucrative executive compensation’ is today, and while many successful US corporations may seek asylum offshore, there may be a pain-inducing effort towards protectionism, both in keeping corporations in the US and trade tariffs. The role of government in business is likely to increase, and government intervention in health care will continue at a fevered pace, though likely still missing the point as in prior democratic administrations.

The replacement of two or more Supreme Court justices is near certain, but given the age and makeup of the court today, it is most likely that those who may leave the bench will be those that have a more liberal bent to begin with, notwithstanding unexpected health conditions. The makeup of the various lower courts will likely be very different as more liberally-minded judges are likely to replace many of their retiring conservative peers.

Conservative commentators will likely gain the same type of traction that their liberal counterparts have seen in recent years, but only after what might be an attractive ‘honeymoon’ period. Conservationist efforts may overtake more productive ‘green business’ activities, resulting a more ‘tree hugging’ environmental movement than a more effective business led campaign.

In the event that McCain becomes the next US president, it is most likely that liberal commentators will immediately surge and the negative rhetoric that has surrounded the Bush administration will continue. Unless McCain is a more eloquent and convincing orator than his two republican predecessors, it is likely that only the conservative faithful will gain much additional confidence and trust in the economy and government.

Taxes on those that contribute the greatest portion of federal revenues may decrease at the cost of fewer federal services and higher federal deficits. Trade barriers are likely to remain low, and the globalization of our economy will continue to increase at a rapid pace, though trade imbalances may ebb and flow. In the short term, the US may continue to be seen less than favorably around the globe as many nations will continue to see a McCain administration as a continuation of those that came before, but in time, assuming deft foreign policy actions, the US’s global esteem should improve even as the US economy regains lost strength.

Free market influences may constrain jobs at first, but will likely give way to more higher paying jobs as entrepreneurs and innovators are encouraged to build, grow, and develop ideas into profitable business enterprises. ‘Green’ business practices are likely to escalate rapidly as it becomes more obvious that businesses can profit from them while improving public relations.
The makeup of the US Supreme Court could shift farther to the right as aging liberal justices are replaced, and liberal columnists and activists are likely to gain enough additional momentum to make a second McCain term as hard fought as the first. US forces abroad will almost certainly maintain a high level of activity.

The overall effect of either of the candidates on the US economy during the next two presidential terms is uncertain. There are as many respected decision makers who favor one candidate as there are those that favor the other. Some predictably conservative voices in our society sound like they favor a change in parties for the coming administration, and at the same time, many more liberally minded business executives appear to be leaning towards a house, senate, and presidency that represent the same party.


ON THE LIGHTER, BUT STILL ENLIGHTENING, SIDE

The following came to me this week by way of email. I thought you might enjoy it and maybe even learn something from it.

BAR STOOL ECONOMICS:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar everyday and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers’, he said,’ I'm going to reduce the cost of your daily beer by $20’. Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
'
I only got a dollar out of the $20, 'declared the sixth man. He pointed to the tenth man, 'but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!

''That's true!!' shouted the seventh man.

'Why should he get $10 back when I got only two? The wealthy get all the breaks!

''Wait a minute,' yelled the first four men in unison. 'We didn't getanything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible