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Dari Investoralley.com
Beware of the Obama stimulus trap
By Martin Hutchinson http://www.moneymorning.com/, MoneyMorning
Monday, August 3, 2009
Upbeat headlines have been everywhere in recent weeks, and they all seem to
point to a single conclusion: The U.S. economy is in the early stages of a
very rapid recovery.
In fact, when you peruse the news it’s difficult to come to any other
conclusion. For instance:
- A number of key earnings reports have been much better than expected,
and company executives buttressed those profit figures with positive
comments about the next 18 months.
- The trading operations of Goldman Sachs Group Inc. (NYSE:GS) and
JPMorgan Chase Co. (NYSE: JPM) both just reported record profits.
- U.S. housing prices rose in May for the first time in three years.
Initial jobless claims have plunged 15% since their April peak. The
Conference Board’s Index of Leading Economic Indicators rose 0.7% in June,
its third successive positive reading.
- And just yesterday (Thursday), the Dow Jones Industrial Average topped
the 9,200 mark for the first time since November, a potentially highly
bullish development for the economy, since stock prices are forward-looking.
But while many experts will look at these developments as an excuse to
celebrate the looming rebound to come, I actually see them as a real cause
for concern. The reality is that these reports, when viewed in concert with
other data, are actually a sign of a re-inflating financial bubble.
This is actually an Economic Recovery Trap that, when sprung, will inflict
a lot of pain on overly optimistic investors. Now that we’re sufficiently
forewarned, we should re-orient our money accordingly.
*Doomed by Deficits*
It’s not surprising that the U.S. economy has shown signs of strength in
recent weeks; it has had huge amounts of money thrown at it.
On the fiscal side, the Obama administration’s May budget plan suggested
deficit for the 2009 fiscal year (which ends in September) would reach $1.83
trillion, about 13% of gross domestic product (GDP).
However, subsequently released unemployment figures have shown that the U.S.
jobless level reached 9.5% in June, far above the 8.3% rate assumed in the
budget. And unemployment is expected to spike further in the second half of
the year.
This worsening unemployment situation strongly suggests that the true
budget-deficit figures will be even worse than those already announced, a
supposition strengthened by the postponement from mid-July to mid-August of
the normal mid-term budget review. Since U.S. President Barack Obama is
currently attempting to steer two difficult and expensive pieces of
legislation, the cap-and-trade energy bill and the healthcare-reform bill,
through Congress, he does not want unfavorable budget numbers appearing that
might be used to persuade wavering legislators to oppose them.
Even at 13% of GDP in fiscal 2009 and 10% of GDP in fiscal 2010, the U.S.
federal deficit is far above any previous level reached in peacetime, so
it’s likely that if the economy begins to recover these deficits will prove
difficult to finance, meaning the budgetary shortfalls will push up
long-term interest rates.
That escalation in long-term rates, in turn, could choke off the economic
recovery, which to be healthy requires a rebuilding of inventories,
extensions of credit to new domestic-and-foreign customers, and a revival of
enthusiasm for such large-ticket items as housing and automobiles.
With the yield on 10-year U.S. Treasuries already up from a low of 2.07% in
December to a recent level of 3.60%, the dampening effect of rising interest
rates may already be becoming apparent. In any case, the deficit is a dark
cloud that threatens to obscure the economic outlook.
And that dark deficit cloud will be very difficult to remove.
*Know Your (Real) Enemy*
The other main problem with today’s economy is the likely resurgence of
inflation. Even the U.S. Federal Reserve, which under central bank Chairman
Ben S. Bernanke for a long time apparently maintained a fear of deflation
above all else, admitted in its last meeting that the likelihood of
deflation had receded.
That’s not surprising: In the last six months, core consumer price inflation
(excluding food and energy) was a reported 2.4% annually. Although the
headline figure has been low because of the sharp drop in energy prices
the United States economy has experienced since last year, that effect is
about to disappear, as energy prices peaked in early July 2008 and fell
sharply throughout the fall. Thus, even reported consumer price inflation,
on a year-over-year basis, is likely to surge in the months after this one
(July).
Moreover, the reported inflation figure may be low. Each month, the U.S.
Bureau of Labor Statistics seasonally adjusts consumer price statistics to
remove normal seasonal patterns from the data. That seasonal adjustment
