The Administration Speaks, the Market Unravels

by Steven M. Cohen  •  Mar 10, 2009 at 5:25 pm

http://www.buyselljump.com/2009/03/the-administration-speaks-the-market-unravels

Despite today's "relief" rally, the list of explanations for the market's daily collapse continues to grow, faithfully compiled by a legion of experts and commentators. Let's review:

1. President Bush left things in such sorry shape that the market is destined to resemble a vast investment wasteland for years.

2. The "stimulus" package just won't be "enough" to get the economy out of its tailspin (to repeat, having been left in such sorry shape courtesy of President Bush);

3. The various bailouts—AIG, Citi, autos, banks, mortgages—just can't collectively serve to arrest the accelerating economic meltdown;

4. Greedy bank officials, mendacious mortgage lenders, feckless corporate chieftains, and rapacious Wall Street honchos have wreaked permanent damage on the economy, reducing it, as Warren Buffet recently remarked, to a "shambles."

Conspicuous by its absence on the list is any connection between the market's abysmal performance and the new Administration's prescription for a cure. There is by now a nearly perfect correlation between the daily drumbeat of announcements from the White House and the market's precipitous decline. Despite this obvious close connection, it's beginning to look like there is no one within the Administration—or the Democratic congressional majority for that matter—who notices or, perhaps, cares.

So while the list is interesting, it misses the larger point. Matching up stock price action with Administration action strongly suggests that investors—represented as a whole by the stock market—despise the new Administration's economic policies. Perhaps some would say that "despise" is too strong a word. Those doubters might consider the fact that the S&P 500 has lost about 25% since Election Day. Maybe "despise" is too mild.

Much of this slide has coincided with specific Administration actions. (For those in doubt, I have a portfolio you might want to buy at pre-election stock prices.) It started with the election morning-after, continued into the Inaugural, and has gathered steam with ubiquitous presidential addresses and press conferences, legislative proposals and congressional appearances by various Administration officials. Most recently it was manifested in the presentation of a hopelessly bloated budget containing equal measures of stern lecture about past excesses and eye-popping numbers representing future ones. (I again offer my portfolio to anyone who doesn't appreciate this inconsistency.) Evidently investors sense something that is making them rush for the exit in droves.

This phenomenon, of course, was best demonstrated by the congressional testimony of newly-minted Secretary of the Treasury Timothy Geithner. Without dwelling on it, let's just say that most listeners, including congressional committee members, were somewhat underwhelmed by the lack of detail. Surprising were both Geithner's unpreparedness as well as his ability to make Henry Paulson look like a great orator. Admittedly, this is the most extreme example, but the market's downward trajectory could be followed with every syllable of Geithner's testimony.

Of course there is no empirical test to prove the Administration's role in market wealth destruction. Perhaps the apparent relationship between White House pronouncements and the rather sickening market downdraft is coincidental. The question does not exactly lend itself to the scientific method.

We can only imagine, then, how the stock market might look had the Administration adopted policies aimed directly at ending the recession, undiluted by social engineering projects and surreal spending plans. Where would the market be now, we can only surmise, had the White House offered a stimulus package containing dramatic reductions in capital gains taxes, payroll taxes, perhaps even income taxes (fat chance)? Maybe even a plan to cut federal spending and a budget proposal genuinely free of earmarks and other pork. How might the market have reacted to federal plans to address enormous structural problems in the financial and manufacturing sectors that didn't simply constitute huge, bottomless bailouts of moribund business models? Since the Administration appears to be committed to precisely the opposite policies, we'll never know.

It's particularly ironic that a president who is a great communicator has ignored the lessons of two other Great Communicators: JFK and Ronald Reagan, both of whom lowered taxes in the teeth of significant recessions. Those actions, of course, helped to revive the stock market and to ignite long periods of economic growth.

Instead, the market is laboring under the oddly populist messages emanating from the White House. It sees a president ready to condemn business at every turn, even in the course of a first address to a joint session of Congress. Throughout that speech market participants witnessed an inappropriate and rather tawdry exercise in Wall Street bashing in what should have been a somewhat stately and historic occasion. Symbolic red-meat "issues" like corporate bonuses and private jets take precedence over a coherent recovery plan. Investors are bombarded with endless proposals to raise taxes and discourage investment and risk-taking. Shareowners see an Administration determined to boost capital gains taxes while investors are already fleeing the markets in distress. These are anti-growth, anti-investment policies that press every wrong investor button. Thus the market speaks in a loud and clear voice.

Yet an odd disconnect remains between the Administration's go-for-broke political agenda and the message delivered by the market every second of every trading day. It's as if no one in the Administration can make the connection between an economic recovery and stability in the stock market as a critical component thereof. Evidently, according to what we have seen so far, this Administration, this president, believes that these factors are independent of one another. This is hard to fathom, even for a political cynic, and it would not be surprising to soon see some of the economic advisers on the President's dream team, so dutifully lined up behind him during his first press conference, slinking away from this policy train wreck. Some of them ought to know better, and do.

In these days of electronic time-frame compression, the Bush excuses will soon fade into irrelevancy and this market crash will squarely belong to the new president. Nevertheless, the Administration evidently believes we can have an economic recovery in spite of the collapse of the stock market. It won't happen.

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