Obama's Boot on the Neck of the Recovery

by Steen M. Cohen  •  May 25, 2010 at 1:20 pm

http://www.buyselljump.com/2010/05/obamas-boot-on-the-neck-of-the-recovery

Stock markets the world over are plunging just a few weeks after the worst of the recession appeared to be behind us. It's not surprising to see some retrenchment after last year's epic run, but we have already plunged through levels that would suggest simply a normal pullback in response to stocks getting slightly ahead of themselves. Technical analysts point out daily the latest support level that failed to hold. Down is the direction of least resistance, and that is the case with nearly all asset classes, whether stocks, fixed income securities, real estate, commodities, you name it—with the exception of gold, a traditional refuge in times of crisis, and the dollar. The dollar's strength is remarkable, as it again proves to be the default currency when panic abounds. This is the case in spite of the fact that a politically-charged Fed keeps printing more of them at an alarming pace. The U.S. seems to be doing everything in its power to undermine its currency rather than protect it, yet the world still is drawn to it. Perhaps it's testimony to how bad things are everywhere else.

Market analysts and other observers and pundits are putting forth many explanations for the latest collapse in stock prices, and nearly all of them are legitimate worries that should impact markets negatively. Some of these factors are very recent, including the horrendous oil spill in the Gulf of Mexico and rising hostility between the two Koreas. Others are of longer standing, including Europe's day of reckoning for financial irresponsibility and its effect on the euro, even raising doubts about the currency's survival as well as the long-term prospects for the European Union itself. Credit in Europe is now becoming a serious issue as lending among banks appears to be drying up in a hurry. All of this suggests sluggish growth, if any, among many countries that can barely support their outstanding debt obligations now. And of course all of Western Europe increasingly looks like a line of dominoes standing on end, as Greece is about to tip over onto Spain, which in turn will knock over Portugal, creating a chain reaction down the line.

All of these, and others too numerous to mention here, are legitimate worries for the market, especially one that appeared to be overextended in terms of valuation, with the S&P 500 trading at 20 times earnings, well above its average of 16. So it wouldn't have taken much to knock the markets from their perch, and world events have provided plenty. But there is another factor that the markets are reflecting now, which has provided the downturn with additional momentum. That factor is domestic economic policies that are a function of populist politics rather than economic soundness or even plain common sense. Each of these policies is already exacting a huge toll on a fragile, tentative recovery, a recovery that without them would likely be further along and perhaps even creating jobs.

The White House showed its tough-guy image when it vowed to "keep a boot on the neck" of BP, as if the company could be any more incentivized to contain the spill than it is now. Perhaps not caring about the offensive nature of such Gestapo-esque imagery, yesterday Interior Secretary Ken Salazar vowed to "keep a boot on their neck until the job gets done." This is in keeping with a policy that encourages obsequious outreach to sworn enemies while alienating allies. In other words, BP is now the corporate equivalent of Israel. It's also of a piece with Chicago-style politics, where boots have been known to be applied to the necks of many opponents of the entrenched machine that engendered the political career of the present White House occupant.

Here's a fact: Over the course of the year, many economic data points were somewhat encouraging in suggesting a gradual, if sluggish, recovery. A few, like the jobs numbers, did not reflect much improvement, but overall, things like retail sales, manufacturing, even housing prices, were in a more hopeful mode than during the depths of the recession. Inflation remains at remarkably low levels, and interest rates remain at historic lows. Despite unsettling and even dangerous world events, the markets were responding to expectations of improved conditions under which the economy could again grow and companies could prosper—and maybe even hire. In the face of that, after a lengthy and deep recession, it takes more than external events to create a significant market reversal, something beyond a normal pullback. The present administration's anti-business, anti-wealth creation policies are a boot on the neck of the recovery; it could not be any clearer.

The latest example of this is the effort in Congress to pass financial "reform" legislation, with the president already pen in hand ready to sign any sausage of a bill that emerges from that house of increasingly ill repute. In keeping with its practice of applying the precisely wrong policy at the worst possible time, the administration and its congressional cohorts are conjuring up legislation that is creating fear, and even worse, confusion, in the financial community, at the precise moment that recovery in that sector is critical to the economic healing process. There is widespread fear that the hodgepodge bill will create a plethora of unintended consequences, much like one of its unfortunate predecessors, the suffocating, onerous and expensive Sarbanes-Oxley junk pile, another supposed "reform" bill that saps strength and energy from the business sector. One is hardly filled with confidence in the process of creating such a bill having witnessed the spawning of the ObamaCare monster, possibly the most disgraceful, dishonest and cynical political process ever inflicted on the American people, who, by and large, opposed the legislation and continue to detest it after it became the law of the land.

Identifying other policy decisions that head 180 degrees in the wrong direction is just too easy, but let's name a few: Raising taxes significantly during a period of economic distress; rewarding unions that are a large part of the problem with big ownership stakes in bailed-out car companies while applying the neck-boot to secured bondholders, thereby trampling on centuries of settled bankruptcy principles; singling out individual classes of people, like those bondholders and specific business leaders for public vilification for opposing any administration position; aiding and abetting philosophical soul-mates in Congress to establish mammoth new government programs that must be paid for by future generations, thereby creating unimaginable deficits that promise to be an albatross on the economy for decades to come; encouraging a redistributionist, confiscatory environment whereby wealth created by one citizen is simply transferred to another, with the government serving as middleman; fomenting gigantic stimulus spending to no good effect, and nationalizing whole industries by engineering unprecedented intervention by the federal government into the private sector; and conducting a foreign policy that punishes allies, rewards those who wish us harm, and has cast a pall of shame on the country through multiple apologies, sometimes to tyrants, for our supposed bad behavior in the past.

This is a remarkable record for consistency in serving as a perfect contrary indicator to sensible economic policy, fruitful foreign relations, political comity, fundamental fairness, and heretofore sacred traditional American values like the rule of law. In fact, it is just about flawless.

Thus the U.S. stock market is anticipating a future with stifled economic growth, greater burdens, financial and otherwise, upon the private sector, fewer jobs, and a diminished prosperity. Foreign markets made up of companies that rely on a strong U.S. economy—as well as a strong and unambiguous U.S. presence on the world stage—are despairing of the prospects of returning to those conditions any time soon, if ever. Instead, they see an America seemingly determined to repeat already-failed European models which are now detonating like land mines all over the Continent. They see an America with little incentive to invest, to create businesses, to reward risk-taking and entrepreneurial spirit; instead they see an increasingly entitlement-based society with a confiscatory tax code and a federal government that has metastasized into a creature that could not be recognized by the Founding Fathers.

Thus, Mr. President, by virtue of your radical policies and grossly overreaching efforts to convert American society into an image you prefer, you now own what will perhaps become the second dip of the recession, along with the market collapse that will accompany it. This is the day of reckoning for an understandably sour American electorate that allowed itself to be seduced by empty slogans, dishonest pledges, and a gross misrepresentation of a candidate's vision for the country. Perhaps that same electorate will shake itself out of its nightmare come the November election. Until then, this administration has its boot firmly on the neck of a recovery.

Steven M. Cohen is a money manager in New York.

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