Wednesday, January 21, 2009

Inaugural Speech a Crisis

Getting a rebound day after, which may calm my concern, but I found the market verdict on Obama's inaugural very troubling. While not as severe, Obama has unusual similarity with FDR inaugural as the prime problem then as now was a bank credit crisis. Things have been learned in last 76 years and the monetary side of the fiscal-monetary measures has been implemented and has worked a shown by the return to normalcy for bank credit spreads in the money market tenor. But Bernanke, noting a near absence of coherent political and executive plan in the fiscal area has started to move down the yield curve and trying to evoke fixes in areas that in the end will only be fixed by appropriate fiscal measures. This is Bernanke's quantitative easing measures with program purchases of agency backed mortgages and now an intended program, TALF, in asset backed securities.

I could find only one solid Keynesian concept in the inaugural which addresses expectations and risk (or "rent" in Keynes words) schedules over time. When Obama said:

"We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. "

This is almost a direct quote from an essay Keynes wrote in the 30s found in "Essays of Persuasion" It indicated awareness that the crisis had nothing to do, in fact, with the justification or even reality of the fiscal actions to be taken, just that expectations have to be modified to a base schedule that can sustain growth. But that's all I could find. The rest of the inaugural was a hodge podge of shibboleths and wordsmith and a cynical lack of daring or courage resting solely on the historical significant event of being the first black President. In normal times that would have been sufficient to make the history books for all time - and it will. But in the midst of a once in a lifetime crisis, more courage and more daring and more dedication to showing resolve and the obvious, that a solution will occur with dispatch no matter what the cost in treasure, this was not forthcoming.

In March 1933 the SPX, after the immediate bank holiday solution after an extraordinary and immediate special session of congress called by FDR on his first day in office, showing resolve and definitive immediate action, rallied 22% in a few days - with a near immediate reversal of deflation and liquidity re-established in the banking system occuring. The stock market rallied the 22% almost immediately. These were problems that Hoover and most felt were intractable and just something that required fortitude and endurance which Americans have a history of accessing during tough times. FDR found that inhuman, unacceptable, and insisted on immediate action. Expectations which most academics thought were written in stone and would at minimum last a decade were reversed and shaped in one speech and with one day of policy choices. One day. "All we have to fear is fear itself". And FDR immediately demonstrated that was not a semantic phrase but that he enforced that philosophy immediately.

It is a serious and terrible error for Obama to take on what is basically a Hooverite train of thought, as ironic as that sounds. Paragraph after paragraph of text shows that Obama shares the standard view that we should be "afraid, be very afraid". Winter, woe, crisis, words have meaning as FDR showed and Obama's inaugural is a trail of tears. I was left with the idea that he was offering me the opportunity to show to all my good character but with near term results that I would not enjoy and basically suffer for the sake of my children. Just picture in whatever color or form your own representation of the schedule of expectation, of "rent" for the economy - I see this image as Obama spoke gremlin gleefully running down a structure indicating time slamming away at any positive outcome I could expect.

This inaugural speech, read without being aware this is the first black President and real historical significance - read with the idea that the speaker is a standard WASP very intelligent populist good looking male; read the text with that in mid as the speaker and you see not just a suave Jimmy Carter, but even at times Hoover.

Given the context this inaugural address is one of the most cynical and politically expedient and cowardly of any of the 44 addresses given.

With all the above in mind it is easy to see and understand why the Dow made the largest swoon in the history of data for when the leader of the USA provides his game plan.

Unless Obama reads stuff like this, accepts and understands the markets grading of his policy stance ( or lack there of), and makes corrections - he will have a four year term, Congress will come in Republican majority in 2010, the Senate and the Presidency Republican by 2012. The only administration to successfully apply Keynesian principles to date have been Republican - Eisenhower, Nixon, and Reagan. I thought of that as pictures of Obama were shown in the shadow of the Great Emancipator. Very ironic as perhaps Obama should have been running in the party of Lincoln, the Republicans.

SPX volatility surface certainly confirms the dim view I have of this inauguration:

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