Inspirations and Aspirations

On this morning’s Morning Joe, Jim Cramer eats crow again: “I’ve got to admit, [Treasury Secretary Timothy] Geithner is more sophisticated than I first gave him credit for.”

Stablemate Erin Burnett concurs: “There’s no question, Geithner is a guy of real substance.”

Inasmuch as these two can be said to sum up the common wisdom of the equity markets, the equity markets and their gatekeepers, the financial advisors and institutional money managers of the world, are finally warming up to the Obama administration.

This shouldn’t come as too much of a surprise, although it can be beyond frustrating that it takes so long.

Market history is only a fair indicator of market futures. But a quick look at the history of the Dow in the transition years between the Hoover and Roosevelt administrations, the Nixon and Carter administrations, and the Reagan and Clinton administrations, reveals a remarkably similar pattern.

The performance of the Dow in the first weeks and months of each of these transitions to Democratic administrations was consistently abysmal, continuing broad, severe bear markets that began during the last year or years of the preceding Republican administration. But in each of these cases, somewhere between month 3 and month 6 of the new administration, a bull market emerged, creating broad and sustained rallies. A sustained Obama rally could now be emerging; time will tell.

There are two broad implications if this pattern holds true once again. 1) counter to the common wisdom, long-term Republican stewardship of the federal government is bad for equity markets (each one of the multi-term Hoover, Nixon and Reagan administrations ended with horrible bear markets); and 2) there is a knee-jerk bearish reaction to any Democratic presidential victory, which is historically unwarranted, and time after time unwinds into a sustained rally several months into the new administration.

Pass me my rose colored glasses. I’m beginning to think springtime is coming.

The debate rages on over Obama’s budget.

For good reasons, the “fiscal hawk” position has become a consensus position in our national politics. But what too many fiscal hawks are missing, is that there IS a difference between “investing” and mere “spending”. If there weren’t, all your 401(k) money would go towards electronic Dura Ace 11-speed upgrades.

(Oh, I forgot: it already does!)

During the campaign, Barack said repeatedly that Bush didn’t just spent too much money, but that, in the end, we got nothing for it. The money was spent recklessly, and didn’t help create any platform (infrastructure, education, etc.) to leverage in the future. (And, IMHO, when the full record becomes available, the amount of criminal spending, i.e., big ticket no-bid appropriations that went to politically connected friends, is going to be shocking; remember the $4 billion that “disappeared” in Iraq?)

Obama’s theory is that future increases in economic activity made possible by investments in meaningful things today (repeat after me: Energy, Education and Health Care; Energy, Education and Health Care) will significantly reduce future structural deficits.

This theory makes at least as much sense as the theory behind massive tax reductions, i.e., that the incentives for American entrepreneurs had been thrown so wildly out of whack by the pre-1982 federal tax code that drastically lowering taxes would actually raise tax revenues. And Obama’s reasoning certainly makes as much sense as the Republican orthodoxy, developed over the past decades by a reductio ad absurdum of that same logic – and without the pre-1982 top marginal tax rates any longer as a pretext – that any and all tax reductions actually increase tax revenues.

Obama’s investment-oriented budget is not simply neo-Keynsian tax and spend liberalism; and neither does it make sense to view it through the same lens as one viewed the last decades’ disastrous “voodoo” economics. Maybe we should call it “401(k) liberalism.”

It’s a new mindset: try to think for once past October 2010 (the end of the proposed budget’s fiscal year), and ask yourself, what should America invest in? If you think a good part of the answer to that question is Education, Energy and Health Care, maybe it’s time to stop whining about the size of the investment, and how much that investment is going to (hopefully, temporarily) take from our extravagant spending pockets. Instead, let’s start a dialogue about our priorities and what returns we expect in the future from our current investment in our government.

A favorite professor of mine, Alan Wolfe, explains the difference in this week’s New Republic.

“It was hard for me to believe that you were entirely serious about that socialist question,” Obama [told the New York Times], defending his policies as consistent with free-market principles.

“The fact that we’ve had to take these extraordinary measures and intervene is not an indication of my ideological preference, but an indication of the degree to which lax regulation and extravagant risk-taking has precipitated a crisis,” he said.

http://www.reuters.com/article/newsOne/idUSTRE52L0J820090322

Like the alien in the 1951 classic, The Day the Earth Stood Still, Barack Obama has been having difficulty convincing knee-jerk conservatives, on Wall Street and elsewhere, that he’s come to save capitalism, not to destroy it.

Yes, the equity markets are not the ultimate arbiter of economic health, but in light of yesterday’s gains, fears that the America we know and “love” was coming to an end – for better or worse – seem grossly exaggerated. Jeff Macke, who suggested on CNBC’s Fast Money, that under the Obama administration, we would be well advised to “work until we made $249,000 and then take the rest of the year off,” will have to postpone his Spring idyll in Aruba. Will Larry Kudlow, of the same network, who has been warning us all to prepare for “Obama’s War on Investors,” now start telling his minions to stand down?

Just a week ago, Mike Huckabee, Renaissance man of the Religilous Right – one part James Dobson and one part Stevie Nicks – railed against Obama’s economic plan:

“Lenin and Stalin would love this stuff,” says former Arkansas Gov. Mike Huckabee. “The Union of Soviet Socialist Republics may be dead, but a Union of American Socialist Republics is being born.” 

Is lovable Mike ready to admit that Lenin and Marx long ago joined the firm of Shearson Kuhn Loeb Marx Lenin & Medvedev (known to the homeless intelligentsia around Harvard Square as Dewey … oh, you get the picture)?

Like FDR before him, Obama assumes the mantle of the presidency at a time of economic meltdown. (A meltdown, much like the Depression, of our own making; but that’s another post.) And braving the taunts and torrents of criticism from both left and right – but especially from the disingenous right – is navigating a course designed to once again save capitalism from itself. To the chagrin of the (so-called) left, he is not going to dramatically alter the American corporate or banking systems, storming the offices of Mother Jones magazine in the name of a Scandanavian-style cradle-to-grave welfare state. Neither, to the chagrin of the right,  is he going to back down from his commitment to address the obvious inequities in the current system, to end the decades-long rape of the middle and working classes by their executive overlords, to raise the top marginal income and capital gains tax rates by some incremental amount, and to insist that the government builds and sustains the legal and human resources necessary to ensure that the stewards of our large public companies are bound by the fiduciary responsibilities they accepted when they became officers of those companies.

Fiduciary responsibility: to wit, corporate officers (whether of banks or motor companies) are the custodians of large sums of other peoples’ money – our money, investors’ money. Schemes that lead to excess corporate compensation – whether they are built on bad loans, clever stock option manipulation, or just the bald assertion that one person’s honest labor is worth 400, 600, 800 times that of another – are just simple theft.

Reining in excess compensation, and increasing marginal taxes on incomes at the far end of the earnings bell curve, is not socialism. It’s shareholder activism, writ large, and (finally) with the power of the federal government behind it. Here’s hoping that yesterday’s rally means that Wall Street’s instinctually right-wing know-nothings, and their financial commentariat echo chamber, can wrap their collective head around the fact that this is hardly the apocalypse. It’s just an adult president telling them, as gently as possible, that they have to start acting nice, and give back some of their friends’ toys. As the whining and tantrums in the pits and trading desks start to settle down, I expect the equity and the credit markets will settle right down with them.