White Out

The White House, Wealth and the Economy

Larry Kudlow of CNBC always talks about mustard seeds in relation to the economy. The trouble is that his optimism, while refreshing, had been unrealistic over the past year. As I've said before, there is a difference between optimism, pessimism and reality. It's now becoming clear that some of those who were previously labeled pessimists are actually perpetual optimistic realists. Today however, it looks like the mustard seed is finally in the ground. It will need plenty of water, nutrients and time to grow, but the seed has been sown nonetheless. I've penned some Q&A-style perspectives below..



Isn't the market supposed to be forward-looking?!?
Many people have said the markets are forward looking and that the next 6 months are already factored in to the stock market. Obviously they were wrong if they said this three months ago. The reason they were wrong is that the stock market is not some kind of oracle but merely an indicator of economic sentiment and perception. The perception was wrong as CEO's and analysts were continually making downward revisions to their guidance leading to a negative feedback loop in the economy. The popular perception is now much closer to reality now, in my opinion, which means we are at, or near a bottom in the stock market.

What did the Obama administration have to do with the economy?
Thus far they haven't done anything measurable. The market correction paused to determine if the smart guys in the administration had a magic bullet that would stop the declines. They didn't, and when this fact became apparent, the declines resumed their course. Sporatic reactions to announcements and press releases are never a reflection of long term equity value with the very rare exception of events that act as a catalyst for catastrophic events (the Lehman Brothers failure for example).

So the Obama administration actually knows what it's doing?
Not really. In his testimony yesterday Treasury Secretary Timothy Geithner admitted that if the administration's GDP growth projections for the next decade are off, the public debt may no longer be serviceable. He emphasized that he didn't see any better alternative to the current direction given their inheritance. He's probably right and certainly transparent; but this does not inspire much confidence in their ability to fix the economic problems.

Is now the time to buy stocks?
Yes and no. One certainty is that anyone predicting a bottom will be wrong. However, my outlook several months ago was that the Dow Jones Industrial average would bottom out in the 4000-6000 range. My outlook has not changed (as it sometimes does), and the stimulus packages could help push this bottom higher than my estimate. I'd be ready to diligently put long-term investment capital to work. Traders beware of expecting large returns and high long-term growth rates. Profit taking will ensure that volatility remains in the markets for the next 3 months as the economy moves towards a rebalanced state. A structural debt problem that still exists in the United States economy should be considered very carefully.

Does this mean the economy is turning?
Yes and no. More job losses are on their way. House prices still likely have further to fall to eliminate the excess in homes. There is still more downside. When growth does resume it will not be a sudden dilation back to 2007 activity levels. On the other hand, the light at the end of the tunnel is becoming visible. Just realize that the path to get there will be a difficult one.

Every obstacle forges fortitude, every hurdle appraises fitness and every challenge tenders opportunity.

-You're smarter than you think.