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I Know What Keeps Obama Awake at Night

madhedgefundtrader's picture





 

While Obama relaxes in Hawaii, sipping Mai Tai’s adorned with little umbrellas and hooking up with distant relatives, a potential nightmare is giving him sleepless nights. Let’s say we spend our $2 trillion in stimulus and get a couple of quarters of decent growth. The “V” is in. Then once the effects of record government spending wear off, we slip back into a deep recession, setting up a classic “W.” Unemployment never does stop climbing, reaching 15% by year end, and 25% when you throw in discouraged job seekers, jobless college graduates, and those with expired unemployment benefits. This afflicted Franklin D. Roosevelt in the thirties.

So Congress passes another $2 trillion reflationary budget. Everybody gets wonderful new mass transit upgrades, alternative energy infrastructure, smart grids, and bridges to nowhere. But with $4 trillion in extra spending packed into two years, inflation really takes off. The bond market collapses, as China and Japan boycott the Treasury auctions. The dollar tanks big time, gold breaks $2,300, and silver explodes to $50. Ben Bernanke has no choice but to engineer an interest rate spike to dampen inflationary fires and rescue the dollar, taking the Fed funds rate up to a Volkeresque 18%. %. The stock market crashes, taking the S&P well below the 666 low we saw in March. Housing, having never recovered, drops by half again, wiping out more bank equity, and forcing the Treasury to launch TARP II.

The bad news accelerates into the 2012 election year. Obama is burned in effigy; Sarah Palin is elected president, and immediately sets to undoing all of his work. Republicans, reinvigorated by new leadership, and energized by a failing economy, retake both houses of congress. National health care is shut down as a wasteful socialist mistake, boondoggle subsidies for alternative energy are eliminated, and the savings are used to justify huge tax cuts for high income earners. We invade Iran, and crude hits $500.

 If you’re over 50, and all of this sounds vaguely familiar, it’s because we’ve been through it all before. Remember Jimmy Carter? Remember the “misery index,”  the unemployment rate plus the inflation rate, which hit 20, and catapulted Ronald Reagan into an eight year presidency? A replay is not exactly a low probability scenario. This is why junk bond yields are still stubbornly high at 12.5%, and credit default swaps live at lofty levels. It’s also why the investing public is gun shy, favoring bonds over stocks by a ten to one margin. Are the equity markets pricing in these possibilities? Not a chance.

The risk of economic Armageddon is still out there. Personally, I give it a 50:50 chance. Batten the hatches, and please pass the Xanax.

For more iconoclastic and out of consensus analysis, visit me at www.madhedgefundtrader.com.

 

 


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Tue, 01/05/2010 - 08:58 | Link to Comment TruthHunter
TruthHunter's picture

"Romney is a liberal with an R after his name... look at what his healthcare did to MA. He's just as bad as all the rinos and dems currently in office."

No, Romney is a pragmatist.  He did what was required to survive

politically in the most liberal of states.  In a state hell bent on socialism

he did what he  could to keep it rational.

Out of school, I think he was focused on a business career. If he had

been a career politician, most anywhere but MA would have been

better. 


Tue, 01/05/2010 - 12:44 | Link to Comment WaterWings
WaterWings's picture

+1

Mormons will help you as long as you are willing to help yourself. Romney played his hand well, considering the circumstances.

Tue, 01/05/2010 - 03:08 | Link to Comment Anonymous
Tue, 01/05/2010 - 00:33 | Link to Comment litoralkey
litoralkey's picture

The American political process is about as broken as the financial system. Therefore, one has to be a bit skeptical. Just to give you one little example, one unrelated to the financial crisis. Here we are on Dec. 29, almost a year after the Inauguration, and there is no Under Secretary of the Treasury. That should be an important position. How can we run a government in the middle of a financial crisis without doing the ordinary, garden-variety administrative work of filling the relevant agencies?
----Paul Volcker

 

Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is … forever. OK, strictly speaking it’s 18 years, since that’s how long it has been since the Japanese bubble burst, and Japan has never really escaped from its deflationary trap. This line of thought explains why I’m skeptical about the optimism that’s widespread right now about recovery prospects.
----Paul Krugman

 

 

Mon, 01/04/2010 - 23:38 | Link to Comment Anonymous
Mon, 01/04/2010 - 23:37 | Link to Comment heatbarrier
heatbarrier's picture

This time is different.  The fabric of society is breaking up.

"Strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem," said Robert Shiller, an economist at Yale University. "It will grow because of a building backlash against the financial sector, growing populist rhetoric, declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the Bible that they would repay."

http://online.wsj.com/article/SB126261702966614853.html?mod=WSJ_hps_LEFT...

Mon, 01/04/2010 - 22:49 | Link to Comment Great Depressio...
Great Depression Trader's picture

We will be in crisis mode for the next 20 years.

We have been in crisis mode since 2000 when the dot com bubble blew up. Soon after 9/11 happened (which i believe was a false flag operation) which further put us in crisis mode. The Greenspan fed panicked and dropped rates down to 1%. Then the housing bubble blew and burst and now rates at 0%. Even though things have stabilized for the time being we all know that crisis mode will return, whether it comes in 2010 or 2011. We also have to worry about peak oil, never really knowing when it will rear its ugly head again but with crude at $81.60 in this environment the future doesnt look bright at all.

We also have the bond market to worry about as we all know that gov debt issuance will explode in the next 3 years. Rates will rise further putting pressure on real estate values and bank balance sheets. Bottom line is we have a plethora of problems that will keep on hitting us in the face.

Therefore, we must numb our emotions to the current environment if we want to be happy. There is, unfortunately, nothing we can do about this. The PTB have a strong hold on the people and will maintain their power for another generation at least. The only thing we can do is personal preparation, whether it be buying gold, guns, food, saving money, preparing emotionally, etc. The message of truth will not reach the mainstream, the mainstream must seek truth for itself. For people love the lie and hate the truth. For when the truth shines on the darkness, it exposes evil and therefore the darkness tries to hide.

I have accepted reality for what it is now. I know there is no truth in the land. I know that corruption and lies reign. I know that the next 20 years will be very difficult. I know that there will be no colorful revolution of any sort and that liberty will die as fascism will reign. Thus, i will do everything in my power to have peace in my spirit, and not let the evil of the world consume me.

 

Tue, 01/05/2010 - 00:09 | Link to Comment Anonymous
Mon, 01/04/2010 - 22:28 | Link to Comment booboo
booboo's picture

Obama is Madhedgefundtrader's main man, loves hob knobing with the dems and speaks highly O's lofty goals of green energy and mass transit funded by powdered bones of your "granchilen"

Mon, 01/04/2010 - 22:05 | Link to Comment Anonymous
Mon, 01/04/2010 - 21:32 | Link to Comment Anonymous
Tue, 01/05/2010 - 02:22 | Link to Comment Anonymous
Mon, 01/04/2010 - 20:36 | Link to Comment ozziindaus
ozziindaus's picture

What makes you think the Republicans will repeal any legislation spearheaded by Democrats? You mean you believe in the two party paradigm? For fucks sakes man. If anything, they'll just make the situation worse regardless of any historical lessons to be learnt.

Mon, 01/04/2010 - 20:28 | Link to Comment Anonymous
Mon, 01/04/2010 - 20:13 | Link to Comment Anonymous
Tue, 01/05/2010 - 02:33 | Link to Comment Mr. Anonymous
Mr. Anonymous's picture

Because the war was 'won'.  If we had lost, the stimulus failed (like the Keynesian stimulus failed in Germany).  The stimulus of WWII worked because, first and foremost, we were the only free industrial state standing and EVERYONE had to buy their goods from us.  How's that for market share?  Secondly, we had, a la China, manufactured and exported the shit out of goods for which we took borrowed dollars.  We were a net debt-holder to the world as recently as 25 years ago.  Wars only succeed if you win AND you find a bagholder.  Look at England: they got one for two right and yet it left them financially wrecked, ending their Empire and bringing about the malaise they only recently (via the financial ponzi scheme) and temporarily escaped.

Military Keynesiasm, in and of itself alone, is just one more lie on the fire.   

Mon, 01/04/2010 - 19:53 | Link to Comment Anonymous
Mon, 01/04/2010 - 19:22 | Link to Comment Edna R. Rider
Edna R. Rider's picture

I would be surprised if someone as arrogant as Obama lets anything keep him up at night.

Mon, 01/04/2010 - 20:07 | Link to Comment Harbourcity
Harbourcity's picture

I disagree.  I don`t think Obama is arrogant.  He was chosen for his ability to seem confident and trustworthy throughout these events.  Arrogance would imply he has any real control. 

Mon, 01/04/2010 - 19:19 | Link to Comment DosZap
DosZap's picture

 Dupe

Mon, 01/04/2010 - 19:15 | Link to Comment DosZap
DosZap's picture

 Mad

"Unemployment never does stop climbing, reaching 15% by year end, and 25% when you throw in discouraged job seekers, jobless college graduates, and those with expired unemployment benefits."

I submit to you we are already at 25%...........

The Disgruntled, and tired of looking, and the part timers.

The only thing that's keeping this puppy from going violent, is the nearly 52 weeks of Unemployment bene's they have been recieving.

When this start to run out, and are not renewed.........look out.

Mon, 01/04/2010 - 23:42 | Link to Comment Daedal
Daedal's picture

The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data. The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.

Unemployment rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with full employment. The recession also saw an extremely sharp decline in industrial production. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%. At the end of the recession, production quickly rebounded. Industrial production returned to its peak levels by October 1922. The AT&T Index of Industrial Productivity showed a decline of 29.4%, followed by an increase of 60.1% – by this measure, the recession of 1920–21 had the most severe decline and most robust recovery of any recession between 1899 and the Great Depression.

http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

Tue, 01/05/2010 - 04:20 | Link to Comment dhengineer
dhengineer's picture

The remarkable thing about the 1920-21 recession/depression is that it righted itself in a few months with absolutely no government intervention.  The 1929 depression was on its way to recovery in 1931 or 1932, but Hoover/Roosevelt got their clumsy mitts on the controls and totally screwed it up.  They should have taken a lesson from good old Warren Harding:  hang out with the mistress more often, leave the White House in the hands of Silent Cal, and don't touch nothing!  Just leave it alone!  When will our supposed "experts" figure out that they actually know nothing about running an economy?

Tue, 01/05/2010 - 04:13 | Link to Comment dhengineer
dhengineer's picture

The remarkable thing about the 1920-21 recession/depression is that it righted itself in a few months with absolutely no government intervention.  The 1929 depression was on its way to recovery in 1931 or 1932, but Hoover/Roosevelt got their clumsy mitts on the controls and totally screwed it up.  They should have taken a lesson from good old Warren Harding:  hang out with the mistress more often, leave the White House in the hands of Silent Cal, and don't touch nothing!  Just leave it alone!  When will our supposed "experts" figure out that they actually know nothing about running an economy?

Mon, 01/04/2010 - 20:05 | Link to Comment Harbourcity
Harbourcity's picture

This.

How long can Congress extend Unemployment benefits is an important question.  Once the extensions end, so does any resemblence of a recovery.

 

Mon, 01/04/2010 - 19:14 | Link to Comment Anonymous
Mon, 01/04/2010 - 18:11 | Link to Comment Rainman
Rainman's picture

Before we consider odds, let's wait til the State and Muni public sectors FINALLY come to grips with the longer term condition of their budgets. They've tried the furloughs. That's not nearly enough ........ lacerations are not cuts. Once they've come to grips with the permanence of the downturn, they'll cut jobs like mad . The Sun and Sand states will be into it bigtime by mid year. The other Bloated Blues will follow.

An unemployment rate at 10 % will make us giddy with relief when we return to it in about 3 years.

Mon, 01/04/2010 - 19:23 | Link to Comment besodemuerte
besodemuerte's picture

Probably something that isn't discussed enough.  The financial system won't stay high then suddenly fall off a cliff.  It'll happen domino-style with the states leading the way.  California, among others, is so screwed right now it's laughable.  Maybe the realization of states failing one by one will be the Black Swan we're all looking for?

Mon, 01/04/2010 - 20:03 | Link to Comment Rainman
Rainman's picture

I constantly remind myself that the most vital of steps toward sustaining Fabian Socialism is consistently outsized public sector employment. Taken in the aggregate, it represents an IMMENSE group who are fundamentally and realistically wards of the Fed, State, City, County or other municipality.

They aren't rising up, protesting or snitching......unless or until the employment ax falls. Keeping them employed will be a very high priority for our Gubmint Masters. 

Mon, 01/04/2010 - 16:42 | Link to Comment Anonymous
Mon, 01/04/2010 - 16:33 | Link to Comment Anonymous
Mon, 01/04/2010 - 16:22 | Link to Comment Oso
Oso's picture

MHFT, i think for Obama to be kept awake at night, he has to have an understanding of what is going on to begin with.  Nothing he has said or done gives me any indication that this is the case, and with all his advisors constantly telling him what a great demi-god he is, I honestly believe he sleeps like a drunk baby.

Mon, 01/04/2010 - 17:25 | Link to Comment Silver Bullet
Silver Bullet's picture

Must be nice. I love sleeping like a drunk baby.

Mon, 01/04/2010 - 17:23 | Link to Comment besodemuerte
besodemuerte's picture

I refer you to PierreLegrand's post above, #182131.  I concur with him, Obama knows exactly what he's doing.  It seems to many he's a bumbling idiot when it comes to running the show, but that's because he's not trying to run the show.  He simply isn't playing the game that the POTUS is supposed to play.  It's like saying Pete Rose was doing a piss-poor job managing the Reds during games that he was trying to lose for benefit of his own interests.

 

He's just a cog in the wheel who's goal it is to overload and topple our system.

Wed, 01/06/2010 - 00:32 | Link to Comment KevinB
KevinB's picture

Much as I detest Pete Rose, he maintained, and it was never disproved, that he never bet against the Reds. He's still a turd, but he's not as big as turd as the stain in the White House.

Mon, 01/04/2010 - 16:38 | Link to Comment Anonymous
Mon, 01/04/2010 - 16:14 | Link to Comment Anonymous
Mon, 01/04/2010 - 15:52 | Link to Comment Anonymous
Mon, 01/04/2010 - 22:57 | Link to Comment Anonymous
Mon, 01/04/2010 - 15:43 | Link to Comment Anonymous
Mon, 01/04/2010 - 15:42 | Link to Comment Anonymous
Mon, 01/04/2010 - 15:05 | Link to Comment besodemuerte
besodemuerte's picture

I'd like to know what MadHedgeFundTrader predicts this will do to the lifestyles of us simpleton, average folk.  Do we carry on as usual, or does life as we know it come to a screeching halt as we adapt to eating Top Ramen for the rest of our lives?

Mon, 01/04/2010 - 17:14 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

There is a reason it is called the misery index.

J6P won't be sent to the gas chambers or anything, he will just lead the lowly life of quiet desperation that he was meant to live, as has been the case throughout history.

Think fewer opportunities - for education, for career advancement, for luxury goods, for vacations, for just about anything in life beyond toiling away to pay for the essentials.

The nice experiment our forefathers were able to set up is over, sheeple.  Things are going back to the way they have been throughout history - two classes of people - the oppressors and the oppressed.

Now get back to watching TV.

Mon, 01/04/2010 - 19:55 | Link to Comment Anonymous
Mon, 01/04/2010 - 14:54 | Link to Comment Anonymous
Mon, 01/04/2010 - 14:50 | Link to Comment Gimp
Gimp's picture

Sad but true Misthos. At least pulling a lever or punching a touch screen once every four years gives us the feeling we matter :-)

Mon, 01/04/2010 - 14:48 | Link to Comment Stoploss
Stoploss's picture

Well done, exactly as i would expect this to play out. My first introduction to the stock market was in 1974, after being snatched up from watching cartoons, and whisked away to the brokerage with my father, to stand in a line more than 2 blocks long. Deja-vu..

Mon, 01/04/2010 - 14:39 | Link to Comment Misthos
Misthos's picture

It doesn't matter.  The only reason we have presidents is so we can name a specific time period after them (e.g. Bush era, Reagan era, Obama era...) and so we can feel like we actually have a democracy and a voice.

There is little difference between the Presidents.  Does anyone really see a difference in how this crisis has been handled between Bush and Obama? 

Palin being Reaganesque?  Ha!  Reagan did what any President would do after interest rates subsided...  He ran the country on a credit card.  You think Palin, or anyone else for that matter will be able to run the country on a credit card in 2012?  You think the Bond Market will allow for a significant tax cut?  Do you have the faintest clue of who really calls the shots?

Follow the money.... then you will understand how our "democracy" works.

Nonetheless, it's funny watching the "little people" discuss presidential politics as if pulling a lever every four years actually accomplishes something.

Ross Perot would have been the only unencumbered President.  We lost that chance.  Anyone else that comes from the status quo parties only changes the drapes in the White House.... little else.

Mon, 01/04/2010 - 20:03 | Link to Comment Harbourcity
Harbourcity's picture

I find it funny that this post was alloted to the `junk`category by some individuals in this forum where it`s common knowledge that the two parties are opposite sides to the same coin.  Presidents are only presidents because their party allowed them to become the president.  All US citizens had a choice of was between the two candidates that the two parties put forward.

Tue, 01/05/2010 - 03:47 | Link to Comment i.knoknot
i.knoknot's picture

+10

after watching the '08 campaigns and debates... it was with disgust that my general summary of the US political system was "out of 300 million citizens, those two are the best we could do?"

this from someone who hasn't voted either main party in 20 years... i may be forced to watch the silly game, but i don't have to play. sadly though, i must suffer the results.

 

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