If you feel like the market took one sniff at the much anticipated Obama, cue horns, bassoons and oboes, "American Jobs Act", and threw up all over this latest Keynesian abortion, you are not alone. Here is David Rosenberg explaining how, unlike Goldman which thought the plan is more than expected, is actually nothing more like a tiny flatulent wind in a feces-storm. He summarizes it best: " I'll put it to you this way. Assuming (i) that the House Republicans do not accept the Obama spending measures, and (ii) half of the tax relief goes into savings and debt reduction, then we are talking about the grand total of $35 billion of net new stimulus from this "jobs plan". That's principally because so much of it is merely extending what is already in the system. At an annual rate, that is a 0.2% boost to baseline GDP growth. In other words: much ado about nothin'. It doesn't even come close to offsetting the ongoing drag from the retrenchment at the state and local government levels." So anyone looking for an explanation why the market is down 4.3% since Thursday, here it is. And what is more disturbing, not even rumors of additional QE on top of the widely priced in Operation Twist, have had any impact. In other words, the time for another Hugh "I suggest you panic" Hendry soundbite is nigh.
From Gluskin Sheff's David Rosenberg
SMOKE AND MIRRORS
That is how we would describe the Obama "jobs plan". Much of it is merely rolling over existing tax relief passed in late 2010, such as payroll taxes for workers and extended jobless benefits.
I'll put it to you this way. Assuming (i) that the House Republicans do not accept the Obama spending measures, and (ii) half of the tax relief goes into savings and debt reduction, then we are talking about the grand total of $35 billion of net new stimulus from this "jobs plan". That's principally because so much of it is merely extending what is already in the system.
At an annual rate, that is a 0.2% boost to baseline GDP growth. In other words: much ado about nothin'. It doesn't even come close to offsetting the ongoing drag from the retrenchment at the state and local government levels.
The employment impact will also be negligible since labour costs were only cited by 6% as the primary concern among small businesses in the most recent National Federation of Independent Business (NFIB) survey. No wonder the equity futures barely responded after the speech ... this is a huge non-event.
It is incredible how many resources Wall Street and Bay Street economists are expending to research this initiative, especially since so much of it will never see the light of day. Then again, look at all that wasted time spent on Sunday conference calls the weekend after the U.S. credit downgrade, which was never ratified by Fitch or Moody's.
But the bottom line is that this "plan" isn't even much of a "re-election" plan either. It barely moves the needle. We may well be charitable about the assumption that half the tax relief gets spent. Look up the term "Ricardian Equivalence" — if people see this as the short-term gimmick that it is, basically raiding the Social Security fund, which everyone knows is going to have to get refilled, then very little of this relief is going to be spent.
In fact, because everyone was so focused on repairing the balance sheet back in the spring of 2008, of the Bush tax rebates that got everyone so excited about (which boosted disposable income at an epic 84% annual rate in May of that year) 17% was spent and 83% was either out in the cookie jar or used to pay down debt. The legacy of that policy move was to boost the personal savings rate temporarily, from 3.9% in April of 2008 to 6.1% as of June.
If, in fact, households behave as they did in the opening months of 2008, then in actuality we could be overstating the overall macro impact of this so-called stimulus plan. Again, assuming that the spending proposals are dead on arrival at the House floor, then all we are likely talking about in this scenario is a microscopic $12 billion add to GDP. In a $15 trillion economy, that can be considered nothing more than a rounding error.
Moreover, the entire tenor of last Thursday's speech was off base. When Mr. Obama rails at the "rich" (making $250K may mean you own the biggest mansion in Des Moines, but in New York City it may get you a parking spot in Tribeca) and "rich" oil companies, he misses the fact that over 50% of Americans don't pay taxes. This group does not include the "well off" either, no matter how the White House wants to define it. That's the issue — the middle class actually is very under-taxed relative to Canada and most other jurisdictions in the OECD. In fact, outside of Greece, the United States, for all its ingenuity, may well have the most inefficient tax structure in the world. It should be pulling in more in revenue, but when tax expenditures, or loopholes, cost the Treasury more than $1 trillion annually, something is definitely wrong.
Besides the fact that there is such a strong lobby group in the form of the National Association of Realtors, and that for some reason homeownership is considered more sacred than even mom's apple pie, how can mortgage interest deductibility AND tax-free capital gains on the same principal residence be justified. A subsidy for a place that you live in isn't an investment?
Nor does housing even add to the productive capital stock. It is, at its root, a consumption good. Why not give tax write-offs for SUVs and iPads while you're at it? The premise that homeowners make better citizens than renters was never adequately proven either, and in fact, the term "strategic defaults" was never a reference to apartment dwellers, come to think of it.
Here is what a drive towards sustainable economic growth should look like:
- Make everyone pay a flat tax of 20% and get rid of the rest of the tax code.
- Go back to the drawing board on Obamacare. It's a job killer.
- Extend retirement age for social security.
- Extend the age for eligibility on Medicare, and reduce Medicaid.
- Take these savings and embark on a real energy infrastructure program: build massive wind and solar farms, and give massive incentives to gas producers to produce gas, change the fleet for truckers and buses all over to natural gas and switch a massive portion of electricity generation to gas turbines from coal fired.
- Take revenues generated from a recovery and rebuild schools and give grants for re-education for construction workers to private firms who could do a better job than the government.
But the President, unfortunately, passed up the opportunity to do these things. As such, look for the economy to get worse. A hard-nosed Republican like Perry or Christie will get elected next year (at least the recession won't be totally wasted) and things will change for the better. Just like Reagan replacing Carter. The players have changed but the policy divergences have not.
In the meantime, the market will likely go down another 15-20% — that is on the premise of a recessionary bear market taking hold. And it could be worse if Europe falls apart. We are on the precipice right now; the situation is very fragile as it pertains to a Greek default in the near-term. The reality is that Germany holds the key to so much and here we have all the North American focus on the Dow and S&P 500 and yet the German DAX index has not recovered from early August lows —making new lows — as are the banks, which are down 50% this year. German investors know Europe better than U.S. investors; the latter still think we are going to
miraculously muddle through. Things will be fine in Europe and U.S. stocks are cheap — especially the banks!
But what is happening in the past two or three days is that the North American markets are succumbing to the events in the euro area — more so than by developments in the United States. The vagaries of globalization: 20-years ago, world equity markets had a 40% correlation with each other. Today that correlation is north of 80% (as we found out in 2008 when there was nowhere to hide and decoupling was confused for lags).