The Stage

This note was originally published at 8am on September 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“All the world’s a stage,

And all the men and women merely players:

They have their exits and entrances;

And one man in time plays many parts.”

-William Shakespeare

 

If U.S. politics is beginning to feel like theater, it should.  Two nights ago, we had the Republican presidential candidates on stage.  Last night, we had President Obama on center stage (albeit not the prime time stage due to a NFL matchup).  All the political world is, indeed, a stage.

 

In Act 1, the Republican nominees took turns taking various shots at each other and at the current resident of the White House.  According to the main stream media, former Massachusetts Governor Mitt Romney emerged as the protagonist in the dramatic comedy that has become the Republican race.  Meanwhile, current Texas Governor Rick Perry seems to have lost, at least for now, his role as leading man.  Although he did reaffirm his willingness to star in more independent films with the following statement about Social Security:

 

“It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you're paying into a program that's going to be there.”

 

That line is certainly not characteristic of a mainstream Hollywood blockbuster, but for those of us that enjoy factual documentaries it is a noteworthy comment.

 

Sometimes hero and sometimes villain, Congressman Ron Paul also provided ample Oscar worthy material two nights ago, which included the following quips:

 

“It isn't authorized in the Constitution for us to run a welfare state. And it doesn't work. All it's filled up with is mandates. And the mandates are what we're objecting to. I want to repeal all the mandates.”

 

“You can buy a gallon of gasoline today for a silver dime. A silver dime is worth $3.50.”

 

As for President Obama, like a poorly reviewed low budget film, expectations were low for him heading into last night’s command performance.  While “expectations are the root of all heartache”, low expectations, on the other hand, are also the source of many upside surprises.  Unfortunately, President Obama had center stage last night, but like an off Broadway show that isn’t quite ready for the big lights, Obama fell short.

 

Initially, the equity futures cheered Obama on as it was clear that his American Jobs Act was to be an upside surprise at $447 billion versus the rumors of $300 billion, but the new ideas that he and his aides were hinting at were virtually non-existent.  The core tenets of his proposed job bill are as follows:

 

-          Cuts payroll taxes in half for every working American and small business ($240 billion);

-          Extends unemployment benefits for another year ($63 billion);

-          Immediate investment in infrastructure ($50 billion);

-          Rebuild and modernize at least 35,000 schools ($30 billion); and

-          Help prevent state and local governments from laying off teachers and police ($35 billion).

 

Sound like a sequel?  It should.  The American Jobs Act has very similar tenets to President Obama’s original $800+ billion stimulus program, a program whose benefit to the economy was dubious at best.  In fact, some estimates suggest that President Obama’s original stimulus bill cost an astronomical $280,000 per job.  This is not exactly Keynesian policy that we can believe in.

 

While I’m generally hesitant to support government intervention in the economy, I would admit that there are policies that the government can enact which could catalyze long term economic activity.  Unfortunately, this bill does not any. On the first key point of cutting payroll taxes, it is certainly a short term economic benefit, but short term cuts do not motivate long term investment.  On the second key point of infrastructure spending, while perhaps the United States needs heightened infrastructure investment, there is no multiplier effect or long term job creation with such.

 

In addition, not only did President Obama present a bill last night that has limited new ideas and likely wouldn’t meaningfully stimulate the economy, he also presented a bill that will likely not pass through Congress.  In presenting a bill last night that he did not first discuss or at least attempt to craft with Republican leadership, Obama continued to play into the highly partisan environment that is gripping Washington.  To be fair, the partisanship is not all his fault, but he is certainly reaffirming that he is not a disinterested statesman who is above the fray.

 

Three years into his Presidency, it is also now clear that President Obama owns the economy.   Without a doubt, he can blame the prior administration for leaving him with an economy that was on life support, but he and his administration have passed extensive legislature that has been largely ineffectual.  As Michael Boskin from the Wall Street Journal wrote yesterday:

 

“Cash for clunkers cost $3 billion, just to shift car sales forward a few months. The Public-Private Investment Partnership, despite cheap federal loans, generated 3% of the $1 trillion claimed, and toxic assets still hobble some financial institutions. The Dodd-Frank financial reform law institutionalized "too big to fail" amid greater concentration of banking assets and mortgages in Fannie and Freddie. The foreclosure relief program permanently modified only a small percentage of the four million mortgages the president promised. And even Mr. Obama now admits that the shovels weren't ready in all those "shovel-ready" stimulus projects.”

 

The best future advice for President Obama and his administration likely also comes from Shakespeare:

 

“Boldness be my friend.”

 

As it stands, the American Jobs Act is not bold, innovative, or likely to pass.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Stage - Chart of the Day

 

The Stage - Virtual Portfolio


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