Friday, April 17, 2009

The Beat Goes On

Citi and GE earnings are in and they are much better than consensus. The financial system is healing. Both Goldman and JP Morgan are anxious to repay TARP money and get the government out of its life. Big government has frightened investors away from the TALF, but, in the end, the TALF won't matter. The securitization market is beginning to show signs of life anyway. Housing is looking better for the first time in a while. All of this is very, very positive.

The big negative remains the Obama administration. Hopefully, the Congress will kill off card check, cap and trade, the health care nationalization scheme, and the massive tax hikes in the works. If much of this stuff survives, economic growth will be limited over the next decade or so. If most of this stuff is vaporized by a revolt of Democratic moderates, then a reasonably healthy recovery can take place starting as early as the Fall of this year.

Looking back, it is hard to not to see this as a brief but deep contraction in the economy. What kicked it off? Something that happened in September was undoubtedly the catalyst. Some say the Lehman bankruptcy...I would argue the extreme rhetoric of the Bush-Paulson-Bernanke campaign for TARP passage was the main catalyst. In any event, the recession did not begin in December 2007 as officially claimed. After all, the first two quarters of 2008 were both quarters of positive economic growth. Recessions are not slow growth periods. If that were the definition of a recession, then the term would be meaningless. The recession began in late September and early October of 2008 and will reach bottom this summer with recovery beginning this Fall.

What this means is that stocks are way, way too cheap, treasuries are way, way too expensive. Opportunities abound for investors. We will all look back on this period as one of extraordinary opportunity. This, of course, assumes that the Obama adminstration doesn't destroy the economy with its nightmare blueprint for the economy known as the "Obama budget." All bets are off if that budget passes. With the Obama budget, we will see a return to the 1970s ("Welcome back, Carter") -- high inflation, slow growth, laggard stock markets, high unemployment. Without the Obama budget, the US and the world economy have a bright future.