Sunday, November 01, 2009

Washington - Do This Next - Jobs & Expectations.

Its been 6 months since the bottom in the market and many of the actions by government have helped move the public's feelings that we were on the brink back to a more normal state. The question now should be focused on what to do next and this is where we're floundering as a nation.

The answer resides in a success which they've already accomplished - restoring confidence in the general public that tomorrow wasn't going to be the end of the world. Fortunately the recipe for doing this is a tried and true skill of government - spend as much as is necessary and then add $500 billion more under the guise its "necessary" in order to get the votes necessary to make it happen. In any event, it worked - the world isn't going to end, our 401Ks are not going to zero and life it seems will drag on.

But, what kind of life will it be? That is the next question that everyone is asking themselves and its now supplanted the prior question as the new most important piece of information before the economy will move from capital preservation and cash flow maximization to betting on the future being at least mostly as bright as its been over the past 20 years.

So, if we can sleep at night not worrying about tomorrow, but are still worried about next week, month, year and 5 years, how much have we really gained? I'd submit nothing - we're still in a wait and see mode albeit with a little more calmness. What we really need is a new believable long term model for growth upon which we can make all our hopes, dreams, and government expenditures possible. Its this long term model that is now holding us in suspense; nobody knows what it is because it is 100% in the hands of the congress and all the signs point to "not good" for growth by the Democrats.

Here are some things that could settle the long term fears (1-5yrs) which is where all the eyeglasses are focused now:

1.) The "rich" pretty much know 2010 means bad news for taxes which hurts the economy, but what really scares them is the fact that there is little to no word on their long term tax obligations stoked by constant chortling about how they need to pay for all the new programs congress is piling on daily. The rich are planning day by day - if you don't think its true, look at Businessweek last week - they're the only group who has curtailed their spending dramatically in the past year.

2.) Cap & Trade - another potential liability with the possibility to impact heavily everyone in this country. A noble effort yes, but a classical curse of the commons - that being everyone on the Earth. If China doesn't get on board, all we'll be doing is taxing local growth and giving a competitive advantage to importers who don't have to pay the cap and trade taxes. Try to tariff Chinese goods and you create and even larger uncertainty and liability that further tanks the future expectations of growth between China and U.S. and the rest of the world.

3.) Future debt obligations - the quantity of future debt obligations we're setting ourselves up with and the rhetoric we're using to calm our creditors leads to a growing desire for our creditors to de-couple themselves from their reliance on buying our debt. Pile this on top of our "talk out of both sides of our mouth" policy regarding whether we are going to back the dollar or let it slowly fall creates uncertainty which creates immobility in terms of investment in the U.S. as a whole. The effects right now are murky, but when they become clear they'll prove devastating. Think of this as the asshole boss you'd like to quit on because he doesn't appreciate your necessity and contribution. You're working to free yourself from him daily and when you finally tell him to "shove it" and quit - he'll be up a creek. That's the U.S. if they don't create credibility in their dollar possibility - they're basically pissing on all the worlds current and future holdings of our debt who will retaliate or dump us the first chance they have to do so.

4.) Financial Regulation - like any regulation is creates a freeze until certainty arrives. If this is truly a priority, get it done quickly so investment can resume in this sector and speculation over the actual outcome will give way to actual long term investment. Ask yourself - "why would I risk investing in something that the government might regulate to unprofitability?". Don't think the government can do/does this - take a look at the credit card industry now. How many of you have lower rates than 1 year ago despite interest rates from the Fed at 0-0.25%? How are your credit limits doing? Are they going up - I don't think so.

5.) Tax Cuts & Incentives - Here is where a long term promise on lowered taxes and incentives to invest would relieve the gridlock of fear in the economy. Short term stimuli are just that - they boost a quarter and they get people to trade in older cars, but they don't lead to hiring. With the unemployment officially at 10% (those who say 9.9% need to get off the media's obsession - round it up, its already unofficially much worse - how's 16% sound?) the only things that are going to get jobs created are long term commitments to spur people to start and grow new businesses and the most broad way to do this is through lower taxes. Those who don't start new businesses will consume more as they can build new rates into a 3-5yr plan which any sensible person does when evaluating their financial budget regarding cash flow and credit. Think this is stupid? Ask yourself if you'd start a business where the profit margin is 5% and you can make $1m next year netting you $50k / year. If it cost you $100k to start your payoff is 2years. Now ask yourself if you'd start that business if you thought your taxes on sales of $1m could increase by 3-4%? Your payoff goes from 2 to 8-10 years - not exactly a call to action.

6.) Government Spending - we've all had enough of it. I read everyday about the cost of Obama's dinner dates with Michelle, and the program to give cell phones to poor people (how did poor people survive before cell phones?) - I'm not trying to be mean, but this type of spending is not going to grow a thing - if you want to spend tax dollars - make tax breaks to job creators with promises for long term investment (we're letting the Special Master set bonuses based on 3-5yr stock price) in jobs and growth, not a bunch of crappy little projects that will whither away when the spending does leaving with just the debt of that waste to repay.

If there is a common thread in all of these its the notion that with an economy out of panic mode, they're now sitting in neutral waiting to see what happens next. Get the next steps right or capital will flow elsewhere. I heard today Brazil is limiting foreign investment to keep their dollar from appreciating vs. ours (which is sinking) due to so much inflows of investment capital - it sounds like the growth story is where is investment is - lets make the growth story and American one again.