Saturday, August 6, 2011

Osama Bin Who?, What to Make of the State of the Economy, Debate #3 Prepping

President Obama - At the Low Point
I remember when Osama Bin Laden was killed by a daring raid on his compound in Pakistan just a few months ago. Political pundits, both wishful Democrats and mainstream commentators were speaking of how this would seal the deal to re-elect President Barack Obama to a second term. I got a good laugh at the time. It isn't that President Obama didn't get a bounce in the polls as a result of the Bin Laden raid - he clearly did. For a fleeting second, we were just a bit more unified as Americans. It is just that I know how short the American attention span is. President George Herbert Walker Bush was flying at 89% approval in the spring of 1991, coming fresh off victory in the Persian Gulf. By November of 1992, his approval was 34% and he got a mere 38% of the vote in his attempt at re-election.

Whether President Obama is re-elected in November 2012 remains to be seen. As I just noticed, a lot can happen fast in American politics. What is clear is that the approval benefit that the President got from the killing of Osama Bin Laden has faded and then some. The last few weeks of debt-ceiling wrangling has taken its toll on his numbers, as evidenced below.

His monthly numbers put him at the low point of his Presidency. Being clearly into the negative numbers is perilous for a guy hoping to be re-elected. The gamblers on Intrade still think an Obama re-election is more likely than not (it is currently priced at a 54% probability), but less likely than at any previous point in his Presidency. Simply, unless the Republicans commit suicide with a candidate like Bachmann, the President will need to at least hold and probably improve his current job approval numbers to get four more years in the White House.

Correcting Stock Markets, Austerity and Debt Downgrades, Oh My!
The investment world took a collective gasp this week. It wasn't one event. In fact, in a lot of ways, the fundamentals were looking better. The debt ceiling was raised. The European central bank is looking into buying the debt of Italy and Spain, providing an under-pinning of support for the fragile Euro. Corporate profits are at record levels. But people are very nervous. And there are causes to be nervous.

1. Austerity
The debt deal will clearly lead to lower government spending, across the board, which has an anti-stimulative effect on an economy, at least in the near-term. $666B of the $787B in stimulus funds (85%), the keystone economic program of the Obama administration to date have already been spent. The "stimulus by another name" payroll tax credit expires at the end of the year. Extended unemployment benefits are also set to expire at the end of the year.

President Obama has called for extension of unemployment benefits, an extension of the payroll tax cut and increased spending on infrastructure, all of which sounds like stimulus without the President actually calling it stimulus. But is it realistic to spend more and tax less at the same time that the Congressional panel must find another $1.5 trillion in cuts or tax hikes over the next 10 years? It's hard to do deficit reduction and stimulus at the same time.

2. The Stubborn Jobs Picture
Hiring actually picked up a little in June, but progresses at an anemic pace. The 117,000 jobs created last month are scarcely enough to keep pace with population growth. The official unemployment rate remains a stubbornly high 9.1%. If you include those who have given up looking for work, it's an even-more depressing 10.9%. Include those working part-time who are trying to work full-time and you get the "underemployment" rate, a whopping 16.4%.

People who aren't working aren't generating economic output, paying taxes or spending money. Not a great place to be.

3. The Debt Downgrade
Standard and Poors downgraded the quality of U.S. Government Bonds from the highest rating of AAA, a rating U.S. debt has held for all of modern history, to its second-highest rating of AA+. This has received a lot of press, but is probably overblown. Treasury yields are near the lowest levels in modern history as the massive sums of cash not being used to grow the economy are finding their way to the "safe haven" of governmental debt. There simply is no other debt market that can hold that much cash and so it is highly likely that Treasury Yields will remain low of the near-term and the government will not have an issue finding a home for its debts.

Besides, let's be real...S&P doesn't exactly have a stellar track record. Those Collatoralized Debt Obligations that imploded the economy in 2008? AAA rated by S&P. AIG's debt in 2007? AAA rated by S&P. Is S&P really saying that governmental debt now is more risky than AIG or CDO's were then? Or perhaps they are just admitting that they aren't very good at projecting risk.

At any rate, the economy continues to limp along. Whether it will take a turn towards higher growth or slide back into a second recession is difficult to predict. But it will have a huge impact on the election.

Time for Another GOP Debate - What to Watch
Next Thursday at 9 PM ET, Fox News will host the third official GOP Presidential primary debate. I say third official, because the first debate was before the major players got in and therefore excluded key contenders like Mitt Romney and was not broadly watched. This debate should feature all the key players, except for the still-undecided Texas Governor Rick Perry, who really is the guy everyone wants to see.

What we should be watching is how hard the other candidates come after Romney, who is the clear front-runner at this point. Romney has been on lock-down during the debt ceiling discussion, stating no point-of-view. Are the other candidates going to call him on it? Go after him for Romney-care? Try to sell themselves as the more plausible alternative?

Tim Pawlenty was widely criticized for playing it very safe in the second official (but first broadly participated) debate and failing to go after Romney. His campaign is languishing, so don't expect that this time. Expect Bachmann to be full of fire, as she always is. And expect the others to attempt to do something to break themselves out of the pack. I'm just not convinced that any of the present field can beat Romney or that anybody other than Romney can beat Obama. But, like I said, Rick Perry isn't in the game yet.

If you like this game, tell your friends.

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