Darshan's Blog

Darshan's Daily Market Ponderings

Obama - The Law of Unintended Consequences?

Tuesday 23rd March, 2010

Afternoon all,

President Obama is a man on fire. The USA has been all about legislature over the last few days. Last week he signed a $17.6B jobs bill into law; the purpose? Why of course, to stimulate employment through tax breaks for employers hiring new workers. Although as he signed it, he did mutter something about it not being enough...oh wait his exact words were "It is by no means enough....to bring about a full economic recovery". Of course, it's not enough Mr President - nothing will ever be enough if the Government doesn't let market forces take control. What do you think is going to happen if you incentivise employers to hire new workers? That's right they'll do so for a certain amount of time, benefit from the tax relief, less tax will be levied and as a result - somewhere else, jobs will be lost. When will Obama, Geithner and their gang ever learn? The fact that the last FOMC minutes had the Fed's Evans stating that unacceptably high unemployment and low inflation require monetary policy to be loose in to at least 2011 - shows that the trillions spent to 'stimulate' the economy and add liquidity to the system, has not worked. What on earth is $17.6B going to achieve?

Your taxes will forever be used to inject more of a quick fix to the addict that is the debt-driven economy. Of course on Sunday, the Health Care Bill finally passed through the House of Representatives. On moral grounds this is great news and it affords healthcare to 32 million more Americans...that is pretty amazing. Raising taxes for the wealthy is progressive...again great. Making policy practices such as refusing to insure those with pre-existing medical conditions - brilliant.

All that - I can understand and agree with. However, in terms of reality - can the USA afford another $900bn of spending? The national debt ceiling has already been raised a number of times and while the bill proves that Obama means business - winning the battle, might mean losing the war. The reforms will equate to 7% of the US GDP by 2025 and 12% by 2050. Interesting times ahead for sure. Finance aside, morals aside, the heap of concessions allowed to get this bill passed aside, let's just think this whole thing through. I can't help but think that such a huge reform being nursed through into law - can only create a raft of unintended consequences down the line. Professor Steven Horwitz, makes a very valid point...

"I and other have noted that a provision in the law appears to create strong incentives for businesses not to hire poorer, single mothers who will need subsidies to afford family-covering health insurance. Among the other unintended consequences of the health care reform legislation are its possible effects on small health care providers."

I am fully agreed on this one. The biggest unintended (or maybe it is intended hmm) consequence of this reform will be concentration of power via the major health insurers. I genuinely feel that the the rule stating compulsory purchase of health insurance by 2014, will be favourable to the larger insurers. They will be able to take on the demand, offset the risk, hire the staff needed for the administration and in turn this will create a health insurance industry - akin to the banking industry - i.e consolidating and powered by a few, as the smaller peers go to the wall. Dangerous? You bet.

Time will tell but for now, I think the correct way of doing this would have been to fix the banks, let credit and the multiplier solve the employment problem and then tackle healthcare. Doing it this way round, smacks of a President desperate to prove a point. That I'm afraid, will be of no use to the economy and ultimately, the people of the USA. This is not a debate about 'socialism' (As if the Tea Party activists even understand that word properly), nor is it a debate about absolute cost - it's a debate about timing and more importantly, the worrying prospect that those in charge genuinely don't have a clue about which order to make changes in.

I would love to hear your thoughts on this!

So Obama aside, what about the markets today?

Yesterday, we had another range bound day...yes watching paint dry is now officially what traders are getting paid for. I'd say give it until Thursday and we should see some sustained downwards action - until then, it's just the big players jostling for position at the top of the ski slope.

You know I don't believe in the news moving the markets - i.e. it is merely used an excuse to time a move - but if you must follow such media driven rubbish, then today we have Existing Home Sales data coming out of the USA (forecast is 5.01m vs 5.05m last month). The real question isn't the direction of movement today but whether there will be any volatility both ways.

The more I look at it, the more I believe in the scenario I described yesterday (http://is.gd/aTppV) - i.e. - that we drop 30 odd points on the SPX (and roughly the same percentages on the other indices - for example, I can see the FTSE 100 dropping about 400 points from here over the next few weeks, so that it can fill the gaps it has left below from the pump up over the last month) and then we get a final pump to coincide with the UK General Election and the Fed's unwinding measures in May. So stay ready for more fun and games. Now is not the time to be long - now is the time to protect your longs and get short. I'll let you know when to get long again for the final run up (if the technicals warrant that).

Happy trading,

Darshan

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