A State of the Union the markets will like

January 26, 2011

This is probably a State of the Union the markets will like. That might not necessarily be such a good thing.

The markets will like that it is vague, that it is unobjectionable, that it makes a feint at diminishing the deficit without really cutting hard enough to hurt economic growth, and that it makes the right kinds of noises about corporate taxation.

In short, it does very little to upset the current dispensation; that the Federal Reserve is kicking asset markets uphill and that this is a “good thing.” In fact, in the speech President Obama cites the roaring of the stock market as his first piece of evidence of the economic recovery, and by extension of his competence as an economic manager. This is a grave mistake, just as would have been citing the booming housing prices in 2006 as evidence of a strong economy then.

To his credit, Obama went on to emphasize the need to create jobs and new industries, but the baseline assumption conflates a healthy economy with rising asset prices.

The pledge to freeze discretionary spending for five years, saving $400 billion over a decade, will be a salve to bond markets, but in truth is not really very meaningful. It more serves to illustrate the difficulties of bringing the budget in line without touching entitlements.

One area where price tags were not attached was on investment proposals, notably for clean energy, infrastructure, high-speed rail and wireless. This is a pity; wise investments will spur growth, which in turn will make the deficit more manageable. Better that Obama should nail his colours to the mast and make the case for investment, including owning up to how much it will cost and what must be sacrificed. Instead, the fear coming out of this State of the Union is that we will get neither the cuts nor the investment.

3 comments

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No smart investors are investing in the US these days. They’re all placing their bets on Asia and the other emerging markets. That’s where the returns are, and that’s where the investment dollars are flowing….
What we have to do (must do) is to work towards reversing this trend and get the flow coming back to the US. Only then will jobs return, and only then will the US economy return to health.
What the stock market, which is after all a secondary market, likes should not be a ‘primary’ concern at this juncture….
Get schooled… It’s educational.

Posted by edgyinchina | Report as abusive

Not much to add to the above comment, except that smart investors may be investing in U.S. companies whose markets are increasingly in developing economies, rather than the U.S. or Europe.

Further, there will always remain excellent investment opportunities among the many start-up companies in the U.S. We haven’t exported all of our entrepreneurial talent yet.

Posted by johnvos | Report as abusive

Sounded like pep talk from Madoff at the 12th hour given our current finacial situation!!

Posted by DrJJJJ | Report as abusive