Obamanomic's Dilemma and Market

Obama in his weekend radio address says this recession could linger for years and the unemployment rate could reach double digit. In the past month alone, the economy has lost more than half a million jobs – a total of nearly 2.6 million in the year 2008. Another 3.4 million Americans, who want and need full-time work have had to settle for part-time jobs. Families across America are feeling the pinch as they watch debts mount, bills pile up and savings disappear.

I agree, but that’s not the half of it. The government has released one of the most shocking federal budget reports of all time. The 2009 federal deficit will be US$1.186 trillion! In sheer dollars, the 2009 fiscal deficit will shatter every record deficit of every nation in history, representing 8.6% of GDP, more than four times the average under Bush, nearly seven times the average under Clinton and 1.4 times the post World-War II record of 6% under Reagan.

And please be reminded that numbers have not included fiscal expansion of Obamanomics. If that is being included, federal spending could reach as high as 25% of GDP – the highest level in American history outside of World War II. During the WW II, most of the money was spent on war-related production, creating entire new industries and keeping millions of American in uniforms or on the job. In contrast, most of the 2009 deficit spending will be for corporate bailouts, unemployment benefits, social security and Medicare.

Investors will be tested in the coming weeks as earnings season approaches and corporations share their ‘gloom & doom’ of the past quarter. So far, stocks are giving back those gains form the first trading day as investors were over-analyzed economic data. However, bond investors appear more willing to accept risk as US$750mn flowed into high-yield funds during the last two weeks of 2008.

As usual, for every bull out there calling for a new rally, you will find a bear calling for another leg down. But I have just read one of my favourite fund managers – Barton Biggs that he says ‘sometime around the middle of the year, there is going to be pretty conclusive evidence that the economy has stabilized. That’s what the stock market is now looking forward and seeing, and that’s why I think this rally carries furhter’.

Who’s know? And I wouldn’t be surprised to see the unearthing of further frauds, too. Think about all the good times before that, when everything was going up – that’s when the scamsters would have been sewing their bad seeds. Still, after the impressive rally that we’ve seen since 21 November, I certainly would not rule out the possibility that the we’ve seen the bottom of the market.