Soon after Congress’s 11th-hour deal on the debt ceiling was signed – the deal that President Obama promised would keep our federal debt from being downgraded – Standard & Poor’s threw the country a curve ball by lowering its rating of U. S. Treasury bonds from AAA to AA+. Thereafter, the stock market, which represents the collective “mind” of the country – at least, the mind of its investor community – threw a series of knuckleballs at the president and the country.
As any hitter – from little-leaguer to major leaguer – will tell you, a curve ball can really mess up your timing, if you’re expecting a different pitch. And experienced catchers will affirm that you never quite know where a knuckleball is going.
The S&P downgrade was a shock to the nation’s financial system, not to mention the world’s. Other major raters of securities (e. g. Moody’s and Fitch) did not downgrade USA paper similarly, but that may just be a temporary hiatus. The White House responded angrily to the S&P action, pointing to an alleged $2 trillion error in S&P’s calculations and insisting that the rating was lowered because the political process for making the debt-ceiling deal was so untidy. Press Secretary Jay Carney claimed that Republicans’ refusal to raise taxes, as Mr. Obama had requested, really caused the downgrade. Mr. Carney said the increased revenues would have satisfied S&P enough to forestall the downgrade.
The “knuckleballs” were two weeks of wild swings in the major stock market indices. The Dow average went from 12,132 at its close on August 1, just before the debt deal was signed, to 11,269 at its close on August 12 – a net loss of 864 points, or 7.12%. Between those dates came a series of heart-stopping rises and plunges, including three days with losses over 500 points, and two days with gains over 420 points. (See the table below.) The loss of 635 on Monday, August 8, was especially shocking, since Mr. Obama tried to calm the markets with a speech during the trading day. His “soothing” words were expected to stop the market’s crash. Instead, the Dow fell another 200 points.
|8/2/2011||11,867||-266||-2.19%||Debt ceiling deal signed|
|8/4/2011||11,384||-513||-4.31%||Mr. Obama's birthday|
|8/5/2011||11,445||61||0.54%||S & P downgrade|
|8/8/2011||10,810||-635||-5.55%||Mr. Obama's speech|
After a wild two weeks that gave investors a case of the bends, the market closed up 126 points on August 12th. One reporter wrote, “Dow’s volatile week ends well” – to which the correct response is, well… not exactly. In fact, the Dow lost 176 points for the week. (True, this improved on the previous week, when the loss was 688.) The 864-point decline since August 1 is non-trivial, but even it doesn’t tell the whole story. Since its high point in March of this year (12,876), the Dow has actually lost 12.5% of its value – obviously, a serious decline. The question is whether this loss was a “hiccup,” an overdue “correction,” or the start of a real crash. It will become clearer in the coming weeks which view is correct.
Mr. Obama’s administration has a tendency to cite stock market rises as vindications of its policies and indications that the economy is heading in the right direction, while ascribing market declines to earthquakes, the Arab Spring, Wall Street hedge fund managers, greedy oil companies, and other parties and situations beyond their control. Of course, Mr. Obama blamed the market’s recent swings and significant decline on the S&P downgrade. However, he ascribed the downgrade not to the size and (apparent) intractability of the federal deficit and cumulative debt, but to the contentious debate that erupted during the congressional debate over raising the debt ceiling.
The debt-ceiling agreement contained no tax increases. Its substance was unenforceable congressional “promises” to cut $1.2 trillion in spending over 10 years – i.e. about $120 billion a year. This feat of legerdemain might have fooled a goodly segment of the public, and might even have fooled some of the politicians who put it together. But it fooled neither the investment graders at Standard & Poor’s nor investors who watch those ratings carefully. Savvy investors saw the downgrade coming, since even a child can grasp that cutting back by $1200 over the ten years when you planned to overspend by $15,000 would not put your finances right.
Investment raters don’t care a fig if the honorable members of Congress throw rotten fruit, duke it out in the Well of the House, or moon each other from the gallery. “Nice” is not the measure. In the final analysis, it’s all about the numbers. Only in Mr. Obama’s Dream World do comity and compromise constitute success – a particular irony, since his party has been the one calling fiscal conservatives “terrorists” and other vile names during the “debt crisis.”
The long and short of the situation is that Mr. Obama has spent the country into a hole during his two and a half years in office. He is truly a Man of Miracles. When he speaks, huge deficits come into being. He has turned the flowing streams of the American economy into rivers of red ink (which look very much like rivers of blood to the casual observer). Mr. Obama has shown himself to be a consistent and implacable enemy of “profits.” Early in his term, he said there was a time for profits, but that time was “not now.” It is clear that he does not understand business, at a fundamental level. In the midst of the worst recession since the Great Depression, Mr. Obama’s record-player is stuck in the same groove: he cannot stop talking about raising taxes. Grown people are covering their ears and saying, “La la la, I can’t hear you!” when he appears on TV.
By some estimates, 20 million Americans are either underemployed or out of work entirely. Gas prices are close to $4 a gallon. Drilling to tap our own fossil-fuel energy has largely been stopped, even as vast new discoveries are emerging. People are hanging onto their money and hunkering down for a double-dip recession, while their 401Ks and kids’ education-savings evaporate. The mood is grim. Yet Mr. Obama keeps declaiming that all this has been caused by George Bush and Republicans, and that things will be put right if “millionaires and billionaires” are made to pay their “fair share.” He wants to spend more, not less. Is it any wonder that investors – both foreign and domestic – think the White House is operating more like a fraternity-house than the seat of our government.
In his recent column, “What if Obama offered Hope,” Victor Davis Hanson – a classicist and historian at Stanford University’s Hoover Institution – wrote of how our economy might be turned around by some wise and farsighted steps. I recommend his excellent analysis to all of my readers. (Please find his column at http://www.washingtontimes.com/news/2011/aug/11/what-if-obama-offered-hope/ )
I won’t attempt to summarize Dr. Hanson’s article except to note his correct assertion that an economic “depression” is partly psychological. Sound fiscal policies are needed, certainly, but people also need hope that things will improve. Mr. Obama seems to have no clue on how to furnish that kind of hope. He is used to having “softballs” pitched by admiring media and handpicked crowds of admirers that he can knock out of the park. Even hard-headed businesspeople treated him deferentially and lobbed underhand poof-balls to him, early in his term. But the game has changed. Maybe that’s why he has no idea how to handle a major league curveball from S&P and serious knuckleballs from the market. Some high hard ones from a serious, credible challenger will be a real shock.
This is a rude awakening for a man who was called the smartest person who ever lived and was actually compared with God. (You can look it up.) When you fall from that height, it’s a long way down. And there’s no net.