This Is The Stimulus Package We Need
Two mistakes cost President George Bush
his re-election in 1992. Both mistakes now haunt not just his son in the White
House but also Wall Street. The first mistake was not to oust Saddam Hussein
when we had the chance. The second was not to stimulate the recessionary economy
as it fell victim to the oil price shocks associated with the Gulf war.Â
Today, the younger Bush is about to return to Iraq
to complete the job his father didn’t. Many Americans have no quarrel with the
exorcism of this demon as there is little question the Butcher of Baghdad
intends harm. We all should have a major quarrel, however, with how Mr. Bush
seeks to exorcise his second economic demon. This quarrel is rooted in his
inability to clearly understand both the cause of the current economic malaise
and the critical difference between “structural†vs. “cyclical†budget deficits.
The current malaise was triggered by a dramatic
contraction in the rate of business investment. Our days of slow growth and a
bear market will not end until corporations resume robust capital spending. The
Federal Reserve has tried to stimulate such spending with fully 12 interest rate
cuts. However, investment remains anemic for one major reason: the “geopolitical
uncertainty†associated with an unresolved war. This uncertainty has also put an
increasing damper on what has been the stalwart of our economy — consumer
spending. We are now at risk of the unthinkable — a “double dip†recession.
From none of these observations does it follow that
the answer to our economic question is a long-term stimulus package that will
institutionalize “structural†budget deficits for the next decade. Rather, the
answer is a quick resolution of the Iraqi conflict that will drive oil prices
back down to an expansionary $20 per barrel.
What is a “structural†budget deficit? One
exists when the economy is at full employment, tax revenues are at a maximum,
government payments for jobless benefits are at a minimum, and the budget is
still in the red. The only solution to this “spending beyond our means†is to
cut expenditures or raise taxes. Otherwise, the government must sell bonds or
“print money†to finance the deficit. Both financing options are inflationary
and drive up interest rates, “crowd out†private investment, and lead to a
stagnant economy and chronic bear market.
It is precisely such a structural budget deficit
that President Bush aims to give us as he strives to exorcise his second demon —
one that makes him fearful he will suffer his father’s same one-term presidency
fate. The irony here is that Mr. Bush is moving his stimulus package forward
under the mistaken premise that what we face is merely a “cyclical†budget
deficit. A cyclical deficit arises when an otherwise fiscally responsible
country suffers from a recession. As tax revenues fall off and unemployment
compensation and welfare payments rise, the deficit grows simply because of the
lack of economic growth.
The answer to reducing such a cyclical deficit is
perhaps counter-intuitive: Engage in deficit spending and tax cuts to stimulate
the economy back towards full employment. That will paradoxically fill back the
government till, and it is here where the Bush family history is so
instructive.Â
When the budget deficit soared during the
latter part of the Bush Administration in 1991, it did so because the cyclical
portion of the deficit was growing rapidly as the economy was sliding into
recession. The appropriate response would have been an aggressive tax cut and
spending package much like the junior Bush is recommending now. Of course, the
elder Bush resisted this policy prescription and wound up falling on the
Clintonian sword.
That was then. But we need a very different
prescription now. In truth, the only “stimulus package†we really need is the
elimination of the Iraqi threat, either through the swift diplomatic exile of
Saddam or an only slightly less swift forced removal. To do anything more at
this point on the stimulus front will not just saddle this country with
structural budget deficits for years to come but it will doom investors to a
secular bear market for at least another five years.
The Week’s
Macro Data Market Movers:
The
Macroeconomic Calendar
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Potential major market movers in red
War
and terrorism will continue to dominate the market thematically, particularly
since it’s mostly a nothing week on the macro data front. The biggest
potential market mover will be a mixed bag of retail sales on Thursday. The
auto component is expected to drop because of a reduction in sales promotions in
January. The cipher will be whether retail sales ex autos is good or bad. With
plummeting consumer confidence catching up to spending patterns, the risk is to
the downside. As for Friday, the market will fall or rise with the industrial
production report. The big question here is whether the numbers will
corroborate last week’s surprising strength in the ISM or expose the ISM for a
statistical aberration. We speculate the latter may well be the case.
Macroplay of the Week:
Short Johnson & Johnson
(
JNJ |
Quote |
Chart |
News |
PowerRating). This
pick is courtesy of my partner David Aloyan. JNJ stock has formed a
head-and-shoulders top formation, and prices are at the neckline support. If you
are aggressive, short this stock on anticipation of a break of the neckline, but
get out of the short on any rally. To be conservative, wait for the break of the
neckline on a volume surge. The downside target is around the $42 level. The 7,
14, and 50-day SMAs are crossed down, and the MACD is below the zero line.
If you
have a favorite macroplay or stock you would like us to consider in this column,
send an e-mail to
peter@peternavarro.com or go directly to
https://www.peternavarro.com. We’d love to hear from you.  Â