With the market on a decided upswing against a competing chorus of true believers versus bear-market-rally enthusiasts, it’s worth stepping back and looking at where things stand since stocks revisited their lows in early March. An increase of 25% in share prices cannot be dismissed as a trivial event unconnected with the underlying economy. Nevertheless, a brief analysis of the ways in which the federal government has addressed some of the underlying economic issues reveals a continuing ad hoc plan that has often produced unintended consequences.
To be sure there are genuine developments to celebrate: take, for example, the single morning on which bellwethers Google, GE and Citicorp reported significantly better earnings than expected. It’s a reassuring start to an earnings period that was widely expected to be a catastrophe. And then there was the news from abroad of a stimulus plan that was actually working: demand for raw materials in China has surged, banks have made about $400 billion in new loans in the January-February period, and the Shanghai stock market is up 35% for the year. Of course it’s easier to get such results in a command economy compared to sometimes unwieldy capitalism. Nevertheless, policymakers in Washington would be thrilled if the American stimulus version yielded similar results.
Yet significant risks to this fragile recovery abound even though the president this week detected “glimmers of hope across the economy.” Those flickering expectations can be extinguished in a heartbeat. On the same day as the president’s observation, the Treasury Department reported that the deficit for the first half of fiscal 2009 was approaching the $1 trillion mark, already more than double the deficit for all of fiscal 2008. And this is just the opening chapter of an administration agenda that promises to increase government spending 25% while tripling the deficit in ten years. A market rally with the looming fiscal irresponsibility of this magnitude is a miracle in itself.
Other data provided a sobering reminder of the recovery’s still-feeble condition. Retail sales, which had picked up early in the year, fell more than 4% in March from the previous month. Consumers, it seems, won’t soon be leading the economy out of its funk. On April 15, the always depressing tax filing deadline, the Wall Street Journal reported that the largest banks and mortgage companies are actually escalating foreclosure activity after a self-imposed moratorium. These include J.P. Morgan Chase, Wells Fargo, and Fannie and Freddie. According to the article, the lenders have begun to distinguish those borrowers who are “candidates for help” from those that are beyond help. Members of the latter category are being forced out by some of the very institutions that received bailout money, setting the stage for more congressional histrionics, precisely what the country doesn’t need at this particularly precarious moment.
Besides stepping up foreclosures, many TARP-receiving banks have recently raised credit-card rates and tacked on extra fees for routine transactions. Some are also being accused of making loans bordering on “predatory” (remember those?) even as they continue to hoard capital by denying conventional loans to businesses and consumers. This has already begun to raise the expected outcry in Congress, but perhaps the government, as a major shareholder in these same banks, should be grateful they are trying to return to profitability—and and might, perhaps, eventually pay off those taxpayer loans. But as both a supposed guardian of consumers as well as a gargantuan shareholder, the government appears severely conflicted.
Which brings us to the strange case of Goldman Sachs, a firm that wants to repay the government loans it didn’t want in the first place. In its typical one-size-fits-all approach (proponents of government healthcare intervention take note), the feds won’t allow any of the large banks—even those that are able-- to repay their TARP loans until they pass the much-vaunted “stress test,” which amounts to a kind of too-big-to-succeed doctrine. Even in its darkest days, Warren Buffet thought enough of Goldman to invest $5 billion, and the company just raised another $5.75 billion through the sale of stock. But all the banks are stuck with TARP loans to prevent the public from recognizing which ones still need the government’s help. Presumably this makes sense to someone arguably in charge.
Consumer spending did, however, get a boost from the unusually high level of tax refunds, but it’s unlikely the Obama administration will connect the dots. Perhaps if lower taxes had left more money in the hands of its rightful owners, the economy could have rebounded sooner. But the lesson of the benefits of lower taxes is surely lost on a president who seeks to eliminate the last round of tax cuts just before raising them to the moon in order to fulfill his “share the wealth” campaign pledge.
Steven M. Cohen is a money manager based in New York and has spent more than 25 years in the hedge fund business. He writes the blog buyselljump.com.