Market Impact: 2009 Watch List – Part1

In a background where top economist have given little credence to the idea that the U.S. economy is going to recover in the next six months over the weekend, I thought it may be appropriate to visit the important impacting factors that will shape the markets in 2009. The main focus of course will remain on the US economy. We start with the stimulus package that the market appears to be so bullish about.

How quickly will the US stimulus package be approved?

Source: Society Generale - Cross Asset Research

The stimulus package expected to be announced during this month is one of the key drivers of optimism today. Seasoned observers however feel that it will take a while before the package is passed and it will have its own speed bumps. Given the amount likely to be involved (estimates are close to a trillion dollars) the process they feel will be theatrical with a lot of face saving.

"…These debates typically play out with the party in charge seeking far more than it wants. Then it drops demands and both sides declare victory with a compromise. We expect this battle to play out that way as well..."

What kind of stimulus package is approved and how it relates to the assessed depth of the recession will be keenly observed. Remember nobody today has a clear idea how long the recession may last (current wise thinking is till mid 2009) or how deep it is likely to be. The nature of package will itself have a causative effect on the perception of the longevity of the recession/deflation.

How effective will it be?

The approval of the package is no panacea. There will be a number of issues to ponder over. The clarity of objective is very important, other wise one can loose the way easily. To quote:

“… to win a war, it's a good idea to map out or at least have a sense of the endgame before deploying the troops. That is, lawmakers must think about establishing yardsticks, curbs and deadlines for the money.

Otherwise, there's a risk that the historic recovery package morphs into a boondoggle that mortgages the nation's future by adding hundreds of billions to the deficit while creating a hard-to-tame bureaucracy.”

Obama is also aware of that this could turn out to be black hole and a clear exit strategy is required otherwise today’s momentary happiness will turn out to be a long term sorrow story. How the growth on spending once started will be controlled is far from clear.

"...We're going to be focusing on the budget, to make sure that even as -- in the short term, we deal with the potentially $1 trillion-plus deficit that we're going to be inheriting and we are trying to jumpstart the economy, that we're also in the medium and long term looking at how we can get on a path of fiscal responsibility and sustainability,…" - Obama.

Another key issue: How will success be measured? Employment will be a lagging indicator and may not allow for quick course corrections.

And the Challenge:

“…Allow politicians to take billions of dollars of your money and dole it out to other politicians, who then give it to other government administrators. All of whom ask you to trust that the funds will be spent wisely…”

Tax Cuts: How effective will it be?

“Generally speaking, economists say, permanent tax breaks boost the economy more. Why? Because consumers feel freer to spend it rather than save it since they know it's a sum they'll get every year.

Vice President-elect Joe Biden said last week the stimulus tax cut would be a "down payment on the tax relief that we promised for the strapped middle class." So the promise of permanence may have its own stimulus effect. But considering that Congress hasn't weighed in on the issue, there's no guarantee.”

What happens to TARP & its cousins?

A Market Watch report says

“…lawmakers are expected to enter a new round of wrangling over the uses of the $700 billion Troubled Asset Relief Program. The Bush Administration's decision to extend the financial system bailout money to automakers pushed total TARP payouts past $350 billion. The Treasury Department must now convince Congress, which is at odds over the best uses of TARP, to release the second half of the $700 billion.

The House Financial Services Committee will hold a hearing Wednesday on uses of the TARP. Separately, Treasury Secretary Henry Paulson is scheduled to speak on the government-sponsored mortgage agencies.”

The prediction is

"...by the time all is said and done, the Troubled Assets Relief Program (TARP) funding will go well beyond $700 billion. President Obama will request, and Congress will approve, another several hundred billion in aid. Much of that will go to homeowners, although airlines will probably get a slug of cash as will auto parts makers.”

Watch out for the black hole syndrome.

Copyright © 2008 Tradesense