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Keep Focus on the Recovery
By: Dr. Charles Lieberman
Date: 1/25/2010
Politics is sometimes the art of compromise and sometimes the art of distraction. Investors must remain focused on the economic recovery, despite the political distractions of last week. If the recovery continues to become stronger and better entrenched, then equities are very attractive and bonds become increasingly risky. If politicians mess it all up with populist policies that seek to divert attention from their inability to address economic problems, then equities become risky and bonds become a safe haven. Economic trends appear promising, although last week's political developments suggest it could yet unravel.
The economic trends appear very favorable. Job losses are getting close to zero. Industrial activity is rising. Housing has bottomed and should become a major contributor to growth in 2010. An article on page A2 in the weekend WSJ that should have been on the front page indicated that inventories of unsold existing homes in California are now down to a 3.8 month's supply, versus a normal level of 6 months. The article noted that some buyers have lost so many bidding wars they have given up looking. Implicitly, there is now a growing need for new construction. That is likely to occur only after prices rebound, although the median price rose 8.4% over the past year. More gains are likely. Fourth quarter GDP, which is to be reported this week, should reveal a strong increase, likely above 4%. The stage for a well entrenched recovery is set.
Even so, politicians seem entirely capable of derailing the recovery and undermining the financial system. Opposition mounted last week to Bernanke's confirmation in the Senate. Much of that opposition seemed based on populist rhetoric or pure politics. Blame the Fed chairman, so the public doesn't blame you. Such behavior doesn't instill confidence in our politicians. In their desperation to avoid being kicked out of office by a vengeful public, politicians are blaming the Fed, Bernanke, Geithner, and, especially, banks. Such blatant populism is all too obvious however, so investors turned tail and fled the stock market. Politicians will not escape the public's wrath, but they could screw up the system before they are voted out or choose to retire.
Hopefully, the few sensible politicians will prevent the show-boaters from getting their way. But, we must keep close tabs on the machinations in Washington to see if the political turmoil undermines the economic recovery or investor confidence in the market. It is distressing that we must do this, but that's the price we pay for electing such irresponsible government officials.
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