Machiavelli, Obama and S&P 1300.

July 12, 2011
Jobs.  Can't wait to leave them.  Can't live without them.
After landing his dream job, Obama now finds that jobs have become the bane of his existence.  His biggest impediment to re-election.
At this point in the recovery, why are new jobs so sparse?  Let's begin with the size of the government.
In 2000, Federal spending was about 18% of GDP.  Today it is close to 24%. This means that 6% of private sector GDP has been pushed from the dance floor.   More government leads to less private sector, which translates to fewer jobs.  Consider Europe in the '80s and '90s.
Studies have shown that for every bit of incremental growth in government, there is a correlating contraction in GDP growth.
The problem? Not just the fact that government growth supersedes private sector growth, but that the government never performs its role as effectively as the private sector likely would have.
The President must create jobs or be evicted from 1600 Pennsylvania Ave.
The constant fixation on the debt ceiling and the deficit do not help his cause.  With all of the current political posturing, investors look like deer in the headlights on some dark country road.
This translates into a murkier view of the economy, global politics, earnings prospects. Investors, already leery of what escapes the mouths of most politicians, view the recent verbal ping pong match as ridiculous, wasteful, and yet--completely expected.
And so investors crowd the sidelines like a high school football team that refuses to cut anyone.  Lots of energetic spectators, very few real players.
What has always existed as a basic lack of trust between investors and the political class has widened from crack to a canyon.  Nor will that change until we implement term limits. (But, that remains fodder for another day.)
Much of what transpires in the market and politics is cover for what is really going on behind the scenes. We're not speaking of lone gunman-type stuff. We're talking modern day, cloak-and-dagger economics.
Consider Friday's pathetic employment numbers.  The growing mistrust is leading some circles to charge that the administration is deliberately depressing the jobs data. Why?
There's an election next year.
Reagan was the only president since FDR to gain re-election with unemployment above 7.2%.  The only data that matters in the election will be the data at this time next year.  By depressing the numbers now, there is a lower baseline denominator against which to measure next year's growth.  Accordingly, a much smaller rate of growth could cause the unemployment rate to drop dramatically when it matters most.
Sacrificing growth now to amplify jobs growth next year?  Plausible, considering other recent efforts for the public good that just happened to carry political benefit.
New margin requirements for silver.  The release of crude oil from strategic reserves last month, concurrently leading to June's market bottom.  How about last year's sudden enactment of quantitative easing and then hyper-low interest rates?
Each represented major efforts by public officials to influence market behavior in dynamic ways.
Sound like a page from Machiavelli's The Prince?
In his treatise on gaining and retaining power, Machiavelli states that "perception is reality."  In other words, with proper planning, politicians can determine how constituents view the environment--even if the reality differs greatly from the perception.
Crass? Yes. Possible?  Of course.  Same tactics were allegedly employed during the Bush administration. This represents a more sophisticated approach to the same manipulative game.
What can all this conspiracy type of point and counterpoint lead us to conclude?  Read between the lines.
The Fed reports that, while still growing, industrial production is slowing across the country.  Further, already anemic employment growth appears to be slowing, as well.  Fiscal stimulus has been considered a non-option. The Fed has discontinued its easing activities right as many of the cyclical indicators are pointing to a slowdown.  Rightfully so, as QE parts one and two have achieved little.
But, all that may change.
The government is in the business of staying in business (again with the term limits...).  And with the 2012 election cycle heating up, you can expect the denizens of D.C. to pull every rabbit from the hat.  Would not surprise me a bit if a third round of quantitative easing is announced late in the third quarter.  Possibly geared towards the housing market, where so many one-time jobs lay dormant, waiting to be resurrected from the dead.
Machiavelli?  Guy has nothing on Obama and Bernanke.  Elected positions, and the subsequent political appointments they bring--are won by intelligent, ambitious men under the most bare knuckle circumstances. They are not vacated without a fight.
Bottom line?  Expect this market to dip to 1,300 level. Possibly a bit lower. Earnings season begins and the reports from leaner, meaner companies will send the markets higher before they plateau and begin another slow decline.
Too much indecision and acrimony in our nation's capital.  That will not permit the markets to gain much traction.  It's no wonder we've begun to feel like the human equivalent of ping pong balls.  Swatted back and forth between the major parties as they posture and preen in an effort to score points.
It will continue to be a market in which those with responsive re-allocation strategies and an ear on the ground can make money.  But, until our political duopolists can provide some clarity, the forest on the way to grandma's will remain ominous.  Stay tuned.
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