What the Obama Presidency Means for the U.S. Economy 2009

By: David_Urban

The election of Barack Obama to the office of President of the United States on November 4, 2008 was historic for many reasons. Investors, however, are worried for a number of reasons. Democrats have been known as the tax and spend party, although the Clinton administration went a long way to begin changing investors' psychology towards the party.

We now stand at a crossroads with an economy in a recession, the country fighting two wars overseas, a widening budget deficit, massive money printing and issuance of government securities, and an infrastructure in shambles.

The key here is how we deal with the legacy or mess left behind from Bush's reign in office.

Most presidential tenures are marked by the recessions early on with a recovery beginning in the second or third year carrying into the election four years later and hopefully a second term.

The economy has been in a recession now for some time although it has not been officially recognized. It is expected that the 4 th quarter GDP will be in the 0% range with 3 rd quarter GDP revised lower. A recession will be officially declared which will allow us to begin to move ahead with an economic recovery and a second stimulus package.

The real quandary comes with the budget deficit as the last year of Bush's reign was market by an explosion in the national debt which will flow through to the budget deficit via an increased interest expense.

The key will be putting all of the problems from the Bush reign behind us much like a corporation taking a huge writeoff at the end of a fiscal year and taking a fresh step forward. A massive expansion in the federal budget deficit would be expected and if so, not necessarily a bad move so long as the budget deficit begins to contract in following years and the growth in spending slows to a manageable level.

The biggest worry comes from the nationalization of the banking system. When a credit cycle hits the bottom, banks will typically tighten credit policy and purchase government securities as they weigh the risk-reward scenario between making a loan and owning government securities. When the risk-adjusted spread favors making a loan the banks will make a loan and vice-versa. Now with the government owning stakes in banks it can be expected the government will eventually use its ownership stake to ‘lean' on the banks and begin arm twisting to push out more lending at the expense of risk management. Barney Frank is already threatening to stop bailout funds unless banks start aggressive lending.

Longer term, this is the next potential problem as government arm-twisting may give way to making the risky loans on the level of the types of loans that were made at the end of the credit boom even though the types of credit that created the crisis will no longer be available for the foreseeable future. In other words, if the government eschews risk management in favor of aggressive lending it will lead to increased systemic risk at the expense of a stable financial system and a far greater crisis down the road.

A key sign to look for is the government using their stakes to vote for preferred members of the board of directors and possibly adding a director or two for ‘oversight' purposes.

Taxes will be a very touchy subject as it currently appears as though the Bush tax cuts will expire unless the economy is still slow. This can be used to spark a stock market rally or used as a bargaining chip to offset a rise in the top tax rate.

During a period of economic weakness the idea of raising taxes is generally a bad idea as it does not help capital formation and can hold the economy back.

The key here will be restraint in spending after the initial surge in taking care of the problems created from the Bush reign.

National healthcare will be pushed through with the support of the business community who is struggling under the burden of higher than inflation yearly increases in the price of healthcare. During a period of falling profit margins double digit increases in the cost of healthcare will necessitate a change in the healthcare policies in the US .

Currently there may be sectors which may be undervalued at the present time but investors should be cautious as to determine whether we are at the beginning of another leg up or falling into a value trap. The most attractive area may be in the Baa and Ba corporate bond categories where bonds from solid utilities are selling with yields greater than 8%.

Investors still need to do their homework but a solid yield may help investors ride out the storm until the political waters clear.

By David Urban

http://blog.myspace.com/global112

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