Two Predictions, and Obama's Lucky Timing

Two predictions for 2009:
1. The Stimulus Plan, whatever it is, will not actually help the economy. However, since the economy will recover despite what the government does, Obama will get 'credit' for getting the economy back on track anyway.

2. The stock market will be up this year, by about 15-20% or so. The VIX peaks at bottoms. It peaked at an incredible 70 in late November. It was a panic bottom unparalleled in 50 years. That was the bottom for the stock market, which remains undervalued as of now. We wont get that panic VIX reading again, and if we do, time to buy. Probably we will have a January rally and a pullback in the spring as the market digests whatever nonsense Obama comes up with and Q4 and Q1 numbers are shown to be bleak. Recoverey wont be until later in 2009, but stock market will anticipate that in the late spring when the real rally will occur. We have already passed the bottom, the bad news is priced in to the market, and any price under S&P 900 or Dow 9000 is a good buying oppty. The current negative reporting casts a negative pall on the marketplace and makes buyers less certain and willing to invest. The intrepid investor wins.

How does bullishness about the market comport with pessimism about the so-called 'stimulus' bill? Even Government stupidity and meddling cannot stop the growth of the natural economy.

A video explanation on why Keynesianism is wrong, from Dan Mitchell at Cato. He points out how Keynesianism didn't work in the New Deal era, in Japan in the 1990s, and elsewhere. There is the flaw in the defense of the FDR New Deal and the Nazi Germany examples that are touted as precedents for fiscal stimuli. Had nothing been done, would the natural rebound in the economy have been any slower? Or perhaps it would have been faster? We did the opposite of what we should have done in 1991 if you follow Keynesianism, we raised taxes and were trying to cut the budget, yet by 1992 the economy was in recovery and Q4 1992 growth was 4%. Why? Because the natural economy has its own force anyway.

Consider 2 alternatives:
1. Suppose we fail to do the stimulus at all, through an amazing feat of political incompentence, gridlock, etc. The economy recovers in late 2009 and grows in 2010. Unemployment peaks at 8% in June 2009, then falls to 6% by end of 2010.
2. Suppose we do the stimulus as planned, most spending doesnt really hit until late 2009 to 2010. The economy recovers in late 2009 and grows in 2010. Unemployment peaks at 8% in June 2009, then falls to 6% by end of 2010.

EVEN IF THE ECONOMIC RESULT WAS EXACTLY THE SAME AS IF NOTHING GOOD WAS DONE, SOME 'CREDIT' WILL BE TAKEN BY THE POLITICIANS FOR THE RECOVERY. This 'stimulus' is not about improving the economy but more about politicians showing themselves to be useful enough to deserve re-election.

Consider it Obama's lucky timing. Even a mediocre record will look good, since he inherits an economy at its low point.

There is an alternative scenario, wherein rather than a normal recovery, we face years of minimal growth. The Japanese 'lost decade' of subpar growth, the Great Depression are precedents. The common theme? They were both failed attempts to revive the economy through Government spending and intervention. FDR managed to allow the depression he inherited to linger for 8 years, and enacted many coutnerproductive and bad policies that put dampers on the economy. Yet FDR remains revered by (too) many.

It could happen here, should the Obama Democrat plans become excessively counterproductive, and the best preventative for it would be to oppose and limit the many attempts at further Government intervention in the economy. In short, to save the economy we need to stop the bailouts, tax hikes, global warming regulations, and over-spending bills that will drag the economy down. Yet we have to do it in an environment that is tailor-made for liberal Democrat success. On that, I am less hopeful.