On Strong Leadership, Bad Data and Attila the Hun

Good morning,

Why is the stock market down so much today? (Dow is currently down 192 points).

I believe the biggest reason is the growing belief that the US economy is indeed heading into either stagnation or another recession. There were investors who worried about this last year, however most analysts and economists (myself included) found it unlikely. Now, we are in the summer of 2011, and we are beginning to see more and more red flags that make us worried as well.  

Why?

One of the main reasons is the growing belief that the original stimulus package was neither not implemented well nor big enough. As the economist (a conservative publication) pointed out this week. Initial projections on the economy were dead wrong in 2008, showing a less severe recession that ultimately ended up being. Because of this, the initial stimulus package was not as big as it should have been.

“Output in the third and fourth quarters (2008) fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated...We can't know exactly how things would have played out in a world in which key policymakers had better data… however, it seems certain that Ms Romer's models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill.”

Other equally important reasons are lack of effective leadership in both the U.S and Europe and the notion that there is “no good news” around the corner. This lack of leadership resulted in a one-sided debt reduction agreement that does nothing to stimulate the economy in the short term, nor finds a realistic way to balance the budget in the future. This is because it will be nearly impossible to find economic health in the long run without raising taxes.

As David Stockman, President Reagan Budget Director said on Monday (08/01): “You could have Attila the Hun in charge of spending cuts and you would still not balance the budget unless you raise taxes” That is exactly what Reagan did. But that was probably a different time when determined leadership and reason, not political extremism, must’ve ruled Washington.

Have a good weekend

Rod