Today’s Wall Street Journal has an interesting editorial about Washington’s potential plan for your 401(k) assets.

This is unbelievable, but it is good news:

WASHINGTON - House Speaker Nancy Pelosi told the Wall Street Journal that she is considering a two-staged effort to boost the shaky U.S. economy, arguing for action now on a stimulus package of $60 billion to $100 billion, followed early next year by a companion measure that would include a “permanent tax cut.”

In an interview Thursday morning, the California Democrat pointed to weakness in the nation’s jobs market, and urged the White House, long skeptical of Democratic-led stimulus efforts, to work with Congress in the waning days of President Bush’s term.

“Let’s see if we can’t do something, working together now, that gives us a two month jump,” she said.  She said any measure enacted in a lame-duck session of Congress this month would effectively be a downpayment on additional measures enacted later.  “We’ll take the longer view as soon as we take over in January.”

Ms. Pelosi said she doesn’t favor a capital gains tax cut, as pushed by congressional Republicans.  But she did say the “second piece” of the Democratic stimulus agenda should include a tax cut.

The speaker said she prefers a direct tax cut over tax rebate like the one pushed by President George W. Bush a year ago.  The speaker said a direct tax cut can have a more immediate impact on the economy, especially if the government adjusts tax withholding tables to speed dollars into worker paychecks.  “The impact is faster than a rebate, which takes a few months get into people’s hands,” she said in an interview.

 ~ From Thursday’s Wall Street Journal

The election is done.  Time to focus on the upcoming recovery in the stock market and economy. 

Here is what I see happening. 

Let’s first look at monetary policy.  As seen in the below chart, the Fed is pumping massive amounts of liquidity into the financial system:

 
 
After a period of time banks will be saturated with lendable dollars and bankers will start looking for deals.  Instead of being incredibly defensive, they will be on the lookout for borrowers.  There are a lot of good ideas out there but the owners of these ideas need capital to bring them to market.  Growth has been held down by a sharp decline in velocity (the rate at which money changes hands) and fear. 

I expect this activity to slowly increase just from the fact that more money is being made available.  The problem during the credit meltdown was there were a lot of people with ample collateral but could not get approved for a loan. 

So are we close to the market bottom?

Hindsight is the only way to be certain but one indicator that tells me we are nearing a recovery is business inventories.  They’re way down because everyone has been holding back thanks partly to the media spreading recession/depression fears for the past year and a half. 

This tells me companies will eventually need to start producing more goods.  When they do start producing, activity rises as does GDP.  I could be wrong but my best guess is that by the spring of next year we will begin to see the visible traces of growth.   

Now on to fiscal policy - the taxation and spending that goes on in Washington. 

We have an idea of what our President-Elect wants to do but the real issue is what will he do.  Fortunately the high level advisors to Obama carry a lot brain power - especially former Fed Chairman Paul Volcker.  So I don’t expect anything disastrous to happen, just slower growth (than what a free market would produce) once policies are put in place.

As for the stock market recovery, I think it will be closer to a V shape.  Actually, there will be two recoveries - one in the stock market and the other in the economy but we will see the market recovery first. 

Here’s why:

Unemployment is a lagging indicator meaning the peak of joblessness is seen after a market bottom has passed.  A ramp up in business activity and production will not be seen in current jobless claim reports. 

Historically a stock market recovery takes off at least 6 months prior to a recovery in the economy.  Expect the economic recovery to be more U shaped as the economy continues to muddle along over the next few months.       

I will close this post with the following:  My advice to investors over the past several months remains unchanged.  The rate at which the Fed is creating money will eventually have some incredibly powerful effects on asset prices.  When will this be?  Impossible to say but what I am most certain of is that you will either be a net receiver or a net payer.  Buyers of tangible assets at today’s prices will find themselves on the receiving end once the market recovery arrives. 

Michael Cannon, a previous guest on our radio show and the Director of Health Policy Studies at the Cato Institute, talks about the problems with Obama’s health care plan:

Interesting commentary here from the Cato Institute’s Richard Rahn on who you elect to Congress and the impact on your stock market investments. 

Key Quote:  ” … over the last quarter century when the Republicans controlled both houses of Congress, the stock market rose by an average of about 20 percent per year.  When the Democrats controlled both houses of Congress, the stock market only rose an average annual rate of 6.9 percent for the Dow Jones and a tepid 5.1 percent for the Standard & Poor['s] 500.”

For those of you not familiar with the Cato Institute, they are a leading advocate on promoting the principals of liberty, free markets, and limited government.  Cato is the best organization I know of at getting this message out to mainstream America.  Here is their website, blog, and Twitter feed. 
 

What happens when the voter in the exact middle of the earnings spectrum receives more in benefits from Washington than he pays in taxes?  Economists Allan Meltzer and Scott Richard posed this question 27 years ago.  We may soon enough know the answer.

Barack Obama is offering voters strong incentives to support higher taxes and bigger government.  This could be the magic income-redistribution formula Democrats have long sought.

Sen. Obama is promising $500 and $1,000 gift-wrapped packets of money in the form of refundable tax credits.  These will shift the tax demographics to the tipping point where half of all voters will receive a cash windfall from Washington and an overwhelming majority will gain from tax hikes and more government spending.

In 2006, the latest year for which we have Census data, 220 million Americans were eligible to vote and 89 million — 40% — paid no income taxes.  According to the Tax Policy Center (a joint venture of the Brookings Institution and the Urban Institute), this will jump to 49% when Mr. Obama’s cash credits remove 18 million more voters from the tax rolls.  What’s more, there are an additional 24 million taxpayers (11% of the electorate) who will pay a minimal amount of income taxes — less than 5% of their income and less than $1,000 annually.

In all, three out of every five voters will pay little or nothing in income taxes under Mr. Obama’s plans and gain when taxes rise on the 40% that already pays 95% of income tax revenues.

The plunder that the Democrats plan to extract from the “very rich” — the 5% that earn more than $250,000 and who already pay 60% of the federal income tax bill — will never stretch to cover the expansive programs Mr. Obama promises. 

What next?  A core group of Obama enthusiasts — those educated professionals who applaud the “fairness” of their candidate’s tax plans — will soon see their $100,000 - $150,000 incomes targeted.  As entitlements expand and a self-interested majority votes, the higher tax brackets will kick in at lower levels down the ladder, all the way to households with a $75,000 income.

Calculating how far society’s top earners can be pushed before they stop (or cut back on) producing is difficult.  But the incentives are easy to see.  Voters who benefit from government programs will push for higher tax rates on higher earners — at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.

~ From today’s column by Adam Lerrick in the Wall Street Journal 

In case you missed John Stossel’s “Politically Incorrect Guide to Politics” that aired last Friday on 20/20, it is now available on YouTube.  Here is the first part:

Part 2 is here, part 3 is here, part 4 is here, part 5 is here, and part 6 is here. 

A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.

Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.

This was suggested by the chairman of the House Committee on Education and Labor. 

“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

~ InvestmentNews

(Thanks to M.H. for the article)

Update:  Here is more info on this from U.S. News & World Report.   

The Dow Jones Industrial Average was up 290 points on Friday just before the US House of Representatives finally passed, and the President signed into law, the Treasury’s $700 billion bailout.  But the Dow closed down 157 points anyway.  It has fallen another 500 at the time of this writing, and the Dow is now down 1,300 points (or 12%) from its peak just prior to the failed Congressional vote.

Supporters of the bill, along with almost every pundit, argued the bill was absolutely necesary to stabilize the markets.  But the markets are not cooperating.  In fact, volatility and fear are spiking.  One reason is that any Treasury purchases under the plan will not be made for at least two weeks, maybe more.  Another reason is that missteps by the Federal Government have turned what was a large financial problem into a massive one.

Looking back to last year, it is clear the Fed’s rapid interest rate cuts were a huge mistake.  It was clear that risks to lenders were rising as the economy suffered, but because the Fed drove down short-term interest rates, lenders were forced to take less in income.  This undermined lending markets.  Why would a bank make a loan in a riskier environment at a lower interest rate?  As a result, credit spreads widened.  But, for some markets, like those for auction rate securities, the market just froze.  Investors balked at buying these assets at lower rates.  Worse still, the Fed’s easy money caused a surge in commodity prices and a doubling in the price of oil.

Another mistake made by government was not changing mark-to-market accounting rules.  This has turned a containable $300 billion subprime loan problem into a crisis that has become almost triple that size.  Mark-to-market accounting has scared away investors and caused bankruptcies even for firms who are still solvent on a cash flow basis.  These failures have led to more fear and some bank runs. 

These mistakes were like throwing gasoline on a fire.  Now, instead of realizing its mistakes, the government is intervening again with a huge $700 billion intervention in the markets.  The whole purpose of this plan is to stabilize markets, saying people’s retirement savings, businesses, jobs, and homes were at risk.  This helped stir the panic.

~ From First Trust Advisors

Related and Recommended Reading:

Here is a nice collection of quotes from key Washington officials in last week’s Wall Street Journal that sheds light on how we wound up with the Freddie/Fannie debacle.  As Ronald Reagan said, Washington is the problem, not the solution.   

Here’s a nice article in Investor’s Business Daily on what the pulse of America was like prior to Jimmy Carter’s election to office and the blunders that followed.