Sunday, May 16, 2010

The Week Ahead

Things are going to be a little scary this week for equity and debt markets. The Euro remains in free fall (trading in the mid 123's against the dollar). A lot of foolish economic myths are exploding.

Laying aside Greece and the Eurozone for the moment, the US economy faces major headwinds all its own. Most of the headwinds are a direct result of either Congressional or Presidential action. Obama's war on the financial industry will tighten the credit screws even more, so that small business will continue to be hampered by liquidity considerations. Don't expect much hiring.

State and local governments are facing their day of reckoning. Public employees are extremely overpaid in most states and the benefits provided to such employees border on the outrageous. This includes public school teachers. It is a myth that public school teachers are underpaid. They are overpaid and by a lot. There is a long line of qualified teachers ready to teach in our public schools for a lot less money than we currently pay public school teachers. That means the current group is overpaid. Most of these public employees have not suffered a bit in this recession. They applaud Obama's war on the private sector. But the private sector is the sector that funds the public sector. There will be millions of layoffs over the next twelve months in state and local government. Most of this is long overdue, but it is coming at the worst possible time -- when the economy is still very fragile.

Finally everyone knows that tax rates (not revenues) are headed upward. Higher tax rates discourage business hiring, so higher tax rates are another major headwind for the economy.

Meanwhile, there is Greece and the Eurozone. The US is on the hook for a lot of the worthless sovereign debt in Europe and Obama has pledged to buy more. We are now bailing out Europe. Wonder who will bail us out?

So, while the employment numbers and retail sales have been improving, the overall economic recovery is stunted and anemic. Until the White House calls a truce on its war on the American economy, it is hard to see an end to economic stagnation.

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