President-elect Obama makes his inaugural presidential speech on January 20. This speech is going to determine the direction of the stock market for the rest of 2009. If you are a serious investor, it’s essential you watch this speech…
Sentiment is the reason this speech is so important. Right now, America is feeling pessimistic. People are worried about their jobs, their houses, and their finances. No one is spending money. Yesterday, the Confidence Board reported consumer confidence has fallen to its all-time lowest reading since it started compiling the Consumer Confidence Index in 1967.
And last week, the Leuthold Group, a research firm, said investors are holding $8.85 trillion in cash, bank deposits, and money-market accounts. This is equal to 74% of the market value of all U.S. companies. According to the Leuthold Group, this is the highest cash-to-market ratio in 18 years.
To get the financial system working, the government needs you to start shopping again and it needs you to start making risky investments again. In other words, the government needs America to start feeling optimistic again.
The financial system we use today is a simple confidence scheme… a Ponzi scheme. It works exactly the same way Bernie Madoff’s scheme worked, except it’s much larger.
To survive and grow, our system needs a constantly increasing river of capital. As long as more capital enters the system than leaves it, the system functions. As soon as new capital shrinks, the whole system breaks down.
Debt is the reason. As long as we can find new capital to cover the interest on our existing debts, the system works. When capital dries up and we can’t make our payments, the system crashes. This is what happened to Wall Street in October.
Making credit cheap was Bernanke and Paulson’s first response to the crisis. By manipulating interest rates and money supplies, they rewarded spenders and punished savers. They hoped this would reignite the Ponzi scheme.
Problem is, these measures only encourage people to borrow. They don’t actually force anyone to spend.
So on January 20, in his inaugural speech, Obama is going to announce a gargantuan government spending plan, probably around $750 billion in size.
Obama’s plan will make the problem worse. Every dollar the government spends must come from the revenues it receives from taxing Americans. So essentially, Obama will borrow money from the future and spend it today on investments the free market is unwilling to make. This wasted money will hurt our economy for years to come.
In the short run, Obama’s plan might make people feel optimistic again. This could cause a small boom in the stock market. That’s why I’ll be watching sentiment so carefully after Obama’s speech. If Obama can fire up the crowd, I’m ready to bet on a small 12-18 month bounce in stocks.
If he can’t get rid of the pessimism, then the market will turn down again…
• This article was written by Tom Dyson, co-editor of the free daily investment newsletter DailyWealth