The Great Irony Of Barack Obama's Presidency - An Observation

Arguably, no US president in history has benefited the 1%, either directly or indirectly, more than Barack Obama.

When President Obama took office on January 20, 2009, the US economy was in dire straits. The Dow Jones Industrial Average closed at 8,077 that day, having fallen from a then high of 14,093. The Standard & Poor's 500 Index (S&P 500) closed at 831.95, declining from a then high of 1,561. Both indices would continue a ongoing decline to their lows in early March of that year. As a response to the economic climate at the time, the FOMC continued a policy that has become known as Quantitative Easing (QE). The initial QE began in November 2008 under George W. Bush's administration when the FOMC would buy $600 billion in mortgage backed bonds to help mitigate the subprime lending crisis and real estate market collapse. In November 2010, the FOMC began an additional round of bond purchases known as QE2 as a response to the economy not growing as robustly as the Fed would like. In September 2012, a third round of easing, or QE3, was announced which included purchasing $40 billion per month in mortgage backed debt. In December 2012, the FOMC announced an additional amount of purchases of $45 billion per month in Treasury securities. After warning of a possible "tapering" of bond purchases at the FOMC's June 2013 meeting, the Fed elected not to "taper" at it's September 2013 meeting, which was not widely anticipated. This caught markets off guard and has since led to new all time highs in some of the equity indices, specifically the Russell 2000 and the S&P 500, and renewed vigor in the treasuries  market.

Intended Or Unintended Consequences

One of the results of all of the QE programs has been stock and bond value appreciation. The stated desire to drive down interest rates raises bond values as bond prices move opposite to yields. The additional liquidity produced by the bond buying programs has caused money flows in to equities driving those values higher. Because most of these assets are held by the wealthy they seemingly benefit this group the most. On the flip side, when these assets were declining, the so called 1% lost the most wealth. The debate here is not what counts substantively as more or less valuable to folks of different economic classes, but whose material wealth and ostensibly their standard of living was improved during a certain period in history under a certain president.

The President's Background

Given President Obama's background compared to US presidents who preceded him, the results of his administration's policies and their subsequent benefit to a group that the President does not claim to favor, seem ironic. President Obama was raised in a middle class family mostly overseas, Hawaii and Indonesia, studied political science before getting his law degree from Harvard. Before getting his law degree, President Obama worked as a community organizer in Chicago, doing tasks such as setting up job programs, tenants rights organizations and educational programs. This does not paint the picture of a President whose administration would embark on one of history's largest asset revaluations.

Widening Wealth Gap In America

One of the most widely discussed results of the revaluation of assets in the US is the growing disparity in wealth between the upper and lower classes. Many books have been written analyzing this current phenomena and it's deleterious effect on American society. The policies the current administration has used have been referred to as a regressive tax, distributing money from the lower and middle classes to the wealthy in the form of QE, or stimulus. Is there a wider benefit to all Americans? A claim can be made that these policies have mitigated the US recession and avoided a full on depression which would hurt all Americans. Again, would everyone suffer equally? Do the ultra wealthy suffer as much losing millions of dollars in investments as the middle class family forced out of their $300,000 home? On the flip side, does everyone prosper equally? The discussion here is not either question mentioned above but the notion of a widening wealth gap between different economic classes under a president who's background would give no hint that this would occur. To be sure, a key campaign promise of the Obama administration was health care reform, the Affordable Care Act, which was a big sticking point of the Tea Party which resisted passing the latest budget and extending the debt ceiling. This campaign promise is a policy that would easily be associated with a president of Mr. Obama's background. Those in the Tea Party were not voicing their displeasure over their rising investment portfolios or lower interest rate mortgage and car loans. Apparently those folks do not associate their increasing wealth with the President's policies.

How Did He Get Here?

In the administration's effort to "save" the US economy and not appear ineffective, it turned to the FOMC to use monetary policy to support a flagging economy that is yet to pick up steam. One of the tools it has used is QE. QE stimulates the economy by injecting money in to it. This money flows in to assets and is meant to create a wealth effect. With consumers feeling more wealthy they should theoretically be more inclined to spend thus stimulating the economy and creating a virtuous cycle. The administration could use fiscal policy to affect the economy as well, but with the contention and rancor in Congress the easier route is through monetary policy. Perhaps it is this over-reliance on monetary policy, and lack of a healthy mix of both monetary and fiscal policy, that has created an environment beyond the President's control and seemingly out of step with his true character and nature.

Now That The Govt Has Kicked The Can Down The Road Again, What Can We Expect?

Now that Senate Majority Leader Harry Reid and House Speaker John Boehner have decided to agree to disagree Congress will apparently move forward and approve the bill extending the debt limit and opening the government back up for business. The outcome of these now ritualistic events are the worst kept secret since Luke discovered who his father was. It's Darth Vader, if you didn't know. This is how our government functions (or does not function, depending on your perspective) now. The rancor has reached epic proportions, when you consider the seriousness of the impact if the parties involved were actually serious about anything. Would either party let the US Government not only shutdown but more importantly default on it's worldwide obligations? It really is hard to fathom despite our lowly opinion of the folks that we elected to legislate on our behalf.

How Did They Agree To Disagree?

They really did not agree on much. The agreement is all of a continuing resolution to keep things status quo until December when we will revisit this all over again. The debt limit has been extended until February 7, 2014 at which time it will need to be extended again. So this is really more can kicking than agreeing.

Whither The Markets?

Despite general annoyance at what goes on in Washington DC most folks only care about the impact any of these machinations have on the bond and equity markets,  both of which impact their wallets. Equities will rally, at least initially. It is important to point out that equity markets never really faltered throughout this ordeal and are nearly as high as they've ever been and in the case of the small cap Russell 2000, they are at record highs. So where do we realistically go from these levels? Most likely higher. Markets don't tend to change trend until they do and until then they generally continue to follow suit. "It's a bull market until it isn't." This is a popular market refrain. As long as the Fed continues to inject it's stimulus in to the market through it's quantitative easing the market should continue to see gains. When the stimulus ends the market gains will end. Until then, pour another drink.

The bond market is a different animal than the equity markets. It is the "rational" of the two. Whereas the equity markets tend to be more emotion driven, the bond market takes a more sober tack. Given the Fed's QE (quantitative easing) it is not likely that yields can or will climb too high. Again, once the tapering does begin, yields probably will climb. However, unless the Fed increases the stimulus it is unlikely yields and therefore mortgage rates will fall back to their historic lows. If you procrastinated on that refinance four months ago, might be wise to get up on in there and get it done. It will probably take something none of us want to see for the Fed to start injecting that much additional stimulus.

What Have We Learned From All Of This?

Well, it's safe to say that the markets have learned to almost completely disregard what goes on in Washington except when it pertains to stimulus. The absence of any significant sell off in either market reflects this disregard. It's mostly the media that makes any kind of hullaballoo about the goings on in the nation's capital. With a couple months respite from thinking about budgets and debt limits consumers can go back to the malls, the analysts and money managers can go back to trying to figure them out and the media can pick up on the next big story, maybe Syria makes it's way back on to the front page.