That was Freud’s characterization of the goal of psychoanalysis. It captures the state of American economic policy, now that Barack Obama has let the ship of state come about to capture the wind blowing from the right. This doesn’t solve any fundamental problems, but it surely reduces risk and helps valuations.
The risks of confiscatory intervention into private business seemed high during the first months of his administration, especially when the White House twisted the arm of General Motors (GM) bondholders to force a deal particularly favorable to the UAW pension fund. The risk that the administration might panic and seize the banking system in early 2009 was not inconsequential; I was sufficiently sure that this would not occur to buy bank preferreds at the cheap dollar prices of the time, but it was touch and go for a while. The great stimulus of 2009 and the Fed’s quantitative easing were frightening enough.
What has changed? Obama will hand out some benefits to corporations, which means that aftertax profits will do a bit better. He won’t do things to frighten the private sector. He will give lip service, as he did in yesterday evening’s State of the Union address, to deficit reduction. Nothing has really changed since mid-September when I advocated selling bonds and buying stocks.
Profits have had their great recovery and are now improving slowly; unemployment and underemployment effectively remain close to 20%; US manufacturing is poorly equipped to exploit the substantial pockets of growth overseas but is getting something of a boost; housing continues to deteriorate; state and local governments will continue to cut into the bone.
In short, it’s an unhappy economy, not a hysterically miserable one. I sharply reduced my gold positions weeks ago. Gold is an option for the end of the world, and the end of the world is a less probable outcome. The key to contentment in this environment is low expectations for returns.
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