OVERREACT, OVERTHINK
The Well-Timed Strategy for Week Ending February 13th
by Peter Navarro, Ph.D.
February 9, 2009

Market Pulse

The Obama Administration is overthinking the current recession because, in a panic, its economic team sees no light at the end of the recessionary tunnel. This is despite the fact automatic stabilizers such as falling energy prices, falling home prices, falling interest rates, and diminished wage pressures are already beginning to reinvigorate the economy. Accordingly, the Journal's editorial is correct that the Obama fiscal stimulus package is way overdone. The only fiscal stimuli that should be considered are ones that can get right into the pipeline through the rest of 2009 and ones that stabilize the housing market.

This observation leads naturally to the concern that the Obama administration is likewise overreacting to the credit crisis. This crisis does not require massive loan guarantees, big bad banks, or, the deity help us all, nationalization. Instead, the crisis really requires only one solution: Reducing the rate of home foreclosures. Most of the toxic assets on bank balance sheets represent mortgages gone -- or going -- bad. Focusing singularly on stability in the housing market would go a long way towards restoring these balance sheets and opening back up the credit spigot urgently needed by American business.

Accordingly, it will be exceedingly interesting as to how the bond market reacts first to the fiscal stimulus and then to the Big Bang solution to the credit crisis scheduled to come out this week from the Obama administration. At the long bond dives in price and goes up in yields, that's a big bet that the Big Bang will be highly inflationary.

The Russian Bear Ascendant -- China Under the Radar

Now let us shift gears, and allow me to wax semi-eloquent about the tragic consequences of both our media and our new president ignoring foreign affairs as they hyperventilate about the domestic economic situation. For me, this is déjà vu all over again.

During the Bush administration, the President never paid any attention to the rise of China and Russia and the fundamental realignment of the global economy because it was obsessed with war in the Middle East. Now, the new administration is clearly distracted by events on the domestic scene even as significant events continue to unfold beyond our borders were the immediate attention.

For example, Russia is clearly seeking to do strategic damage while we are distracted. Messrs. Putin and Medvedev wants to put naval and air bases on the shores of the Black Sea in a breakaway Georgian province -- a provocative act if there ever was one. Russia has also successfully managed to bribe government officials of Kyrgyzstan to toss out the US air base in its country. Meanwhile, Russia is trying to form an alliance with the Central Asian republics that would be NATO-like in projecting Russian influence throughout the region.

Meanwhile, neither the media or the administration is paying much attention at all to China, which is suffering its worst drought in five years and is grappling with increasing political unrest. At a minimum, the drought is likely to have a sharp effect on food prices down the road while any political unrest in China is likely to spill over by a Chinese behavior on issues like Taiwan.

Last take: The unfortunate "Buy America" provision in the fiscal stimulus package obscures very important issues related to the fairness of trade between United States and particularly China. This kind of provision merely provides the supporters of free trade any cost with the opportunity to wave the red flag and bloody shirt of protectionism. How stupid can Congress be? Oh wait, we know the answer to that question. Very.

THE CHINA EFFECT

Please see my latest You Tube report.

© 2009 Peter Navarro

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

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