Why Obama's Economic Plan Will Fail.

First of all, I would like to preface these comments by stating that I voted for Barack Obama. I am rooting for him like I root for my Mets, NY Giants, And NJ Devils. I, unlike Rush Limbough is not going to cut off my nose to spite my face.

But as the months go on, even with the roughly 30% rise in the stock markets, the jury is still out on the general health of the economy. Retail Sales reports for the first 2 months of the year were positive, but the March Report was negative. So what does that say about the state of the consumer? Gas prices have eased considerably over the last 8-10 months or so, giving the consumer a "Tax Break", but how long can that last? The crude oil trade has always been about a hedge against the credit meltdown, and a bigger hedge against the falling US Dollar, as crude is denominated in $$. How long can crude stay in the 40-50's? When crude was taken down last year, when the global economy went into a tailspin, what was lost on so many was that the "Terrorism Premium" had been eliminated from the price of crude. This premium likely is headed back as tensions will ignite in Pakistan, Iran, and lets not forget we are still fighting a war in Iraq. Things have been quite, too quite on the terrorism front.

There have been so many reports of a pending turn in the credit markets that I have lost count. Jobless claims figures that came out earlier this week, convinced people that the state of employment is getting better, this is after a year of severe job losses, we are saying that employment is turning after one non conclusive report? Recent earnings from Wells Fargo, JP Morgan, and Citigroup have alerted investors that the worst is behind us in the financial space, totally ignoring, the only reason the earnings have been good because the FASB has allowed the banks to mark up bad securities to what ever price, thus the banks have to take smaller writedowns and lower loss reserves to inflate their bottom line. The market is starved for positive information, it will go to no end to see higher prices, but at what costs? To many people who were completely wrong in predicting the downturn are now stating that the worst is over. Too many analysts who had the entire credit fiasco misjudged are now suddenly back on CNBC/Bloomberg/Fox saying its time to put your toe back in the water.

The doubling of the PHLX Banking Index has some how convinced the street that the banks can finally go back to doing what they do best...Rape the public with fees and sell structured derivative products that no one understands with little or no compliance and regulation. They don't understand that the BKX is still down 72% AFTER THIS RECENT RUN UP! Most financials are off some 80% off their all-time highs, while others like Bear Stearns, Wamu, And most notably Lehman are gone. You are telling me that the entire financial maelstrom only lasted less then 10 months? You are kidding me right? This is even after most people opinions that TARP, TALF, and other Government programs have failed miserably. Why in the world should we believe that the recent run up in the S&P 500, which is still down 40% from its all time high, is anything more then a severe dangerous Bear Market Rally? This market has all of the trappings of a classic Bear Trap.

When markets fall apart for systemic reasons, they do not recover in 10 months, nor do they just recover because there is sailor like spending ($3 Trillion and counting) by the government. The markets are behaving like it should at this moment, which is mass confusion. Short sellers, like they always do overreached to the downside, and they have been cleaned out in certain sectors, and buyers are still nervous about putting cash to work. So this recent rally has definitely been a short covering rally, the type of rallies you generally see in long term bear markets. I am not saying we are headed back to the lows, but this is nothing more then that.

The banks and the markets are trying to suck in the last few people on the sidelines before the death blow will be delivered.

What does this all mean to the state of the economy? Will it just delay the snap back? Will it just prolong the pain? I am not here to give an opinion, but I will say this...The economy wont turn until home foreclosures have stopped, so far the pace of foreclosures have increased this year, with no slowdown in sight. Banks like BOFA, Wells, and JP have ramped up the pace of foreclosures this year, right in the teeth of the Obama housing rescue plan. The moratorium on foreclosures have been lifted at most institutions. Thus the resulting increases in the supply of foreclosed homes could and will depress home prices across the country and put pressure on bank earnings as troubled loans are written off. All of this after most financial institutions have received government funds to try to stem home foreclosures. Home prices will continue to fall, probably anywhere from 15-20% additionally. More then 2.1 million homes will be lost this year, up from 1.6 million in 2008, this is according to Moody's. Since the Obama housing program went into effect, it has only been effective for 10% of borrowers, the rest will lose their homes. What good is it to renegotiate mortgage terms, if you don't have a job to pay for the house?

Employment is also a huge factor, with the impending bankruptcy of GM and Chrysler, this figure is still awful, and getting worse. How about we start to add jobs? This is not happening anytime soon. The last recession, it took 18 months after positive GDP revisions for employers to start hiring.

Barack Obama's presidency will likely be decided by one single issue. His ability to deal with the financial crisis and economic meltdown. I give him credit. He has tried many things, most of them have left the crisis unresolved. My view is that an unresolved crisis or even an illusionary recovery will only make the economic pain that much worse. The loss of Political Capital and Popular Support that would ensue will cripple his administration. The fiscal stimulus that will kill our finances long term will only allow us to fend off a worse case outcome.

Will the Obama Plan do the following:

1- Make the Geithner Bank Bailout Plan successful?
2- Make the economic/fiscal stimulus actually work?
3-Connect the disenfranchised of the country?
4-Enforce Obama's political will and capital?
5-Will the foreclosure plan actually halt foreclosures?

I don't think so...But I am rooting for him