Special Commentary

Decision-Makers' Guide to Stimulus Part Deux

Wed, Jul 22 2009, 09:08 GMT
by John Silvia - Wells Fargo Investments, LLC | View company's profile

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“You cannot step twice into the same river…”

Heraclitus, as quoted by Plato in Cratylus

In the Blue Chip Survey published just after the first Obama administration stimulus passed, the consensus estimate for the unemployment rate in the fourth quarter of this year was 9.2 percent.1 Moreover, the top 10 most pessimistic forecasts had unemployment hitting nine percent as soon as the second quarter. Congratulations to them. Our March forecast had unemployment hitting 9.6 percent during the second half of this year.2 Therefore, when Vice President Biden says, “The truth is, we and everyone else misread the economy,” we know that he is taking political liberties with the economic facts.3 Everyone did not misread the economy. Contrary to political rhetoric, economic analysis outside the beltway clearly anticipated a nine percent plus unemployment rate even with the stimulus package.

As we begin the third quarter of this year, there have been renewed proposals for another stimulus, Part Deux, to get this economy going. For decision-makers outside the political beltway, there are several principles that underlie the risks to such a strategy and the outlook for growth, inflation, interest rates and the dollar. Each of these core economic drivers of institutional success will be affected by any attempt at stimulus Part Deux.

Recovery in Growth: Patience not Politics

First, the initial Obama administration stimulus needs time to work. Politicians are quick to overpromise and this was certainly again true in this case. The American voter was eager for solutions, but the economy is not instant oatmeal. In a society accustomed to microwaved leftovers, the economy is a slow cooker. Washington was simply too optimistic on how fast the economy would react to policy action.

Setting the political promises aside, estimates by the Congressional Budget Office (CBO) suggested that most of the impact of the stimulus would begin to appear in the third (now the current) quarter, and then continue into the fourth quarter and the first quarter of next year.4 The major thrust of the stimulus would be felt in the 2010 fiscal year which begins this coming October, according to the CBO (Table 1). Here at Wells Fargo, our assessment was the same, as our March forecast called for a significant rise in federal spending beginning in the third quarter, leading to overall positive growth for the entire economy by the fourth quarter. To credit the CBO again, it indicated that only one-third of government checks would be sent out by the end of September and just 11 percent of infrastructure spending would be started. Shovel ready was nothing of the sort.

During the current quarter, business decision-makers can start to anticipate positive overall economic growth. Unfortunately, a second stimulus could add too much to the growth momentum to be consistent with stability in long-run inflation, interest rates and currency expectations. Inflation/debt concerns, which are already rising, would accelerate quickly and thereby prompt negative interest rate/dollar reactions that would create a boom/bust cycle—especially in the sensitive credit markets. Such a boom/bust cycle would hamper efforts to improve the long-run growth fundamentals in the overall economy that are so necessary to meet entitlement commitments. A second stimulus would, in our opinion, run the risk of steroid-induced, short-run growth increases at the cost of significant long-run losses in economic muscle.

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Published On Wed, Jul 22 2009, 09:21 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. 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There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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