Here's a little analysis from Bank of America / Merrill Lynch. A long read, but well worth it.
The major event last week was Obama’s budget plan
We think of all the major events that happened last week, including all the
economic data, the details of the Geithner stress tests, and the Bernanke
congressional testimony, the most important in our view was the budget plan unveiled by President Obama on Thursday night. Charles Krauthammer, in his weekend column, said it is “the boldest social democratic manifesto ever issued by a US President”. Clive Crook (page 9 of today’s FT) was even more blunt –
“Take this budget at face value, and when Mr. Obama talks about “a new era of responsibility” he does not mean: “We are all in this together”. He means: “The
rich are responsible for this mess and it is payback time”. Leftist Democrats are thrilled and rightly so”. What really caught my eye, though, was the appraisal that the New York Times gave the budget plan on the front page of Friday’s edition, specifically the article titled “A Bold Plan Sweeps Away Reagan Ideals” right on the front page.
Doing away with the policies of Ronald Reagan
That’s it in a nutshell. What we are talking about here is not just about doing away with the Bush era, but also tearing apart the type of economic policies that Ronald Reagan ushered in. Reagan came to office to do four things: shrink government, lower taxes, rebuild our nation’s defense systems and deregulate the economy. He managed to do all four, and we know what that meant for financial markets.
Obama made clear on Thursday that he also has four objectives: completely overhaul health care, provide universal education, establish a new ‘green economy’ funded and regulated by the government, and address income inequality by taxing the rich and directing the proceeds to the lower end of the income strata.
The impact on the public purse is going to be massive. The deficit is going to quadruple in the 2009 fiscal year to $1.75 trillion or to 12.3% of GDP, the highest ever for a peacetime economy. Even by 2012, the deficit is still projected to be $581 billion or 3.5% of GDP. However, that is a low-balled estimate because it hinges on assumption that between 2010 and 2012, the economy is going to be humming along at an average annual growth rate of 4%.
The only thing that will grow is debt and spending. Good luck because the very policies that Obama’s team looks ready to follow are going to do a whole lot in terms of spreading wealth and income around, but the only thing that grows in this fiscal plan is debt and spending. The debt-to-GDP
ratio goes from 58.7% today to 67.2% within a decade, which would be the
highest since 1951. The reason for the debt and deficit boom comes squarely down to the spending proposals because if this budget passes, and it probably will, federal government spending this year hits $4 trillion or 27.7% of GDP, up from 21% in 2008 and 20% in 2007. This would be the highest since 1945, when the nation was still at war.
Who is going to pay for the expanded role of government? It will be the top 5% of the income earning population, those making $200,000 or more, who are going to see their tax bill soar $1 trillion in the next decade, not just in the form of higher tax rates but also in the form of reduced exemptions and deductions such as charitable donations and mortgage interest deductibility. These rich folks have already seen their home values slide nearly 30% from the peak and their stock portfolio shrink 50%. So, let’s just say that this extra kick in the pants on the taxation side is very likely going to extend the bear market in a host of consumer discretionary groups ranging from leisure and recreation to specialty and luxury consumer goods retailers.
It would seem very clear that the message to take back to our clients is that President Obama is not going to let the war on deflation, the war on depression or the war on preservation of banking system from derailing his primary goal of reducing income inequality, which is really what this budget plan is all about – redistributing income as opposed to creating it. This is basically a sweeping attempt to terminate not just a Bush era as much as a three-decade era of economic policy dictated by Reaganomics, nurtured during the Clinton years and then accentuated in the Bush era. What we are talking about here is a very radical departure in terms of rewriting the tax code and in terms of re-defining the government’s involvement in the economy.
What happened during the Reagan era? If this is the antitheses of the Reagan era, it probably pays to see what that era brought us: a strong dollar because the greenback rose 5% through all the peaks and valleys; a bear market in gold, which sank 28%, lower interest rates, with the yield on the note on the 10-year note down 350 basis points, a collapse in
inflation, which plunged 730 basis points on the back of freer trade and
deregulation. Because both inflation and bond yields came down, the stock
market soared 120%, not just on earnings but on a 3 percentage point expansion in the P/E ratio as investor confidence soared. As for economic performance, real GDP advanced at an average annual rate of 3.5% and the unemployment rate fell more than 2 percentage points.
Taking the inverse of Reaganomics: So, if Obamanomics is a repudiation of Reaganomics, we think what we may want to do is take the inverse of this performance, and as far as equity sectors go, the ones that performed the best during the Reagan era were the consumer stocks, health care and financials. The ones that underperformed were basic materials, utilities and tech. If you look at the line by line items of the current budget plan, reversing course on these sectors may well be worth considering for
the next eight years.
Economic Analysis
Economics | United States
02 March 2009
David A. Rosenberg +1 646 855 1389
North American Economist
MLPF&S
david_rosenberg@ml.com
RC
Morning Call Notes
02 March 2009
The reversal of Reaganomics 
![[SIGPIC]](http://www.aimag.com/forums/avatars/sgtcowboyusmc.gif?type=sigpic&dateline=1238721233)
Linear Mode
