Friday, November 07, 2008

The Treasury/Taxes Guessing Game Continues

President-elect Obama gave a news conference today after meeting with his economic-advisor transition team. Wall Street was hoping to hear a Treasury-secretary designate and an Obama decision not to raise investor taxes next year (meaning capital gains). Unfortunately, neither announcement was made.

As a result, stocks traded down from plus-250 to plus-60. However, at the very end of the news conference, Obama was asked directly if he would postpone his upper-end tax increases next year. His response left the door open slightly. He said his economic plan in the campaign is the right program, but over the next several weeks and months he will take a look at the economy. So the guessing game will continue. Who will be his Treasury man and will he raise taxes next year?

Incidentally, after Obama answered that last question, stocks did trade back up plus-160, and they finished the day up nearly 250. In the two days following the election, shares plunged almost 1,000 points -- or 10 percent. I’m pinning this on the stock market vigilantes. These investors are rebelling against investor tax hikes and are trying to send a message to the president-elect not to go there.

During the 1980s, we had the bond-market vigilantes. They would drive up long-term interest rates whenever they saw inflationary money coming from the Fed. Today, by keeping the door open for no investor tax hikes next year, Obama seemed to quiet the new stock market vigilantes.

We are in a honeymoon period right now. Let’s wait and see what happens.

By they way, Paul Volcker was standing right behind Obama at the news conference, and he sat right next to Obama during the sit-down meeting of economic advisors. Will Tall Paul be the Treasury man? Most folks see it as a race between Larry Summers and Tim Geithner. More to be revealed.