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Our Marionette Economy

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The government won't be able to pull enough strings.

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This morning, in the Wall Street Journal, Wells Fargo CEO John Stumpf is quoted saying "If it's not a government program, it's basically not getting done."

While Stumpf's comment was targeted to the mortgage market and associated with a plea for Fannie Mae (FNM) and Freddie Mac (FRE) to raise their size limits so as to be able to pick up more jumbo mortgages, I believe he nailed the current state of our economy:

"If it's not a government program, it's basically not getting done."

Every day, as I look through various government statistics, it becomes more and more clear that our economic condition is entirely a function of Washington.

Banking -- absolutely; Autos -- yup; housing -- yup; technology -- yup. You name it, I see it. More importantly, where it's not, there are increasingly louder pleas (such as Mr. Stumpf's, for more).

But to me, there's a fundamental flaw to the notion that the government can create a sustainable economic recovery.

This past week, as pundit after pundit shared their key learning from the Lehman failure, I kept coming back to a comment from Bennet Sedacca: "They (the government) can make 'em bounce, but they can't make 'em fly."

In the New York Times, columnist Joe Nocera wrote that it was the failure of Lehman that triggered the enormous government response which "saved the system." What struck me as odd about Nocera's comment is that while the massive actions of Washington did stabilize the financial system last fall, it wasn't until March of this year that the broader market (as measured by the S&P 500) bottomed.

And that's my view of all of the various government programs out there; while they can slow a decline, they can't create a sustainable recovery.

Why?

Because government intervention -- at least so far in American history -- is temporary: It's there when needed, but with both a finite time horizon and size limit.

As I talk to leaders in and out of the business community, their message is remarkably consistent: They view everything from Washington as temporary -- the fiscal stimulus, the banking support, the dramatic intervention by the Fed. And they fear what's ahead without it.

Worse, our economic stability is a function of how, where, and when Washington pulls the strings. So business leaders, as much as they plea for more of it, don't really trust it. As the banking community has seen with TARP, there are interesting strings that come attached.

Yesterday, Chairman Ben Bernanke declared the recession as over. While that may be technically true, until I see real private-sector demand for credit, goods, and services, I remain unconvinced. And let me give you just one example why:

This morning, weekly mortgage applications dropped by more than 10% -- despite near-record-low rates and the very sizable first-time home buyer's subsidy. To me, this suggests that we're nearing the point where we've "pulled forward" just about as many home purchases as we can. (Just like we "pulled forward" billions in auto purchases through the Cash for Clunkers program).

So Washington is now faced with a choice -- increase/expand home purchase subsidies or let prices fall. (And I'm willing to bet that the same will be true come November on the auto front).

Government subsidies are great while they last, but as we saw a year ago, they're not enough to prevent markets from finding the bottom.

That, to me, is the most important lesson from last fall. And a year later, I'm only more convinced.
Position in SKF and JPM and SPY options
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