I’ll Huff and I’ll Puff and I’ll Re-Inflate this Economy!

President Obama as the Big Bad Wolf?

Under ordinary circumstances, if you told me that the equity markets being up some 30% off its lows was a bad thing, I'd say you were nuts. Yet here we are. Recently I wrote about how we as investors should stop questioning the rally and not fight the Fed, but now it's starting to get silly. Monday's consumer confidence numbers came out and were surprisingly good. Bob wrote an excellent article on this phenomenon and why we should be skeptical of it.  

So it got me thinking about one of my favorite fairy tales from my childhood, the Three Little Pigs. I suppose it's not a good thing when you can compare your country's economy to a fairy tale, but if the shoe fits....

For those unfamiliar, the first pig builds a house of straw, the second pig builds a house of sticks, and the third pig builds a house of bricks. Then the big bad wolf comes along and blows the down the first two houses and eats the pigs.   When he gets to the third house, the wolf can't coax the pig outside nor can he blow the house down. So he tries to get sneaky and come down the chimney, only to land in a pot of boiling water where he meets his demise. 

Fast forward to 2009 and grant me a bit of poetic license. The way I see it, the 3 biggest problems in our economy are analogous to the three little pigs.

The first pig(s) is the banks and investment banks, which were subjected to the "stress tests" and were forced to take TARP money to survive because their losses were so ridiculously large that they would have failed otherwise.

The second pig(s) is the auto-makers like Ford (F), General Motors (GM) and Chrysler, whose unions and pension plans had become so bloated that they could no longer compete and now are either already in or facing bankruptcy.

And finally the third pig(s) is the housing market, whose prices had been pushed so high by speculators, unqualified buyers, and unsuspecting consumers alike that the inevitable de-leveraging and price deflation may be too much for our economy to bear.  

So what does this mean for the economy? Well as we have seen, Obama has blown down the first two houses and has eaten the pigs, so to speak. The banks have had terms dictated to them about what they can and can't do under TARP, and the auto-makers are moving toward bankruptcy and restructuring as well as being forced to make more energy efficient cars.

But we still have a problem with that third little pig in the brick house (ironically). All of Obama's huffing and puffing hasn't been able to budge the housing market higher. So they decided to be sneaky and offer the $8000 housing credit to try to entice the pig(s) to come out. And as the story goes, the pig does not come out and the big bad wolf ends up in hot water. 

Let's hope President Obama remembers this story like I do and decides to leave this third pig alone! Then maybe housing prices can truly bottom and those responsible enough to not have participated in the housing bubble/crisis will be rewarded.

Now there's a fairy tell I could believe in!