Should US Government Spending Crash Like the Stock Market?

Thanks to Marry Meeker for putting out this slide on her latest Awesome Web 2.0 presentation about the "State of the Web".  This slide struck me the most as a concern for investing in the future of technology.  Until the US Government cuts spending by 50% and gets out of the private sector way we are going to be in stagnant economy for a long time.  This slide is telling me a few things need to happen before our economy has even a chance of turning around.  In Wallstreet terms, I think we need the great capitulation of Government spending in order to right the private sector economy.   I will not get too excited about private sector investing until the following questions are answered . . .

1. Should US Government spending crash like the stock market? 
2. Will industries that rely on Government spending be crushed?
3. Has the Federal Reserve lost all credibility with the markets? 
4. The VC industry shrunk by 80% in the last decade so why not the Government? 
5. Rising interest rates might actually be good for the "real economy"?
6. Are currency wars are going to get even more intense? 
7. Is the US the new emerging market carrying highest investment risk?  
8. Where & when will the next tech industry boom (ie jobs) come from?
9. Is the Obama administration trying to kill capitalism vs government spending?
10. When will kicking the Government debt can down the road STOP? 

Should US Government Spending Crash Like the Stock Market?

In recent years, discussions around government spending in the United States have often been juxtaposed with the volatility seen in the stock market. The notion of a “crash” in government spending, akin to the dramatic drops experienced by stocks, has sparked considerable debate among economists, policymakers, and the public alike. But should government spending, a critical component of national economic stability and growth, be subject to such volatility?

The Nature of Government Spending

Government spending encompasses a wide range of activities, including public services, infrastructure development, defense, and social welfare programs. Unlike the stock market, where investments are traded with the hope of capital gains or losses based on market conditions, government spending is typically designed to support economic stability, promote growth, and address societal needs.

A “crash” in government spending could mean a sudden, drastic reduction in expenditure. Such a scenario could have profound implications, potentially leading to economic contraction, increased unemployment, and diminished public services. In contrast, the stock market's fluctuations, though significant, do not usually have the same broad, direct impact on the daily lives of citizens.

Economic Stability and Growth

One of the key roles of government spending is to act as an economic stabilizer. During economic downturns, increased government spending can help stimulate demand by funding infrastructure projects, providing unemployment benefits, and supporting businesses through subsidies or loans. This fiscal policy tool is crucial in mitigating the effects of recessions, making a sudden crash in spending counterproductive to maintaining economic stability.

In the stock market, investors often react to a variety of factors including corporate earnings, geopolitical events, and economic indicators. These reactions can lead to market volatility, which, while sometimes alarming, does not typically affect the broader economy in the same immediate and comprehensive manner as a sudden reduction in government spending might.

The Risks of Drastic Cuts

A crash in government spending could lead to several negative outcomes. First, it could undermine public confidence in economic stability. Consumers and businesses might cut back on spending, leading to a slowdown in economic activity. Second, critical services such as healthcare, education, and infrastructure development could suffer, exacerbating social inequalities and reducing quality of life for many citizens.

Moreover, a sudden reduction in spending could also impact the stock market negatively. Investors might fear that reduced government expenditure could lead to lower economic growth and profitability for businesses, potentially leading to a decline in stock prices. This interconnection underscores the importance of stable and predictable government spending policies.

The Balance Between Fiscal Responsibility and Economic Support

While the idea of a crash in government spending is concerning, it is also essential to consider the need for fiscal responsibility. Excessive government spending without corresponding economic growth can lead to unsustainable debt levels, potentially causing long-term economic challenges. Therefore, a balanced approach is necessary, where government spending is sufficient to support economic growth and stability, while also being mindful of long-term fiscal health.

Conclusion

In conclusion, while the stock market's volatility can be a source of short-term concern, the concept of a “crash” in government spending is fundamentally different and potentially far more damaging to the economy and society at large. Instead of aiming for a drastic reduction in spending, a more prudent approach would be to ensure that government expenditures are aligned with economic needs and fiscal sustainability. By striking a balance between stimulating growth and maintaining fiscal responsibility, the US can better navigate the complexities of economic management and ensure a stable and prosperous future for all its citizens.

How Much Treasury Debt Does Japan Own?

Japan Owns 20% of the US Treasury Debt or $885 Billion

Why is no one inf the financial press talking about Japan being the 2nd largest holder of Treasury debt as a problem?   Is this the stock Black Swan the market did not see coming?  Will the US Government be able to issue enough treasury debt at current yields and continue the ponzi scheme it has been running for the last few years.  The next few treasury auctions are going to be very interesting to see if the US government can fill the demand and at what price.  If one of the largest investors Japan needs to pull back its contribution of over $885 billion?  Isn't a red flag that one of the largest treasury bond holders funds Pimco has sold their entire portfolio?  Will we see US treasury bond yields spike to 7-12% like Greece and Ireland?    They are currently between .05 and 4.5% depending on the duration.

I happen to be one of the few people that believe the market has been artificially propped up by the Fed buying bonds in the open market.  This cash gets invested back in the markets in order to prop up equity prices.  I am all for capitalism and organic growth but the current run up in bond and equity prices have not been commensurate with the level of growth and unemployment.

Why am I worried about this as an early stage investor? Well, because I don't believe that our growth has been created organically by capital formation and venture capital.  Our industry is still shrinking drastically.  The day that the VC industry starts to expand in the US I will be the first person to claim we are in a real bull market for an extended period of time.  However, for the time being I am bearish until the government can get out of way with regards to financial regulation and the government restructures their balance sheets to fit the private sector drop in wealth.  

US Diplomacy Needs To Be More Transparent

The Egypt crises has certainly caused some confusion amongst financial community, media pundits, political conservatives and liberals.  No one seems to know which side of the table to be on and who to support in the crisis.  Wall Street and emerging markets responded to the protest by dropping a few percent immediately and volatility spiked but for what reason?  What interests is the US trying to protect in Egypt and who do we trust? One important lesson from this power struggle crisis seems to be emerging and that is the "lack of transparency" in US foreign policy and support for Egypt.  I don't expect a full disclosure Wikileaks style, but when I hear that Hosni Murbarak is sheltering billions and worth multiple billions of dollars it makes me sick. The US Government seems to be giving a billion dollars a year to whom?  Egypt or Mubarak?  How does it get spent if at all and who receives the check?  How many other countries around the world do we support like this financially?  I would love to see an in-dept study of this because hedge funds who invest around the World will be all over this issue to find the next "smoking gun".   If anyone comes up with a InfoGraph to tell the story of US financial diplomacy please send it to me. 

Are Groupon Coupons Getting Spammy?

The latest Groupon coupon fad reminds me of the mailing list spam days back in 1999.  Back in the day companies like Yahoo couldn't get their hands on enough lists of emails and would use these lists to pump out advertising offers left and right.  Eventually consumers got smart and had to use spam blockers and finally the Government required companies to offer opt-in email programs.  Groupon is not much different, however, this time they give you a sense of urgency by saying that inventory is limited.  Not only do most offers claim to limit the inventory but they often give you 50% off for a limited time.  Yes, it seems like a good short term promotional tool but how long will it last and what will it do for customer loyalty?

Will Groupon become a victim of their own success always chasing the next deal and lose customer support?  I think coupons should be scare commodity and not available to everyone.  If everyone has a coupon it defeats the purpose of pricing anything and creates a sense of dishonesty amongst your loyal customer base.  I think at the end of the day when this local coupon bubble pops the winners will simply be just good at local display advertising.  I think Google gets this as well and will will likely start see display ads targeted on mobile phones that show offers like this.

Groupon turned down an offer from Google to buy them for $6 billion dollars apparently and it looks like they are headed for an IPO.  I think this is a blessing in disguise for Google and they should be thankful that this did not work out.  The competition in the coupon space is furious and there are literary thousands of Groupon clones that do the same thing.   When Groupon first received funding and their valuation was north of $100M I said it was a great investor ponzi scheme and still think this.  Its a big house of hards that is only held up by the huge pile of cash they have been able to raise.  Its also not surprising to see them acquiring several companies in order to try and consolidate their competition.  I also wouldn't be surprise to see some more controversy surrounding this company get publicized before it tries to go public.  Groupon has lots of "skeletons in the closet" that will come out and at the end of the day the winners will ultimately be small niche local companies like Boomstreet who will be successful.   

Did Google's Failed Acquisition of Groupon Prompt a CEO Change?

Did Eric Schmidt fail to consummate an important acquisition of Groupon that prompted the change?  I personally am happy that Google did not buy Groupon because I think the company is very spammy.  However, the category is growing quickly and Wallstreet doesn't wait around for excuses of why the advertising giant does not have a product in the category of group buying and coupons for local businesses.

Or is it more about control and does Larry Page want more control of the company to make more acquisitions?  Is Facebook's increased threat of taking market share from the search giant prompting some paranoia.  The war is now on between company founders Mark Zuckerberg of Facebook and Larry Page of Google.   It will be interesting to see how each will handle the growing mobile advertising industry and Google has a huge head start.  It's kind of scary to see Apple and Google CEO have leadership issues as they are the two of the largest technology companies. 

Who is More Influential on the Economy Steve Jobs or Ben Benanke?

There is an argument to be made the Apple's $319 billion dollar market cap and its' publishing, advertising, software, retail and venture capital ecosystem of entrepreneurs and companies might be more influential on the economy than the Federal Reserve's interest rates controlled by Chariman Ben Bernanke.  Here are 10 reasons why:

1)  History has shown that the economy only grows when there is an ecosystem of technology that creates jobs & Apple has fueled the growth of tech which has created millions of jobs Worldwide.

2)  Ben's 0% interest rates have had no effect on whether millions of consumers Worldwide have made emotional Apple purchasing decisions.  Two thirds of the US economy is based on consumption and Apple is driving it.

3)  Ben Bernanke is an academic that relies on historical data to make reactive decisions when economic history rarely repeats itself.

4)  Steve Jobs relies on his vision to shape the future of the technology industry and millions of people are affected based on these decisions.

5)  The stock market always needs a leading growth stock story like AAPL in order for investors to get excited and put money to work in the market.  The Nasdaq 100 index QQQQ is 20% based on Apple and thus 99 other stocks are directly affected by how AAPL trades.

6)  0% interest rates over the last few years have done nothing but create a bond market and real estate bubble which does nothing for capitalism and growth.

7)  Steve Jobs has created wealth for millions of entrepreneurs who have started companies to feed off the Apple ecosystem.

8)  Ben Bernanke has put billions of dollars in the hands of bankers and bond fund managers to prop up the stock market and create a false sense.

9)  Foreign countries who invest in US Treasury Bills, like China, are not happy that the US is intensionally keeping interest rates low thus devaluing the dollar.  The Dollar cannot be devalued forever in order to finance the future and thus a long term bubble is forming if it were to rise suddenly.

10) Apple's stock (AAPL) has the largest market cap in the World at $319 Billion and if it were to lose value quickly it would take down a lot of hedge funds, pension funds who have jumped on the bandwagon of wealth creation and could be destruction if we are not careful.

Get well Steve!  We need you and Google to keep all entrepreneurs and investors excited about the future.  Technology NOT energy should be the basis of the World economy in order to leave a better place for our kids.