By: Jonathan Yates

Contributor, Stock Traders Daily

(La Jolla, CA) One vital lesson the Obama Administration learned hard and early was that if you want investors to buy equities and the Chinese to buy Treasuries you cannot bemoan the miserable condition of the US economy.   From Treasury Secretary’s Tim Geithner’s poor performance at his first press conference to Fed Chairman Ben Bernanke’s and other Obama Administration officials comments about the poor shape of the American economy, all contributed to the Dow hitting its low in early March 2009.  Since then, the happy talk from Bernanke and others about the recession ending and the economy recovering have resulted in about a 50% surge for the Dow.

However, as the former heavyweight champ Sonny Liston used to remark, “You can run, but you can’t hide.”  Stocks such as Ford (NYSE: F), Goldman Sachs (NYSE: GS) and Bank of America (NYSE:BAC) have more than doubled as the result of Bernanke talking up the Dow.  But the poor economic conditions will eventually weigh down the securities markets.  Just this week, the non-partisan Congressional Budget Office reported that the budgets of the Obama Administration will add an additional $9 trillion in debt.  The yield on 10-year Treasuries spiked upward in response.

At the micro level, the housing sector is still struggling.  Ticks up in sales for June and July pleased The Market.  But foreclosures are expected to reach 1.89 million this year, nearly a third more than in 2008.  Realtytrac, which monitors foreclosure data, does not see any improvement here until 2011.   Higher interest rates will only exert more downward pressure on the housing market.

Even more worrisome is that consumer confidence remains low and unemployment remains high.  About 70% of the gross domestic product in the United States results from consumer spending.  If Americans are saving rather than spending, while not an entirely bad thing, it will still prolong the economic decline.  And with unemployment bumping at 10% and expected to go higher, it will be difficult to get the consumer to pull out the wallet.  A recent report by the Port of Los Angeles does not expect a normal demand for imports again until 2013 due to the lack of consumer spending in the US.

Another heavyweight champ, Mike Tyson, used to say that, “Everyone’s got a plan “til you hit them in the mouth.”  Almost $10 trillion in new debt will pound any economic plans of the Obama Administration.  This much borrowing by the US will inevitably drive up interest rates and weaken the dollar.  A weaker dollar will lead to higher oil prices as investors flee for commodities.  Higher interest rates and higher oil prices will knock out any economic recovery for the US.  This has already happened: a barrel of oil has more than doubled in price while 10-year Treasury yields have almost doubled this year.  Oil company stocks such as Exxon (NYSE: XOM) have increased despite the economy being in a recession and the use of petroleum declining.  Positive talk form Washington can inspire investor confidence in the short term, but negative economic data over the long term will eventually depress the markets.