Friday, January 22, 2010

Chance Of Double Dip Recession Now Greater: Stocks And Economic Growth Are 55 Percent Riskier Over Last 3 Days

Over the last three days, as President Obama unveiled his plan to restrict bank activities, the S&P500 volatility index (CBOE VIX) rose 55 percent. On Tuesday, January 19, the VIX closed at 17.58. On Friday, January 22, the VIX closed at 27.31.

The stock market and the economy are now 55 percent riskier than they were a few days ago. As the stock market is a signal of US economic growth, the chances for a double dip recession are now greater than they were a few days ago.

The populist backlash, led by President Obama, against banks is the main reason for the increase risk. The President is angry for the Democratic Senate loss in Massachusetts and the now unlikely passage of health care reform. Governmental policy originating from anger and retribution, especially to appease a populist backlash, rarely leads to good policies and often has many negative, unwanted and unintended economic consequences.

Part of the uncertainties facing future US economic growth are the doubts about the confirmation of Fed Chairman Ben Bernanke, the loss of Presidential influence of Larry Summers and Tim Geithner, the new proposed Volcker banking restrictions and the uncertainty of what other populist economic proposals will come out of the current Administration and Congress.

The loss of over 5 percent of the S&P500 and Dow Jones Industrial Indices value in the last three days, coupled with a 55 percent increase in risk, is directly attributable to President Obama's leadership, policies and Congressional influence.

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