The good news from the president’s State of the Union speech is that he recognized that our federal deficit is a bad thing. His proposed spending freeze, starting next year, is only a symbolic gesture, but it is important. It proves that the administration learned a lesson from the Massachusetts Senate race.

Specifically, that lesson is that you cannot criticize, even rightly, the previous administration’s deficit spending and then triple the deficit without paying a price. I find this extremely encouraging.

America has a lot to do before the potential of the economy is unleashed again, but the tide has turned. Americans have seen what out-of-control spending does to states under the ideological control of people like Nancy Pelosi. And that lesson will be driven home in months to come. California’s State Controller John Chiang has warned that the state will be unable to pay its bills if legislators do not act on nearly $9 billion in budget cuts sought by Gov. Schwarzenegger.

I have the dubious distinction, incidentally, of having personally introduced the Governator to the champion of markets, Dr. Milton Friedman. Friedman was speaking at an event sponsored by the think tank I worked for not long after Conan the Barbarian was released. I’d read that the actor admired Friedman and invited him to the event. He came, in fact, and I put the two together.

Sadly, Schwarzenegger’s public appreciation of Friedman never really translated into policy. Today, a distressed California serves as an example of what happens when markets are seen as tax farms for politicians, no matter how lofty their goals. Friends of mine in California now admit that Texas, which they once considered a redneck backwoods, actually delivers what California has only promised.

Of course, the July issue of The Economist helped drive the point home. In a now famous article titled “California v Texas: America’s Future,” The Economist painfully detailed the differences between the states. Texans’ preference for low taxes, fiscal restraint and regulatory reform have made the state the envy of America and a magnet for business, capital and talent. California’s emphasis on government-provided benefits has accomplished the opposite.

In the last six months alone, there has been a massive shift in public opinion toward the Texas model. One of the best proofs is the recent CNN poll showing that 56% of the public opposes the administration’s stimulus plan. Only 42% support it. Back when the stimulus bill was signed into law, polls showed 54% support.

This doesn’t mean that President Obama will pivot to the center as Bill Clinton did in similar circumstances. In fact, Obama proposed massive new spending in the same SOTU in which he promised a spending freeze. The most revealing increase was his plan to further subsidize student loans. He wants to limit loan payments to 10% of income above a basic living allowance and forgive remaining debt in 20 years. The telling part of his plan is that those working in “public service” would have student loans forgiven in half the time, after only 10 years. Remember, public service workers already earn, on average, about $20,000 more per year than private-sector workers.

While the president clearly values taxing consumers more than producers, the public won’t stand for it. This is the basis of my optimism. We don’t need a full economic recovery for transformational stocks to prosper. All we need for money to move is investor confidence in the direction of governance and markets. It will come.

Right now, however, there are the triple overhanging threats of a government health care takeover, the cap and trade scheme and new bank taxes. For certain, however, cap and trade is dead. Though America’s mainstream media are still in denial about the collapse of the anthropogenic global warming (AGW) edifice, most of the rest of the world is not. Particularly in India and China, where most growth in carbon production will take place for some time, global warming is increasingly viewed as a failed scam. Here’s an English article from the Indian magazine Open to give you an idea of the tone.

Health care “reform” will certainly not pass in the form desired by the most extreme proponents. Increasingly, in fact, it appears that it won’t pass at all. I am, by the way, in favor of actual reform centered on limiting malpractice lawsuit abuse. Estimates are that we could cut American health care cuts by $3,000 per person per year on average through tort reform. This would eliminate much “defensive medicine” and lower insurance costs substantially. Americans favor this approach by wide margins, especially among the “Tea Party” movement. I expect it to move forward after the 2010 election.

Incidentally, I want to remind readers who went to last year’s conference in Vancouver that Chris Mayer and I were right about the burgeoning Tea Party movement. Today, it polls better than either the Republican or Democratic parties. Back then, our prediction that it would be a major political force was dismissed by others on our final panel.

In short, there is much reason for optimism right now. The trend lines are extremely positive and will begin to yield real benefits soon. Our debt level is seriously awful, but not worse than it was at the end of World War II. America is going to suffer the consequences of an unnecessary excursion into California-style liberalism, but we’ll come out stronger than ever. Moreover, we will be helped by a huge international market that did not exist in the late 1940s, when our economy was powering ahead.

For transformational profits,
Patrick Cox

February 9, 2010

P.S.: Shortly, investor fears are going to be calmed and the truly revolutionary technologies that will power the next period of economic super growth will accelerate further. In fact, legendary analyst John Mauldin is predicting a full-fledged biotech bubble in the years to come. I’ve been privileged to get to know John recently. We’ve been working together on a few projects, and he’s been buying some of our biotechs. I should point out that to avoid conflicts of interest, I cannot own any of our stocks.

Patrick Cox

Patrick Cox has lived deep inside the world of transformative technologies for over 25 years. In the 1980s, he worked in computer software development and manufacturing. By the mid-1990s, he worked as a consultant for Netscape — the company that handled 90% of all Internet browsing traffic at the time. InfoWorld and USA Today have featured Patrick's research numerous times. He's also appeared on Crossfire and Nightline. Patrick has been quoted by The Wall Street Journal and Reason magazine. His expertise brought him to Agora Financial, where he now heads Breakthrough Technology Alert, the only place you'll find the truly transformational technologies that offer exponential gains.

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