The Independent Investor: Can Politicians' Promises Be Believed?
As the 2020 presidential election campaign heats up, so do the promises. Lower taxes for some, higher taxes for others, better health care, higher Social Security payments; whatever it takes to get elected seems to be on the table for now.
But most politician's promises are made to be broken. Once the candidate becomes the president, reality sets in and the blame game starts. "The House is against me." "The Senate won't cooperate." "The deficit is too large." "Spending is out of control."
The list of excuses goes on and on.
Truth be told, Donald Trump has come the closest to fulfilling at least some of his promises. He gave us a tax cut. He is building his wall. He has moved the U.S. in a dozen ways, away from multinationalism and back to isolationism. He has stood foreign policy on its head by forsaking World War II allies, while embracing dictators such as Putin and Kim Jong Il.
Using executive orders, Trump has gutted efforts to control climate change and protect the environment. He has stemmed the flow of immigrants, both legal and illegal, coming into the country. He has packed the courts with conservatives at every level, whether qualified or not. If you are a Republican and a conservative, you should be quite happy with Donald Trump's efforts to deliver on his promises.
Now, in preparation for his effort to gain a second term in the White House, he is focusing on the economy and taxes once again. The Trump administration is hard at work devising a middle-class tax cut. Supposedly, this "Tax Cut 2.0" plan would reduce taxes on the middle class by 10-15 percent. It would also make permanent some of the tax cuts that were originally implemented in 2018 but were set to sunset in 2023.
Trump is also suggesting a new tax deferred vehicle to encourage lower- and middle-income Americans to invest and save more. One proposal would allow savers who make $200,000 or less to invest $10,000 in the stock market tax-free, in addition to the contributions they are already allowed to make in their 401 (k) or 403 (b) plans at work.
Both the president and the Republican Party have experienced blow-back from voters who felt that the 2018 tax cut did far more for the country's business sector than it did for the middle-class. Taking that on board, President Trump is now focusing on remedying that shortfall, while appealing to a wider swath of voters.
At the same time, the promises he made that the tax cuts would galvanize corporate America to invest more and thereby grow the economy were not kept. The economy's average growth rate is at about the same level it has been over the last eight years. Part of the reason for that disappointing performance was the economic dampening effects of his multi-year trade war.
In that area, he has kept his promise to work on leveling the playing field for the U.S. in global trade.
Whether you agree with Donald Trump's policies or not, he has been steadfast in following his own agenda. For those who believe in him, there is no reason to doubt that if he is elected for a second term, he will continue to make good on his promises.
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The Independent Investor: Economic Inequality Becomes Campaign Issue
As Bernie Sanders takes the lead in the Democratic primary campaign, investors are beginning to take his socialist leanings to heart. But dire warnings from the opposition and Wall Street seem to have little impact. A look at the present income inequality in America goes a long way in explaining why.
Over the years, I have written a number of articles on the growing threat of income inequality and its damage to "the Great Center" — the American middle class. According to a new study by the respected Pew Research organization, over the past 50 years, the highest earning 20 percent of U.S. households have garnered a steadily increasing share of America's total income.
I have pointed out on numerous occasions that not only is our income inequality the highest of the G7 nations, but (depending on some studies), it is also the highest in the developed economies of the world.
If we talk about overall wealth, it should come as no surprise that the gap between America's (richest 1 percent) and poor families has doubled from 1989 to 2016. And middle-class income earnings have grown, but at a much slower rate (49 percent) than upper income families (64 percent), according to the Pew Research study. Given this backdrop, is it any wonder that more and more young Americans worry that capitalism has failed them?
Before I get the usual amount of hate mail, let me be clear: not all Americans believe this. Take someone my age. I grew up in a time when communism and socialism were interchangeable. Both were abhorrent political and economic concepts. The USSR, parts of South America, Eastern Europe, and China had either rejected capitalism outright, or were experimenting with different degrees of centralized government control of the economy. We were at war. It was literally us against them. There was no room for compromise.
Therefore, no matter how hard we try, even the word "socialism" triggers old prejudices and fears. Younger folk, who were not around for the Cold War, only see what is happening today. They see the increasing disparity in income and wealth. They compare the universal health-care systems around the world and wonder why the richest nation on earth can't afford the same.
But it is not just the elderly that shy away from socialism. In the same Pew study, only 41 percent of Republicans and those who lean that way in their political views, think there is too much inequality in this country. That compares with 78 percent among liberals and Democrats.
Of course, many people's opinion of income inequality is dictated by their pocketbooks. Twenty-six percent of upper-and middle-income Americans believe there is about the right amount of income inequality in this country. Only 17 percent of lower income adults think that way. Even on the Republican side, lower-incomers believe income inequality is too high compared to upper-income conservatives (48 percent vs. 34 percent).
However, over in liberal country the reverse is true. Those making the most income believe there is too much income inequality (93 percent), compared to lower-income Democrats (65 percent). Unfortunately, income inequality has been expanding in this country for the last 30 years under both Democrats and Republicans.
In my opinion, as more and more of the middle class slipped into the lower-income category, their stake in the institutions of this country (capitalism and our form of democracy) has weakened. I believe the election of Donald Trump was in response to this trend in income inequality.
His promise to "Make America Great Again" was exactly the lifeline the disappearing middle class was praying for. While it has made most Americans somewhat better off, it has done little to reverse the disparity between the haves and have-nots. This has emboldened some of Trump's political rivals to demand and even more radical change in the economy and possibly the entire political system. It remains to be seen how voters will come down on this issue.
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The Independent Investor: ESG and the World of Investment
Over the last few years, investments that focus on environmental, social, and governance issues, or ESG, have been confused with socially responsible investing or SRI. There is a big difference between the two investment styles.
The simplest way to understand the differences between the two is the profit motive. ESg investments are focused on making money as a primary objective. They do so by identifying specific risks or opportunities now and in the future and investing accordingly. SRI investors, on the other hand, are willing to forego profits in companies that do not meet their ethical standards. They value ethics more than profits in the investment world.
For example, if an individual decides they do not want tobacco, energy, or firearms companies in their portfolio, then, despite the possibility that one, or all three sectors, might generate better returns than the market overall, these companies would be excluded from future investments. If, as a result, their portfolio returned less than the market (or fell further than the market overall in a downturn), the ethical return of knowing you are a socially responsible individual far outweighs the monetary return.
An ESG investor may exclude the same three investments, but for entirely different reasons. If, from an environmental point of view, an investor believes that future government restrictions, increasing carbon taxes, and civil or criminal lawsuits (as a result of pollution and oil spills) make the financial returns of energy companies a poor investment versus other areas, oil and gas stocks might be excluded from an ESG portfolio.
Many investors, of course, want it both ways — to see their money invested in stocks or funds that are profitable and to reflect their social values. Easier said than done, however. In the past, the SRI world could be quite risky, and one person's values and portfolio choices could be much different from another's. Religion, personal values, or even political beliefs can sometimes create contradictions.
You may be anti-conflict, for example, and want to avoid firearm stocks, while having no problem with buying mining stocks in Africa, despite atrocious human rights violations there. You could be a hunter and want guns in your investment portfolio but reject alcohol and tobacco stocks on religious grounds.
Many socially responsible investment choices have been in companies and sectors that were overly dependent upon government tax breaks and credits just to achieve an acceptable level of profitability (think solar, water, and wind). If, as has happened many times in the past, governments chose to remove their support for political or budget reasons, these companies could collapse. Other issues involved liquidity, high expenses, and transparency,
But times are changing, and some of these areas are finally coming into their own. Last year, for the first time, exchange traded funds assets began to see a sizable increase in ESG investing. More than $20 billion was invested and, while that is still only 0.4 percent of the $4.5 trillion invested in ETFs, it is growing. Better still, the premise of these ESG funds seems to be working.
Nine of the largest ESG mutual funds in the United States outperformed the S&P 500 Index last year. Seven of them topped their market benchmarks over the last five years, which is no small accomplishment given the strong performance of the overall market during that time period. According to Bloomberg, assets managed by the 75 retail funds in its ESP survey were up 34 percent to $101 billion in 2019.
It just so happened that these fund managers during that time invested heavily in the technology and financial services sector, since both areas have historically been in low-pollution emission areas. Those same companies were the darlings of the overall market as well. Companies that are advising other companies on how to become more energy efficient, or helping to minimize nasty environmental impacts on society have also done well. Health care was another sector where ESG investments paid dividends.
This kind of investing is also a good fit for those who are saving for retirement, since most money managers consider sustainability investing as a long-term investment The jury is still out on how well ESG will do in the years to come but for those who might want their cake and eat it too, I believe the ESG approach trumps SRI at this stage of the game.
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The Independent Investor: Intellectual Property Has Not Always Been So Important
America's intellectual property (IP) is worth more than $6.6 trillion and employs 45 million Americans and hundreds of millions more worldwide. It is estimated that IP-intensive industries account for one-third of the country's total Gross Domestic Product and 52 percent of U.S. merchandise exports. It is why we, as a country, are fighting so hard to protect these rights today.
The figures above come from the U.S. Chamber of Commerce. If anything, they understate the value of IP to all of us. So what, exactly is IP? Generally, it is any product of the human intellect that the law protects from unauthorized use by others. Inventions, literary and artistic works, symbols, names, and images used in commerce, really; just an endless list of things that people created that makes the world what it is today.
It is usually divided into two categories: industrial property, which includes patents for things like inventions, trademarks, designs, etc. and copyrights that cover most of the artistic world, including everything from television shows to the latest bestselling books.
Our founding fathers thought that IP was so important to the future of this country that they made it a point to protect the rights of authors and inventors in the U.S. Constitution. However, protecting these property rights has not always been the priority it should have been in our nation's history. The most recent example is the on-going trade dispute we are having with China over intellectual property and technology transfers.
A cynical investor might ask why, after over two decades of accelerating trade between our two countries, are these issues only coming up now? If IP is such a vital component of our national wealth, why did it take Donald Trump to shine a spotlight on a business practice that has been going on for more than 20 years, not only in China, but in a good part of the rest of the world as well?
Well, in the case of China, it was the price of doing business. There was nothing sneaky or underhanded about it. The Chinese were straightforward in what they wanted when they first opened the doors to their economy in the Nixon/Kissinger era. The message was clear — if you want to do business in China and sell to our billions of consumers, in exchange, we want to understand, learn, and license the intellectual property behind your products.
So why did we agree to those conditions? During those days, the markets were rewarding companies that managed to plant the first flag on Chinese soil. It was considered a "strategic advantage" to beat your competitors into China. Every company in the world wanted a piece of the action and to be first to crow over a foothold in the country. It was (and still is) the fastest-growing consumer market in the world. Visions of billions of additional hamburger or DVD sales filled the trade journals of the day.
The uncomfortable truth is that our U.S. corporations gladly transferred their secrets to Chinese companies in exchange for that new business.
And don't think our government was not complicit in helping U.S. companies gain an advantage in China. They knew exactly what was going on, in my opinion. And now, only after the horse has already left the barn, are we trying to slam the stable door shut. In hindsight, we have to ask ourselves this question:
"Was giving away our industrial property and looking the other way as our technology was pilfered worth the additional sales we received from the Chinese?"
Evidently not, if you listen to the rhetoric. The media, the public and of course, the outrage of politicians on both sides of the aisle are well known. The inconvenient truth is that we always had the opportunity to "just say no," but we didn't. We said nothing.
Sure, you can blame China for being unfair in the first place, as if business is ever fair or unfair (unless you lose). But from the Chinese point of view, as a country striving to raise itself up by its bootstraps 30 years ago, was it unreasonable or unfair? To me, it was simply a smart business tactic. They recognized the greed and profit motive of capitalistic societies and exploited it for their own benefit.
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The Independent Investor: Can We Afford 4 More Years of Trade Wars?
The Phase One trade deal with China was signed with a great deal of pomp and circumstance this week. While happy that trade tensions on both sides have been reduced, the vast majority of Wall Street players saw the deal as a win for China.
After almost three years of threats, bluster and on-again-off-again tariffs, we are right back where we were before Donald Trump was elected. Yes, China has agreed to purchase an additional $200 billion in U.S. goods over the next two years, but the trade deficit was always the wrong metric when comparing our overall trade with China.
Trade imbalances are caused by capital flows. Don't take my word for it, just ask any economist in the world. In addition, the U.S. dollar is the currency of choice around the world and our U.S. Treasury debt is also considered the safest in the world. Those two factors create an environment where foreign investors use dollars earned from exports to purchase U.S. assets and not U.S. goods.
The president's entire focus on trade imbalances has been bogus from the start. One can only assume that either he does not understand that key point, or that his political base can't grasp anything more than a simplified and erroneous concept of trade imbalance as the source of all our problems with China.
In theory, under this new deal, U.S. exports should increase to $263 billion this year and as much as $309 billion in 2021. That should provide the president with good optics on the campaign trail. The lion's share of the $200 billion in the deal would be in manufactured goods, followed by energy, services and agricultural goods. If the truth be told, much of what China needs from us is on this list.
They want more oil and LNG from America to counterbalance their energy suppliers in the Middle East. U.S. financial services and insurance have long been on China's shopping list since these are areas they need in order to broaden and add competition to their own sectors. Telecom, cloud computing, and intellectual property are also on the list. As for food imports, all of the goods they have agreed to import are in short supply in their country.
Supposedly, some provisions on intellectual property enforcement and protections against forced technology transfers have been included in the Phase One deal. It remains to be seen whether or not these points have any teeth or are just "understandings" between the two countries.
As I have written before, the really tough issues have been rolled back and await a Phase Two agreement. The president has already warned that this will take time and probably won't happen before the November elections. Peter Navarro, an assistant to the president and one of the administration's most hawkish on China, wants China to stop subsidizing its state-owned enterprises. He also wants China to halt what he called "cyber intrusions" that hack into American businesses and steal our trade secrets.
Clearly, intellectual property protections and technology transfers, along with state subsidies, are going to mean changing some of the fundamental tenants of the Chinese economic and political system. That could take years to achieve, even if the Chinese were willing to do so.
In the meantime, the threat of tariffs and more tariffs remains on both sides and will act as a barrier and a weight not only on both countries' economies, but also on the rest of the world. There is already concern that the president will now turn his sights on Europe and once again threaten tariffs on their imports as well.
Fortunately for us, throughout the last few years we have enjoyed moderate economic growth and robust employment. Those factors shielded most of our economy (but not the agricultural or manufacturing sectors) from the worst of Trump's trade tirades. What would happen if, over the next four years, conditions change and/or the economy fell into recession? Could the world and the U.S. economy survive four more years like the last three?
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