@theMarket: Pandemic Fears Decimate Markets
The COVID Crash of 2020 crushed the world's stock markets this week. The average decline in the United States topped 14 percent. How much further will they fall and, more importantly, what should you do about it?
My first bit of advice is to refrain from checking how much you lost in your retirement account. Why? Because it will only increase your angst and might trigger the emotional impulse to sell everything before you lose even more.
Next, lets look at the markets. There are two unknowns driving the markets lower. The first is the fear that the Coronavirus (COVID19) will get worse. Investors fear that self-imposed quarantines will be announced here in the U.S. and people will get sick and may even die. That could happen.
Whether our worst fears are realized or not, the damage done by this virus worldwide has already had an impact on global economies. We just don't know how much and for how long. That is the crux of the matter as far as stock and bond markets are concerned.
It is too early to predict the economic fallout from this calamity, but it doesn't stop Wall Street from guessing. Unfortunately, these guesstimates take on a life of their own. One analyst predicts that China, for example, will see zero growth in the first quarter of the year. The next strategist does one better and predicts negative growth. As time goes by, and the markets fall lower, the case for the worst-case scenario builds and builds.
By Friday, for example, the general sentiment among traders was that earnings for American companies would need to be drastically reduced for this year. And if that is the case, stocks just have to be too expensive at their present level. As the expectations for earnings drop, so do stock prices.
And it isn't just stocks that are falling. Commodities are plummeting as well. Oil has dropped below $45 a barrel. Gold, supposedly a safe haven, while initially rising, has reversed and is also falling toward $1,600 ounce. The dollar is gyrating as well. The only real safe haven so far appears to be U.S. Treasury bonds. Our government bond benchmark, the 10-year U.S. Treasury bond, is at its lowest yield ever recorded. Friday, it touched 1.17 percent and could drop to 1 percent before all is said and done.
In the past, whenever this kind of selling hit, the financial markets looked to the Federal Reserve Bank to come to the rescue. This time around, while the Fed may step in and cut rates, the impact would be largely symbolic. It would not hinder the spread of the virus and by the time the effects of an interest rate cut hit and worked their way through the economy, the COVID19 damage would already have been done.
So, what are my readers to do as the averages are once again in free-fall on a Friday? Last week, I suggested that if the S&P 500 Index broke a certain level, we could see a fairly steep decline. That happened, although the extent of the decline surprised everyone, including me. I expect we will see a bounce of some magnitude soon, possibly sometime next week. If so, it would likely signal a period of ups and downs as the markets attempt to find a floor.
My suspicion is that one should not expect a "V" shaped recovery in stocks this time around. There will be a bounce, then a re-test and then we will see. Until there is more and better information of how badly the global economy has been damaged by this COVID19, markets will remain unsettled. In the meantime, if you have any cash, pick your spots and begin to invest it.
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The Independent Investor: Can America Afford Sanders' promises?
|The presidential hopeful speaks last week at an outdoor event at Santa Ana Valley High School in California.|
On the eve of yet another Democratic primary, the policies and promises of the front runner, Bernie Sanders, haves suddenly come into focus for many voters. The price tag of his platform could be enormous -- as much as $60 trillion. Are these promises just waiting to be broken?
Last week, I focused on the promises Donald Trump has made and his track record on fulfilling them. He gets at least a "B," although things like his infrastructure projects and restoring manufacturing were big failures.
In Bernie's case, as a big picture guy, he is arguing for a new vision of America's future. His platform lists seven major spending programs (and a bunch of little ones). The price tag for a Green New Deal, universal pre-kindergarten and childcare, tuition-free public colleges and universities and public housing, is estimated to cost about $23 trillion. Universal health care would add anywhere from $22 to $34 trillion.
In addition, a proposal to increase Social Security benefits, an infrastructure program, a federally guaranteed jobs program, etc. could boost that total by several trillion dollars more. This money would be spent over a decade and would fundamentally change the direction and vision of our society.
Bernie's program would double the amount of government spending throughout the next decade and would increase the share of federal spending by 20 percent. It would make Franklin D. Roosevelt's New Deal look like peanuts, since the price tag of Roosevelt's efforts increased federal spending as a share of Gross Domestic Product by a mere 8 percent.
Of course, in the midst of partisan politics, the actual cost of these ideas could be far higher (or lower). How does Bernie intend to pay for it? Sanders has said $30 trillion in new taxes would come from businesses and the rich. Another $12 trillion from revenue and savings, and a $1.2 trillion cut in defense spending. He also argues that $6.4 trillion would be generated from earnings from his Green Deal program.
The director of the Progressive Policy Institute's Center for Funding, Ben Ritz, concluded that Sanders' numbers would only generate about $29 trillion in taxes and revenues. That would still leave a big short fall and would need to be made up by either borrowing or by taxing the middle class. To put that into perspective, the entire personal income tax over 10 years would amount to the same amount of money. So, what about borrowing the money?
Both bond investors and more and more economists are concluding that raising the money in the debt markets is entirely doable. In fact, it has never been cheaper for the U.S. government to borrow money. U.S. treasuries this week for at least the next few years.
For the last 40 years, interest rates have been in a broad decline, while the national debt has moved in the opposite direction. There was a time when Republicans were supposedly the watch dogs of the budget deficit and government spending, but that is no longer the case. Under Donald Trump, the GOP spends more money than a drunken sailor and no one cares. Democrats don't seem to care either. Deficits have grown and are approaching 5 percent of GDP and hit an all-time low with as little as 1.25 percent on the benchmark 10-year bond. It appears that this trend is here to stay federal debt owned by the public is above 80 percent of GDP this year.
It seems from this perspective that Bernie Sanders' programs could be accomplished simply by issuing U.S. Treasury 100-year bonds every year for the next decade. Of course, Sanders' knows this as well as anyone, but chooses (because the optics are better) to argue he can finance his program by a platform of taxes and revenues. That is nothing new. Every politician in modern history promised the same thing.
The question one must ask is not whether it is affordable, because most Americans tend to live above their means and have no problem going into debt to accomplish that, but whether or not you embrace Sanders' vision of America's future. It is not a question of socialism. That horse has left the barn. Corporate Socialism is the reality of our everyday lives, in my opinion. It is simply a question of what kind of socialism you want to embrace, his or Trump's?
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@theMarket: Corvid-19 Impact Coming Home to Roost
It began Sunday night with a warning from one of America's largest icons. Through the week, other companies followed suit, issuing warnings that the China-spawned virus is beginning to impact revenues and profits. Investors are bracing for further announcements in the days ahead.
Now that the Corvid-19 virus has been spreading out through the world for more than three weeks, some companies are beginning to get a handle on at least some of the damage that will incur to their businesses as the virus persists. Apple was the first major company to warn investors that their iPhone sales in China will take a hit in the first quarter. Since then, a number of companies have sounded the alarm as well.
But it isn't only corporations that have businesses in China. Companies as diverse as General Motors and Nintendo are telling analysts that their supply chains, which begin in China (where many components are made), have resulted in shortages. Some investors were caught up short by the news.
The markets assumed that once the Lunar New Year was over and quarantines were lifted in various cities, millions of workers, who were visiting their hometowns, would return to their factory jobs in the big cities. Instead, these workers stayed put. Fear of catching the infection at work convinced many to remain where they were. Others were afraid that if they did show up for work, they would be forced into quarantine.
Compounding this dilemma, new findings indicate that some recovered patients still show traces of the virus when tested. Similar cases were discovered in Canada. This further complicates the situation for both workers and quarantine officials. Li Xinggian, who runs China's Commerce Ministry's foreign trade department, is warning everyone that the growth rate for China's imports and exports will decline sharply in January and February.
And while officials in China and elsewhere are still optimistic that the economic downturn will be swift but short, Chinese President Xi Jinping, was quoted in the South China Morning Post on Friday as saying the corona virus epidemic has not reached its peak despite a two-day drop in the daily number of infections reported.
Last week, I advised readers that the future of the stock market depended upon the next development in the epidemic. If things were perceived to be getting worse, the markets would pull back. That is happening as you read this. The question is by how much? Again, that depends on the virus.
More and more companies may need to forewarn the markets that up coming quarterly earning's reports won't be nearly as robust as investors expected. In addition, the longer the fallout in production persists, the longer it will take for the supply chains that feed so many companies' profits and sales will require to get back to normal. Remember, too, that the benchmark index, the S&P, is made up of 500 companies, most of which are large multinationals that derive the lion's share of their profits from overseas.
Since we don't know the future risk posed by Corvid-19, what can we do? Is the present pullback the start of something deeper, or simply a much-needed dip? My advice is to watch the levels of the S&P 500 Index. So far, it is simply a dip. We could get down to the 3,325 area (give or take) and bounce from there. If, on the other hand, we cut through that level, then readers can expect a further drop of maybe another 3 percent or so, at the worse.
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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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