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The Independent Investor: Power Shift III
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In the aftermath of the financial crisis, Americans demanded a change in the regulatory system. Since the financial sector was responsible for engineering the near collapse of the global banking system, it is Wall Street that has borne the brunt of the government's expanding role in the markets.
As in everything, increasing government regulation is meaningless without the power to enforce it. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in July 2010. Hailed as the most comprehensive and far-reaching reform since the 1930s, the 848 page-long bill has far-reaching power over so many areas of American life that it requires five federal agencies just to enact portions of the rules and regulations.
Essentially the bill was supposed to re-write how Wall Street did business. Everything from predatory lending in the mortgage markets to putting an end to hidden fees and penalties on credit cards was included. New rules would end speculation in the derivatives markets and there would be no more danger of "too big to fail" institutions such as AIG dragging the rest of the financial system down with it.
A plethora of new government powers and agencies would not only have authority over the financial system and the economy that would end up affecting veterans, students, the elderly, minorities, investor advocacy and education, whistle blowers, credit rating agencies, municipal securities, the entire commodity supply chain of industrial companies and much, much more.
In signing the bill, President Obama proclaimed that "these reforms represent the strongest consumer financial protections in history." Before the ink was dry the battle had begun. Wall Street and its cronies faced the largest power grab in its history and they were not about to go down without a fight.
For the last two years a combination of Republican, bankers and other corporate entities have done everything in their power to reverse the legislation or at the very least prevent its enactment. Using everything from lawsuits to loopholes from intimidation of the regulators and innumerable stalling tactics, the opposition is betting that if they can stall the legislation until the election, then a newly-elected Republican president and Congress can repeal the act as they plan to do with Obamacare and just about every other piece of Democratic-sponsored legislation.
Their tactics are understandable if regrettable. No one likes to relinquish power and in this case there is a lot of money at stake. Money greases the wheels of industry, but also the re-election chances of all politicians. The two are umbilically connected in this country. The wonder is that any sort of legislation to herd in the excesses of Wall Street passed in the first place.
I credit you and me for that success. The American public was so outraged by the greed and thievery of our nation's banks, brokers and insurance companies that we demanded some action. Even the politicians had to cave in to the public's demands if they wanted to have a chance at re-election. But passage and implementation are two different things. As far as criminal indictments, well that's taking the whole thing a bit too far. No one in Washington is going to bite the hands that feed them that drastically.
So while the excesses on Wall Street continue — new derivative trading scandals, mini flash crashes, interest rate rigging by the world's largest banks — the regulators avoid regulating. One wonders therefore if the power shift that has occurred in this country is really from the people to a handful of politicians and their financial handlers on Wall Street.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shift Part II
The Independent Investor: Power Shifts from Wall St. to Washington
The Independent Investor: Power Shift Part II
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Depending on whose sound bite you are listening to, government spending has gotten bigger or smaller over the last few years. Oddly enough, both sides are correct. It all depends on what statistics you are quoting.
President Obama claims that federal spending, under his administration, has risen at the lowest pace in nearly 60 years. His statement is accurate, as long as you remember that the 2009 fiscal budget is considered part of his predecessor's legacy. As such, the $700 billion TARP bailout and the $831 billion stimulus package occurred at the end of President Bush's term, even though Barack Obama signed the stimulus bill and voted as a senator for TARP. How does that work?
Part of the confusion lies in calendar versus fiscal year accounting. Before 1842, the federal fiscal year was the same as the calendar year. Since then it has changed several times and since 1977 the government's fiscal year begins on Oct. 1 and ends on Sept. 30, so the spending in 2009 was pinned on Bush since he was president on Oct. 1, 2009. I guess that is fitting since the cause and result of the financial crisis that continues today occurred while the Republican Party was in power.
Despite the administration's double talk, the fact is that 2010, 2011 and 2012 are three of only four fiscal years since 1945 that the federal government spent more than 24 percent of GDP in a single year. The Office of Management and Budget predicts that this year federal spending will hit 24.3 percent of GDP. That is about what the government spent in fiscal 1942, when the Japanese attacked Pearl Harbor and America went to war in both Europe and the Pacific.
Before we look at spending today, readers need to understand that there are at least two measures of government spending. The one most quoted by the economic journals and politicians we'll call "G," which is how much federal, state and local governments directly contribute to economic activity measured as a share of Gross Domestic Product (GDP). It is the sum of all the goods and services they provide.
There is also a broader measure that captures all the spending in government budgets. This figure includes all of "G" plus interest payments on our debt, transfer payments through programs like food stamps, social security, Medicare and Medicaid, unemployment insurance, housing vouchers, Veterans benefits, et al. As you might imagine, when you add all this into "G," government spending, as a percentage of GDP, turns out to be closer to 37 percent. In comparison, the average spend since 1960 is about 32 percent.
Now that is down from the 39 percent that it hit in the second quarter of 2009, when the financial crisis was at its peak. If we confine our analysis of government growth since then, government spending has decreased whether you use "G" or the broader measure.
However, if you measure government growth from the beginning of the decade, when government spending totaled just 30 percent of GDP, then yes, government has grown by a whopping 6 percent in the last 12 years.
Beneath the statistics we can see that the government's economic role has clearly grown larger and with it the power it welds. Its historical role as provider of public goods and services remains but is shrinking as more and more of government's budget is spent on transferring cash and in-kind payments to taxpayers directly through programs like Social Security, Medicare and Medicaid.
This is no accident. Remember that an entire generation of Americans is close to or already in retirement. Baby Boomers are tapping Social Security while experiencing mounting health issues as they grow older. They are turning to Medicare to answer their needs. And why shouldn't they?
Throughout their working careers, these hard-working Americans, (who fought three wars for this country in their lifetime along the way), have contributed paycheck after paycheck to guarantee that when the time came, Social Security and Medicare would be there for them when they needed it. So, yes government has grown larger. It is the "why" of it that so many politicians conveniently forget.
As the government's role in the economy gains force, so does its power. But power is agnostic. It can be used for good or for evil. We have seen how Wall Street has abused power. In my opinion, government spending that is used to honor its contract with America's retiring workers is a proper use of that power. Whether this country can afford to honor its commitments is another story and a question we will answer in a forthcoming column.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Profit-taking: An Opportunity
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Now normally, history doesn't repeat itself but it does rhyme, more often than not. The first Federal Reserve Bank quantitative easing (QE 1) was announced on Nov. 25, 2008, and was formally launched on Dec. 16 of that year. QE II kicked off on Nov. 3, 2010, and QE III was announced last Thursday. After both the QE I and II announcements the markets rallied and then spent several days consolidating those gains. That seems to be the pattern we are experiencing now.
Investors who purchased equities during that consolidation phase were greatly rewarded. The stock market after QE1 gained 29.8 percent during the next 12 months. After QE II, the markets gained another 13.2 percent in just six months. The lion's share of those gains came within the first three months after the announcements. This time around, stocks rallied in anticipation of a third easing so some of those gains could already be in the market.
Nevertheless, a fairly safe prediction would be that over the next 6-8 weeks we should see a substantial rally. That should take us just into the November elections or slightly after. That is where things could get a bit dicey, in my opinion.
The stock market, using the S&P 500 Index as a benchmark, is already up almost 16 percent since I advised readers to get back in the market. If the stock averages were to rally into the November elections, we may be looking at a gain of greater than 20 percent for the year. On Wall Street, there are three kinds of investors: bulls, bears and pigs. I try to avoid "pigging out" when it comes to profits so, by November, it just might be time to cut and run.
In the aftermath of the general elections, there are a multitude of economic issues that the lame-duck Congress will either face or flunk. Chief among them is the often mentioned "Fiscal Cliff." Will the makeup of the House and Senate be such that we can avert across-the-board tax increases and deep spending cuts by Jan. 1, 2013? Will politicians agree to raise the debt ceiling once again? If so, what will that do to the U.S. credit rating?
Those are only some of the gnarly issues Congress and the president–elect will face. Depending on who wins, the first quarter of 2013 might also be a bit stormy. Given that I have no idea of how all of this is going to play out, November might be a great month to take profits this year. There is a risk that things may go absolutely wonderful. Congress and the president could make up. A raft of great legislation could pass before the end of the year and this year's Christmas rally could be stupendous. In which case, I would have left some money on the table by getting out too soon.
So be it. No one ever went broke by taking profits. This year has been a good one so far. Although it is only late September, it is time to begin thinking about an exit strategy. Hang in there for now because I do think there are further gains to be had in the markets. But plan for the future.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shifts from Wall St. to Washington
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The financial crisis of 2008-2009 turned the economy and the private sector on its head. Hobbled by the largest crisis in generations, Wall Street was drowning. With the banking sector about to implode, the Street had no choice but to ask the U.S. Treasury for an unprecedented bailout. As one corporation after another (think the auto industry) faced the threat of bankruptcy, the center of financial decision making shifted to Washington, D.C. It remains there today.
Government's role in the economy is nothing new. For many years it has guided the overall pace of economic activity, attempting to maintain steady growth, high levels of employment and price stability. For decades after the Depression of the 1930s, it relied a great deal on fiscal policy to combat the recurring recessions the nation faced.
During the 1960s, the heyday of fiscal policy, the president and Congress played a leading role in directing the economy. However, ideas about the best tools for stabilizing the economy changed after that as a period of high inflation, high unemployment and huge government deficits undermined the country’s faith in fiscal policy. Enter monetary policy (the control of the nation’s money supply) administered by the Federal Reserve Bank and its tools of interest rate manipulation.
In the midst of the panic of 2008-2009, as giant banks went broke and insurance companies teetered on the edge, the government was firing both monetary and fiscal barrels at the problem. The combined policies worked in the sense of staving off a worldwide financial meltdown and another Great Depression. Since 2008, however, because of partisan politics, fiscal policy has fallen by the wayside. Today only the monetary policy option remains to prevent another recession.
In this election year, opposing forces are criticizing the Fed for doing too much or too little to grow the economy. Conservatives say the Fed is creating inflation down the road by its stimulus policies while driving down the value of the dollar. Some have actually accused the Fed of treason in even considering further quantitative easing. Liberals have argued the opposite: criticizing the Fed for being overly worried about inflation and not doing enough to lower the unemployment rate.
Since 2007, the Fed has been engaged in a historical and largely uncharted area of economic manipulation that transcends anything attempted in our country's past. They have been at the center of propping up or selling huge institutions, making loans to banks and others in entirely new and radical ways and buying upward of $2 trillion in government debt and mortgage-backed securities. There is no question that the Federal Reserve Bank, in my opinion, has assumed the throne of financial power in this country by default.
Its power, unlike the private sector, is concentrated in a handful of individuals with considerable independence from the President and the Congress. Both the President and the Congress have all but abdicated their own power to control the economy if not in words, certainly by their actions. The polarization of both parties since the 2008 elections has made fiscal policy initiatives impossible.
The Federal Reserve Bank, through its chairman Ben Bernanke, has on numerous occasions begged the president and both parties to at least share the power via new fiscal policy initiatives. To date that call has been rejected in the name of politics. In my next column I will examine just how big the government has grown as a percentage of GDP and how power could become even more concentrated within our nation's capital in the months and years to come.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Game Changer
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This is a game changer, in my opinion, so hold on to your hats because the markets are definitely going higher. The only question is how high?
I won't bore you by regurgitating all the moves the Fed has made, but I will give you the bottom line. Interest rates on the short end will stay low through 2015. The Fed is going to target the mortgage market (read housing sector) by buying up all the mortgage-backed securities they can find. That should both drop lending rates further and also spur the banks to start lending money to Americans who have not been able to obtain mortgages or refinancing.
These latest moves by the Federal Reserve Bank are actions I have been advocating since writing my column "What the Markets Missed" on Sept. 22, 2011. It actually goes further by putting everyone — the markets, the politicians, the corporations and small businesses — on notice. Fed support will be on-going. Why is that important?
Because up until Friday, the Fed's wait-and-see attitude toward additional stimulus created a great deal of uncertainty within the markets and the business world. It also created what I call a "start and stop economy." In such a business climate, both Fortune 500 corporations and small businesses cannot plan, cannot hire, and will not invest.
The Fed is not only removing any uncertainty that this might have been their last QE move, but goes a lot further by putting everyone on notice that they are committed to stimulate for as long as it takes — even after the economy starts to grow again.
Remember readers that no matter how much support the Fed is willing to contribute they can't solve the unemployment problem alone. Once again, Chairman Ben Bernanke reiterated that without fiscal policy, the unemployment situation is not going to improve very much.
So bear with me as I fantasize about the near future. In my opinion, Ben Bernanke just handed the presidency to his boss, Barack Obama. In exchange, so this story goes, the newly re-elected President Obama will forego partisan politics, work with the opposition in both the House and Senate and implement a full employment policy through fiscal stimulus.
But what specific policies are the Republicans and Democrats going to implement in order to reduce unemployment? Both sides keep jawboning about "getting America back to work" but exactly how are they going to accomplish that? How, for example, is cutting spending and raising taxes either directly (taxing the rich) or indirectly (cutting services to the middle class and poor) going to increase job growth? Readers/voters should demand those answers now — before voting for one politician or the other.
But back to the markets, with "risk on" once again, dividend and income funds should take a back seat to more aggressive areas. That doesn't mean dividend stocks won't still go up. They will, but just not as fast. Other more defensive areas such as utilities, consumer and durable goods, healthcare and such will also see less price appreciation than some other sectors. For those who still hold long-dated U.S. Treasury Bonds, get out of them right now. The Fed is no longer supporting that market and as the economy strengthens the prices of these bonds are going to plummet.
Some areas in the stock market that have lagged the overall markets could do quite well between now and November elections. The materials sector seems ripe for a rebound as do the financials and industrial sectors. Emerging markets, which are also top heavy in commodities, could catch up fairly quickly.
I am not sure how high the markets will go before succumbing to a bout of profit taking but, given the background of central bank stimulus, I remain a buyer of pullbacks, which has been my advice since early June. It was a great summer and it could be an even better fall.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
