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The Independent Investor: Looking Beyond Election Speak
| "If you tell a lie big enough and keep repeating it, people will eventually come to believe it." — Joseph Goebbels, Nazi Propogandist
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Republicans warn of impending disaster if the federal government's house is not put in order. If we continue to do nothing about it, Romney, Ryan and the Republicans will most certainly be right. The question is whether the economy can survive the harsh medicine that these doctors prescribe.
The way to balance the budget, according to the GOP plan, is to cut income and corporate taxes, eliminate at least some tax deductions (no details), preserve defense spending (already larger than the next five nations combined), cut Medicare spending in the 2020s, trim other government spending and gradually shrink the deficit and balance the budget sometime over the next 10 years (yeah, right).
In my last column, I examined the fallacy of believing today's promises by politicians that don't come to fruition for a decade or more. Liberal economists argue that the Romney plan would boost unemployment by slashing public spending next year and the year after and most likely drive the economy into recession. But Mitt Romney knows this as well.
In an interview this spring with Time Magazine's Editor–at-Large Mark Halperin, Romney said, "... if you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5 [percent]. That is by definition throwing us into recession or depression. So I'm not going to do that, of course."
There is election speak at its finest. How far apart therefore are the candidates on what they truly intend to do about the economy?
In comparison, President Obama also wants to cut income and corporate taxes. Where they differ at all is in those who make over $250,000 a year. Obama wants to raise taxes on them while Romney doesn't. In the grand scheme of things, the amount of money that taxing the rich will generate will hardly be enough to make a dent in the budget. The real value is in generating drama and stoking voter sentiment with an "us against them" mentality. Occupy Wall Street would be proud.
Both candidates want to revitalize manufacturing, improve job training, make America energy independent and expand free trade. How they differ is on the margin. Whoever wins will most likely implement the same policies as their opponent.
Take energy independence as an example. The candidates would have you believe that if the U.S. were energy independent, pump prices would go down or at least the volatility in energy prices would disappear. Nothing could be further from the truth. Global markets set oil prices not the U.S. All energy independence would mean is that on the margin, U.S. companies would experience higher profits (and our government higher taxes) from higher oil and gas prices. Romney indicates he would rely on domestic oil and gas exploration including off-shore drilling to accomplish that independence. Obama would focus on fossil fuel exploration and development as well as alternative energy sources.
Where they differ the most is in how to reduce spending. Romney wants to cut government domestic programs that will ultimately impact lower and middle-class Americans on the margin more than wealthier Americans, while keeping defense spending the same. Obama would rather cut spending in both areas so that declines in spending would be a bit more modest.
As for regulation, Obama wants to enforce the Dodd-Frank financial regulations while Romney wants to repeal them. However, in the face of on-going wrong-doing by the nation's financial sector, the Romney campaign has been curiously absent in furnishing an explanation on how they would stop these continued abuses by the financial sector.
The point of this exercise is to separate fact from fiction, rhetoric from reality, in what I see as an increasingly confused and jingoistic campaign. Both sides seem to be relying more on one-liners than substantive explanations of policy. The use of misleading data, deliberate falsehoods and confusing statements intended to incite and confuse voters seems to be on an increase as well.
As such I feel obligated to try and make some sense out of this nonsense. In my next column, we'll look at how much power the president really has in implementing the grand visions they promise.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. There are only a few seats left. For more information or to sign up for the course call the OLLI office at 413-236-2190
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.
@theMarket: The Fed Keeps Us Guessing
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The stock market, which has been climbing all summer in anticipation of another bout of easing, took the news in stride. The averages gyrated up and down but never really went negative despite what some perceived as disappointment. News out of Europe helped sustain the bulls and the averages. Expectations that the European Central Bank "might" further ease monetary conditions next week kept the markets buoyant. And if not Europe next week, the Fed could always ease at their next meeting in mid-September.
Grasping at straws might be a good way of parsing the rumors that surfaced on Friday that the president of Germany's Bundesbank has threatened to resign. Bulls were guessing that the only reason he would quit is if the European Central Bank was ready to provide more stimulus against the wishes of Germany. It was rather silly that anyone would believe this story, but consider the timing.
The rumor surfaced just hours before the Fed disappointed the markets. It also occurred on one of the slowest trading days of the year when volume was miniscule and participants were leaving early for the three-day Labor Day weekend. It sure smells like an attempt at market manipulation and it worked!
I have to hand it to the central bankers. Both Ben Bernanke and his counterpart in Europe, Mario Draghi, have learned the lingo that keeps the markets high and happy. Words like "fairly soon" or, in Draghi's case, "exceptional measures," when talking about future stimulus has worked like a charm. In these markets where nothing matters but the next fix from the central bankers, government officials are becoming adroit in parceling out just enough hope to keep the stock markets calm and trending upward.
The stock market has also been developing a more positive attitude thanks to the Republican convention this week. The most recent polls show Mitt Romney in a dead heat with Barack Obama. Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets.
Personally, I would like to see the S&P 500 Index break out of its present range, which has bounced between 1,400 and 1,426 throughout the month of August. It has been encouraging that the bottom level of support has held but so has the resistance at the top. This sideways consolidation is constructive since it has allowed the markets to work off any overbought conditions.
Clearly, no one has made much money in August. We are now entering September, considered the worst trading month of the year in terms of market gains. Some strategists are expecting as much as a 10 percent pullback. As I've written in the past, stocks could easily pull back 3-5 percent at any time, but that's about it. With both the U.S. and Europe's central banks promising to bail out two/thirds of the world's economies, any dip should be contained and simply provide an opportunity to buy equities at cheaper prices.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
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.
The Independent Investor: Separating the Forest From the Trees
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| "We're not going to let our campaign be dictated by fact-checkers." — Neil Newhouse, founder of Public Opinion Strategies
and GOP presidential candidate Mitt Romney's pollster |
Billed as a choice between two distinct and opposing futures for America, the November presidential election candidates are neck and neck. At the center of the battle are two issues: the economy and jobs. Rhetoric aside, how far apart are these men on the issues?
Up until Aug. 12, the media was hard pressed to find much difference between Barack Obama and Mitt Romney. The president was a democrat defending his track record of moderate economic growth while grappling with his unsuccessful efforts to whittle away at an extremely stubborn unemployment rate. Romney, on the other hand, promised change, towing the typically conservative line of less government, less regulation and more reliance on the private sector for job growth.
Cutting taxes and reducing spending were on both candidates' agendas, although the degree of cuts and increases differed. Both candidates were woefully short on detail on just when and how these changes would be implemented once elected. Enter the game changer, Congressman Paul Ryan.
From the moment Romney announced Ryan as his vice presidential selection, emphasis has shifted from Romney's "me too" economic plan to Ryan's "Roadmap for America." The Ryan plan has been touted as both the best and the worst program response to the nation's economic wounds ever created. The Magna Cartae it is not, nor is it anything like Ayn Rand's "Atlas Shrugged."
For those who have read all three (I have) , Ryan's plan presents a conservative point of view that has been largely espoused by the Republican tea party over the past few years. There is a lot of truth in what Ryan writes and believes, but many of his policy recommendations are in the wrong place at the wrong time, in my opinion. The best that can be said for the document is that it provides a solution to our fiscal issues, something the Democrats are sorely lacking in their own platform.
The problem for conservatives is that Ryan isn't running for president. In fact, if one looks back through history, vice presidents have had little impact on policy once their boss has captured the White House. So those who focus on Ryan's proposals are missing the point. Ryan's appointment to the ticket is meant to rally the hard-core conservatives, the tea party, if you will, to Romney's side. It does not mean that any of Ryan's suggestions will ever become part of a Romney economic plan.
In the meantime, the Democratic predictions of the end of Medicare and Medicaid as we know it if the Romney/Ryan "Comeback Team" is elected are not true. Ryan's plan to move Medicare from a defined-benefit fee-for-service system (where government is your insurance) to a defined-contribution system (where government writes you a check to help you pay someone else for insurance) is a long-term plan.
At the earliest, it won't take effect until sometime in the 2020s. Now, come on, do these politicians really expect us to believe that for the next 8-10 years every administration, regardless of party affiliation, is just going to sit by and agree to abide by Ryan's proposed Medicare changes in the 2020s?
There is no longevity in policy-making. Remember last year's deficit ceiling battle? The bi-partisan Super Committee failed to come up with a compromise in cutting the deficit in exchange for a higher national debt limit. So both parties agreed to automatic cuts in defense spending and entitlement programs. They are scheduled to be enacted on Jan. 1, 2013. Here it is less than a year later and both parties are already planning to change the agreement after the elections.
Nonetheless, the notion that Medicare and Medicaid will end "as we know it" if the Republicans are elected have the elderly up in arms. In a recent Pew Poll, over 55 percent of respondents, 65 years and older, were dead set against Ryan's plan. Over 51 percent of respondents said it was more important to leave Social Security and Medicare alone than it was to reduce the budget deficit.
In my next column, I will continue to separate the wheat from the chaff, as I see it, in the hope that readers will benefit from a little critical thinking as it applies to November’s elections.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
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.
The Independent Investor: Middle Class Dilemma
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That was a quote from the Pew Research Center study released this week. The study shows that families with household incomes ranging from $39,000 to $118,000 have seen their incomes falling backward for the first time since the end of World War II.
At the same time, the U.S. Department of Agriculture (USDA) said the costs of raising a child in 2011 increased 3.5 percent from 2010. But those statistics only include child support to age 17. The USDA also considers middle-income parents as those with incomes ranging from $59,440 and $102,870, which is slightly lower than the Pew study.
Families in the Northeast, especially those residing in urban localities, have the highest child-rearing expenses with housing commanding the highest share of expenses (30 percent). Costs also include transportation, child care, education, food, clothing, health care and other miscellaneous expenses.
In my opinion, those cost numbers are grossly understated. If you plan to send your kid to college, and you include the lost income if one spouse quits working to raise your child, then costs escalate substantially. In past columns, I have addressed both the rising costs of college education and the cost of a spouse (usually the mother) who sacrifices career, income and retirement savings to raise a child. I estimate that both of these additional financial hardships could cost your family another $500,000 or more — two or three times the USDA's estimate.
These costs are escalating as 85 percent of middle-class Americans say they are having the worst time in 10 years making ends meet. Most of this demographic group, according to the Pew study, has been forced to cut spending last year as health-care costs and college tuitions have increased, as well as basic items like food and clothing.
Readers should not discount the middle class's dilemma as simply a rough patch that will clear up in a year or two, once the economy begins to grow again. The Pew study is simply more proof that the American Dream has turned into a middle-class nightmare. Occupy Wall Street was right. The middle class is shrinking.
In 1970, the share of U.S. income that went to the middle class was 62 percent, while wealthier Americans received just 29 percent. By 2010, the middle class received 45 percent of the nation's income, compared to 46 percent for upper-income Americans. The Census Bureau reported last year that although income fell 1.2 percent for the wealthiest Americans, it dropped 4 percent for the bottom fifth of households. That trend is accelerating. We are rapidly becoming a Third-World Nation in terms of income disparity.
It makes one question how believable the claim by conservatives that the remedy for this middle-class dilemma and for the growing separation of wealth between the have and have-nots is by letting the "capitalistic system work." It sounds quite similar to the same "trickle down" economic policies that have created the circumstances we find ourselves in today.
Fool me once, shame on you; fool me twice, shame on me.
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.
The Independent Investor: Is Krugman Right?
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A common fallacy among Americans is that Franklin Delano Roosevelt's economic policies extricated the United States from the Great Depression of the 1930s. Others, with more knowledge of those times, recognize that it was the onset of World War II and the U.S. preparation to wage that war, which truly pulled us out of that economic mire. But stripping that truth down to its bare essentials leaves us with one fact.
To pull this country out of the Great Depression, government spending had to be raised to 43.6 percent of GDP in 1943, 43.6 percent in 1944 and 41.9 percent in 1945. Only in 1946 did spending drop back to 24.8 percent. In his new book, "End This Depression Now," Krugman argues that the answer to our present economic dilemma, which he terms "a second depression," is to spend our way out of recession as we did during WWII.
As today's leading proponent of legendary, supply-side economist John Maynard Keynes, Krugman believes his mentor had it right when he advised government that "the boom, not the slump, is the time for austerity." He argues that Keynes' definition of a depression, "a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or toward collapse," applies to our economic reality today. We are in what Keynes referred to as a liquidity trap in which an indebted private sector is so intent on rebuilding its savings that even interest rates of zero cannot tempt it to borrow and spend enough to get the economy working again at full capacity.
Sound familiar?
Of course, Krugman's ideas fly directly in the face of all the austerity rhetoric that is emanating from both political parties during the run-up to November's presidential elections. Both parties seem to believe that the only way forward is to either raise taxes on some; (or cut taxes on others) and cut spending.
In fact, raising taxes and cutting spending is exactly what Herbert Hoover did back in the early 1930s, just as the economy was struggling to recover from the crash of 1929. In my opinion, Hoover's austerity policies, like those that many conservatives are advocating today, are what drove this country from a prolonged recession into its first Great Depression.
In essence, Krugman is suggesting we increase government spending back to the levels of WWII, if necessary. Today, government in total spends around 36 percent of GDP, if you include all goods, services, cash and transfer payments. That represents over one third of all spending in this country. Clearly Krugman's answer to solving this country's woes would make government bigger while creating the most powerful economic entity we've seen since the 1940s.
In the end, we may very well do just what Krugman suggests. I don't believe the majority of Americans will consciously vote for austerity. Raising their own taxes and cutting spending that they need — especially on Medicare and Social Security - would not be in our individual interests, regardless of how well it may be for the future posterity of our children and children's children.
The two biggest concerns American voters will have as they vote this year is staying employed or getting re-employed. Worries over the debt ceiling, the deficit and America's future concern us theoretically but those issues do not impact our pocket book today. If Americans are faced with a program of prolonged austerity after the November elections, I am convinced that they will vote the responsible party out of office as soon as possible.
Under that scenario, if borrowing, spending more and ultimately inflating our national debt away is easier (and safer) than austerity, then guess what most politicians will do? If you doubt that, ask yourself who was the more popular president — Hoover or FDR? That's my point.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
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.
