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The Independent Investor: Can America Afford Sanders' promises?

By Bill SchmickiBerkshires columnist
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?
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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@theMarket: Corvid-19 Impact Coming Home to Roost

By Bill SchmickiBerkshires columnist
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.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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The Independent Investor: Can Politicians' Promises Be Believed?

By Bill SchmickiBerkshires columnist
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.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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The Independent Investor: Economic Inequality Becomes Campaign Issue

By Bill SchmickiBerkshires columnist
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.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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@theMarket: Central Banks Stem Coronavirus Fallout

By Bill SchmickiBerkshires columnist
Financial markets rebounded this week, despite the escalation of the number of coronavirus cases worldwide. The upturn may have surprised some, but their mistake was underestimating the power of central banks to support the markets.
 
The bear case last Sunday evening was that the Chinese stock market would crater upon opening after being closed for Golden Week, the traditional Chinese New Year. While Shanghai did open down 9 percent, it quickly reversed and spent the rest of the week climbing out of that hole.
 
The main reason for this rebound was the announcement by Chinese authorities that they were prepared to support their financial markets. Publicly, they announced a $22 billion injection into the banking system to provide additional liquidity and support the Chinese currency, the yuan. Here at home, our Federal Reserve Bank continues its "Not QE" repo market operations. Who knows what other actions other central banks have also implemented to calm markets this week?
 
The end result of all this additional money hitting the system was that financial markets once again climbed higher and higher until U.S. markets not only recovered all they had lost (less than 3 percent), but went on to make new historical highs.
 
Last week, I advised investors to look beyond this coronavirus scare. I was expecting no more than a 5 percent correction at worse, so the quick dip and recovery seems to have confirmed my views. That said, we do need a pause of sorts after five days of gains and that was what happened on Friday.
 
The labor market seems to be hanging in there, according to the latest non-farm payroll data announced on Friday. U.S. employers hired more workers than economists had expected. Forecasts were for gains of 165,000 jobs, but the number came in at 225,000. Wage gains were modest, bringing the total to 3.1 percent year-over-year. While a good report, I wouldn’t get too excited about it.
 
The good weather we have had over the last month had more to do with the surprise wage gains than the economy. That’s not to say it wasn’t a good number; just a little inflated in my opinion. I expect that there will be some ups and downs in the macroeconomic numbers both here at home and around the world over the next few months. The vast majority of economists are convinced that the Chinese-born epidemic will have an impact on economic growth. Exactly how much is impossible to predict.
 
China appears to be doing all they can to alleviate the worst effects on the economy. They have already lifted tariffs on a number of American goods this week and are promising a great deal of fiscal and additional monetary stimulus to combat the expected slowdown in the economy due to the coronavirus. However, there will be an impact and when China sneezes, the rest of the world catches a cold, including our own country.
 
One positive by-product of the unfortunate virus and subsequent sell-off is the US Advisors Sentiment survey. Regular readers know I watch bullish sentiment as a contrarian indicator of where the markets might be heading. This week, the number of bulls tumbled from 52.8 percent (a sure-fire indicator that a correction was in the offing) to below 48 percent, which is a much more reasonable number.
 
I know that the higher the markets climb, the more nervous investors may get. That’s a good thing. There is very little exuberance among my clients and given the continuous stream of negative events (geopolitical or otherwise) that we face on almost a daily basis, it is understandable. Yet, remember my "Walls of Worry" principle — markets climb walls of worry. I see further gains ahead, so stay the course. The upside may surprise you.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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