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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@theMarket: Central Banks Stem Coronavirus Fallout
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.
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The Independent Investor: The Great Tax Migration
Americans have been moving from high tax states to lower tax states for decades.
Climate, cheaper housing prices, less congestion, and jobs are some of the reasons behind such moves. That trend, however, has added taxes to that list, thanks to the Tax Cuts and Jobs Act of 2017.
Many of those reasons for moving have been with us ever since Horace Greeley, the American author and newspaper man, reportedly first advised America's youth to "Go west." Back in 19th-century America, the country had embraced the concept of "Manifest Destiny." The Horace Greeleys of the world had argued that it was inevitable, justified, and our God-given right to expand throughout the continent. That turned out to be good for the white guys but bad for the Indians, but that's a different story.
Today, I would amend that saying to include the South and any other state where there are lower, or no state income taxes. In truth, most state residents are concerned about their total tax burden — property taxes, incomes taxes, and sales and excise taxes. But over the last two years, many of those who have moved have done so based on the changes in the federal tax code.
The 2017 federal tax law, which President Trump signed after a party-line vote in Congress, limited to $10,000 the state and local tax payments that families can write off on their federal income taxes if they itemize deductions.
The impact was devastating to those taxpayers in income tax states that were singled out by the Republican-controlled Congress. For many lower-income or retired families, it was the straw that broke the camel's bank. Those who live in New York state, for example, found that they were now paying 2 1/2 times the tax burden of their counterparts in Alaska. As a result, a great migration appears to be gathering steam. The top states Americans are fleeing from include New Jersey, New York, Illinois, Connecticut, California and others.
Those states which are "benefiting" from this trend include Florida, Texas, New Mexico, North and South Carolina, Washington, and Arizona, among others. If you look at the total tax burden (as opposed to just the state income tax), Americans are still clearly being driven by the overall tax burdens. The average state tax burden of the inbound migration states totals 7.88 percent compared to 9.55 percent for the top 10 outbound states.
As we enter 2020, the migration continues unabated. Conservatives are crowing over the trend, while liberals believe they have been singled out for retribution by the GOP and the president. They complain that it is no longer a country of the people, by the people, and for the people unless you are a Trump supporter. As blue states struggle with maintaining services for their enormous population centers, more and more middle and lower-income families have had enough. And that's the rub.
Take me, solidly middle-class. I moved from a higher tax state (New York) to a lower tax state (Massachusetts). Granted, Massachusetts taxes are not much lower, but it did make a difference, especially when it came to state and local property taxes. And given that mortgage tax deductions are now capped, I decided not to take out a mortgage on my new condo. Bottom line: I reduced my overall tax burden considerably. It was a win-win for me, but not so much for Massachusetts.
I am in my 70s, and since moving, my health has deteriorated. Over the last five years, my hospital visits have been numerous. As you might imagine, my overall medical expenses have gone up, but the costs to my new state Medicare department have skyrocketed because of me. In addition, I am enjoying all the benefits the state offers in infrastructure, elder-care centers, discounts, etc. and pay relatively little back in taxes. And because I downsized when I moved, I no longer pay much in property taxes because my condo is much smaller than the house I sold in New York.
Good for me, but not so good for Massachusetts.
How many other migrants are like me? We already know that many who are moving are retirees or the elderly (think Florida and the Carolinas), who no longer pay much in income taxes anyway. Like me, they are also more likely to buy something much smaller, or may even decide to rent. You can bet, as they get older, they too will be consuming a larger and larger share of these low-tax states' goods and services. And since most of them are coming from blue states, they will be bringing their high-brow, liberal political thinking with them.
There might come a time in the not-too-distant future where some of these inbound states will not only be forced to raise taxes just to keep up with all this new demand for governmental services, but may even need to legislate their own state income tax.
Texas, a traditionally conservative "red" state, with no income tax, is a good example of what might be in store for other historically political and fiscally conservative states. Californians have flocked to this great state over the years. However, that is not the entire picture. Property taxes have been the answer for local politicians in their battle to juggle services, an expanding population, and growth.
Today, Texas ranks among the states with the highest share of taxpayers who pay more than $10,000 in property taxes, according to the National Association of Home Builders. At the same time, thanks to all those old hippies from California, Dallas is now a "blue" city. Texas old-timers are complaining that liberals are now making inroads and gaining more political influence in other metropolitan areas. The moral of this tale is to be careful what you legislate. It could turn out that when all is said and done the politicians may have shot themselves in the foot once again.
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@theMarket: Coronavirus Correction
The death toll mounts. The number of cases worldwide builds. Every new update drives the stock market up or down. Where it will end is anyone's guess.
It is called a "geopolitical" event. We suffer through them from time to time. The assassination of Iran's key military leader followed by the Iranian rocket attack on two Iraqi military base that injured dozens of American servicemen was the last such event. We never know when they will occur and, in some ways, these events are simply the price of doing business in the financial markets.
Some market watchers, while recognizing the severity of the coronavirus outbreak, argue that the markets needed to correct anyway. This outbreak was simply the excuse investors needed to pull the trigger and take profits. I believe there is some truth to that opinion.
However, we should recognize that the coronavirus will most likely put a dent in economic growth around the world. Certainly, in the case of China and other nations closer to the epicenter of the outbreak, we can expect a slowdown in economic growth. After all, you simply can't shut down 16-plus major cities during the Chinese New Year, the largest consumer spending day in that country, without consequences to business.
In the U.S., a host of companies should also feel the heat as they too suspend business in their Chinese operations. This quarter's earnings season revealed that 25 percent of company managers expect some impact to their bottom line as a result of this calamity.
There have been some reports in the media (and accusations by others) that the number of cases reported by the Chinese government are being deliberately low-balled in order to soften the blow on business and to reduce the chance of whole-sale panic. So far, the World Health Organization, while sounding a global health emergency, is more concerned about the spread of the virus in countries with weaker health systems than what is happening in China, where more than 10,000 cases have been reported.
While no one can know for sure how long, or what ultimate impact this disaster will have on economies and markets, I believe that like all geopolitical events, they have limited impact and are of short duration. I can see a 5 percent decline in the S&P 500 Index as a predictable outcome, but not much more than that. We are already off 3 percent from historical highs, so I am not talking about much, maybe a decline to 3,200 or a little below that on the index.
This week's Federal Open Market Committee's decision to hold interest rates steady turned out to be a snooze fest for investors. In the Q&A session after the announcement, Chairman Jerome Powell did mention that the Fed planned to begin tapering their purchases of short-term U.S. Treasury bills by the second quarter of this year. He reiterated that the purchases they have made since last September were "not QE" and the Fed could not be held responsible if the financial markets thought differently. Maybe investors are finally beginning to believe that, which may also have contributed to the present sell-off.
As of Friday's close, I suspect that we will have given back most (if not all) of the gains we have enjoyed since the beginning of the year. That should have been expected, since historically, we usually have a late January-into-February pullback in the markets. My advice is to look beyond this event and focus instead on regaining the record highs sometime before the end of the first quarter.
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