“The market” continued its steady decline this week amid more nasty news dispersed throughout the global Market. Several major issues are poised to continue pressuring stocks and causing volatility in the commodity and bond markets. Investors must take note of these specific concerns:
- The Absurd Debate Surrounding the “Fiscal Cliff”
- Continued Government Failures & Housing
- Persistent Government Intrusion of Business
- Union Stupidity: Trading Pay Cuts for Job Cuts
- Israel and Palestine Re-Join Middle East Turmoil
Let’s take them one by one.
The “Fiscal Cliff”
The post-election debate regarding the “fiscal cliff” began this week with little more than political posturing and electoral theatrics. In a nutshell, neither side looks serious about confronting the problem head-on and both sides lack the courage strong leadership requires to win the fiscal battle. Here’s the long and short of it.
Right now the U.S. government has been running trillion dollar deficits for four consecutive years and it has ballooned the national debt to $16 trillion – 104% of GDP. Here’s the deficit table again to refresh your memory.
| (Trillions) | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| U.S. Tax Revenues | $2.6 | $2.5 | $2.1 | $2.2 | $2.3 | $2.5 |
| Government Spending | $2.7 | $3.0 | $3.5 | $3.5 | $3.6 | $3.8 |
| -Deficit | -$0.2 | -$0.5 | -$1.4 | -$1.3 | -$1.3 | -$1.3 |
| Data Source: U.S. Office of Management and Budget | ||||||
To remedy the fiscal imbalance the President has asked for tax increases on high income earners and some businesses, like oil and gas companies. In his plan, the President is looking to raise $1.5 trillion in new tax revenues over the next ten years – that’s $150 billion per year. The Republicans, under the infinite wisdom of Senate Minority Leader Mitch McConnell, have said the president must accept cuts in programs like Medicare to reach a new revenue accord.
Really, Mitch – Republicans want to cut Medicare? Really, that’s the program cut you want to highlight?
No wonder they lose so many elections.
As the President runs through every line of the tax code looking for ways to increase taxes his opposition should be running through every line of the operating budget looking for programs to cut and abolish – and Medicare should be the last one to be negatively affected. To put it simply: raising tax revenues by a few billion dollars won’t solve a trillion dollar spending problem – and it’s certainly not worth selling out the elderly who have very little other market opportunity for reasonable healthcare options.
By maintaining this course of fiscal incompetency, trillion dollar deficits will continue and national debt will escalate to over $20 trillion by the time the Obama presidency is over. There will be more credit downgrades and more calls for more new taxes. Fixing the fiscal problem requires bold action – not nibbling around the edges like what is being bantered around Washington today. A fiscal cliff is inevitable, the only question is when?
I say let’s have it right now, the sooner the better, the faster Real recovery commences.
Annual budget deficits must be eliminated to begin the process – that’s at least $1.3 trillion of budget cuts in the current fiscal year – not over ten years. Such bold action would produce a fiscal cliff – and government would be the one going over it. Again, the problem with the Market is that the free-market has been overrun by irresponsible government making it appear that the economy has recovered when it actually hasn’t. The below chart shows the make-up of the market – a.k.a. Gross Domestic Product (GDP) – in terms of public and private sector activity. As you can see the government has greatly expanded in the last several years at the expense of the free-market.
A dramatic cut in government spending would indeed reduce GDP by roughly the same amount and thereby cause an economic recession – but it would be government and national debt that shrinks the most. That’s the recession we need! Where’s the leadership on this?
Such an adjustment would stabilize the U.S dollar and monetary policy while providing the free-market more room to operate and build sustainable economic growth. Until such bold action is taken, however, the fiscal cliff is only being delayed until the national debt load forces austerity programs like the ones currently going on in Greece, Italy, Spain, Portugal, and France, etc. etc.
While Europe has proven in great example that massive government spending cannot produce prosperity, American “liberals” are looking to raise taxes by $156 billion annually and “conservatives” are looking to reduce spending by roughly the same amount. In other words, maintain the current fiscal course to a European-like Armageddon.
Proponents of government healthcare ought to take special note of the fact that senior citizens who have paid into the Medicare system for their entire lifetime are the first to get their benefits cut when politicians get themselves into financial trouble. Warning Will Robinson!
President Obama says he is looking for new ideas – how ‘bout this one: Instead of the Federal Reserve printing new money via QE and giving it to banks who hoard and invest it overseas, how about directing newly printed money to increase Medicare funding. This will put more money into the healthcare system and ultimately reduce prices for everybody else, as Medicare payments to healthcare providers cover just pennies on the dollar for the services rendered. This forces healthcare providers to recapture that lost revenue from everybody else (non-Medicare patients.) Closing the Medicare payment gap will boost the economy and lower prices for all – something QE has continually failed to do.
Isn’t that better than telling Grandma she can’t have that hip replacement she so sorely needs?
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Continued Government Failures & Housing
For those who think that the housing market is on the mend, like Federal Reserve chairman Ben Bernanke and the CEO’s of JP Morgan Chase and Wells Fargo, it’s time to think again.
The Federal Housing Administration (FHA) announced this week that is has depleted all of its capital reserves and now faces a $13.5 billion deficit. Like Fannie Mae and Freddie Mac, the FHA insures mortgages against default. Fannie and Freddie, of course, went belly up during the 2008 crash. The FHA, and the first to lower insurable credit standards for mortgages in the 1990’s, is now on the same path to insolvency. This contradicts the opinion of “smart” bankers and proves mortgage defaults continue to plague a real estate market that has not healed – despite massive federal efforts like QE. Taxpayers will once again be on the hook to bailout a failed government endeavor.
Ditto for the Postal Service, who also announced alarming news this week by declaring its largest annual loss in history – a $15.9 billion deficit. Sooner or later all of this adds up to real money.
Investor note: the more We the People allow fiscal deficits the more of them we will get. The more we allow government to expand, the more loss we will incur, the more taxes we will be asked to pay.
And that’s not good for Markets.
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More Government Intrusion into Business
I’ve been meaning to comment on this for some time but haven’t. For years now not a week goes by without seeing some kind of government action to penalize industry somewhere in the news. There are too many to note here, but a few are worth highlighting to get a sense of the mismanagement the Market must endure.
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Indeed banks have gotten their fair share of Federal legal action, penalties, fines, and levies; and they most certainly deserve it. But isn’t it silly to levy a $300 million fine on JP Morgan Chase for misleading investors regarding mortgage-backed securities and then turn around and hand them $50 billion of freshly printed QE money? That’s our government looking out for us: the Executive branch fines irresponsible banks and the “bipartisan” Federal Reserve hands those same banks new money to pay the penalty. After all, they’re “too big to fail.”
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News broke this week of a probe into FedEx and UPS whereby the government is claiming that they aid and abet illegal sales of prescription drugs via their delivery services. In other words, the government wants FedEx and UPS to validate prescriptions before their shipping companies deliver purchased products from distributors to customers.
Really? How are they supposed to do that – and why should they? With a $4 trillion budget and agencies like the FBI, DEA, and ATF, it would appear to a reasonable person that this is a federal government role and they have the resources and infrastructure to perform it. Absurd federal actions like these cost companies hard to find money that is better served expanding business and operations or returning profits to shareholders.
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Those two situations are bad indeed, but the grossest example of government abuse lay in the $4.5 billion dollar settlement with British Petroleum for the gulf coast oil spill. Federal prosecutors filed criminal charges against BP in this case – and that’s not only stupid but insensitive. Criminal charges mean that BP paid the fine to the U.S government – and not to the people who really suffered during that tragedy. Federal prosecutors should have filed a civil action against BP and returned the settlement to companies like Bubba Gump Shrimp Company to rebuild their lives and livelihoods (a.k.a. businesses.) But hey, someone has to pay for all those government deficits. Sadly, it came at the expense of many gulf coasters.
Shameful.
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Union Stupidity: Trading Pay Cuts for Job Cuts
At one time in world history unions were sorely needed to protect the rights of workers. But with employment laws as vast and strong as they are today, unions are becoming more trouble than they’re worth. Just look at the union mess in Europe where unreasonable demands are constantly put forward, massive wildcat strikes are persistently employed, and violent protests are orchestrated all too often. None of that is good for workers or Markets.
The newest U.S. victim of unreasonable union behavior is Hostess Brands, makers of Wonder Bread and Twinkies, who shut their doors after 82 years in business when the baker’s union rejected a compensation package that would allow the company to survive. The labor strike which began on November 9 has now ended with the loss of 18,000 jobs – that’s 18,000 jobs lost in a disastrous economy.
How union management could strike such a harsh accord – trading pay cuts for job cuts – in this kind of economy during the holiday season is beyond me. Unions are giving themselves a very bad name – just ask any one of those 18,000 newly unemployed.
When businesses are relentlessly attacked by government and union leaders Markets suffer – and that’s not good for investment, money, or people.
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Israel and Palestine Engage in Wartime Tactics
I know, I know, the Gaza strip isn’t called Palestine. But the people who live there are called Palestinians and their ruling government party is called Hamas, which is very closely connected to a paramilitary terrorist organization also called Hamas. So in my world Palestine is the land, Palestinians are the people, and Hamas is the government (political and military.) And right now they are trading missile fire with Israel – a U.S. ally the last time I checked.
Israel lives in one of the worst neighborhoods in the entire world and has one of the oddest shaped borders of any sovereign nation. Hamas operates in Gaza which is almost within the Israeli domain. Hamas also operates close to the Egyptian border, which is now under new management after the U.S. joined other world forces to oust Hosni Mubarak. Friendly is not a word I would use to describe Egypt’s new managerial position towards Israel.
As you may know, Syria has been in a long and brutal civil war and next to that warzone is Lebanon, another Israeli border. And as the world knows, Iran supports Hezbollah in both Syria and Lebanon – again, friendly isn’t a word I would use to describe their attitude towards the Jewish people.
A major war looks impossible to avoid. And when that heats up – oil prices will skyrocket and put further pressure on shrinking world economies.
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All of these conditions: continued fiscal mismanagement, government failures and unnecessary private sector intrusions, and escalating war, will suppress Market growth and vitality and downward trends will continue.
Position your portfolio defensively and let me know if you need help.
Stay tuned…