Reuters/University of Michigan Surveys of Consumers shows that U.S. consumer sentiment declined in early July to the weakest since March. The stock market has hinted in the last couple of weeks, and consumers are realizing that this may not be a speedy recovery. People are unhappy that it will take time for the unemployment picture to improve and to see their personal finances recover. This is quite understandable; however, it is not a valid reason for a second government stimulus program. Be patient- the economy and the stock markets around the world will improve – in time! Businesses and investors will make money! The worldwide recession did not occur overnight, and overcoming it will take time.
When I read in today’s Wall Street Journal that Chinese auto sales are surpassing the United States, I am beginning to see the Chinese becoming consumers versus savers. As such, this will take hold at some point and they will be buying Levi jeans, Apple iPods and iPhones, Big Macs, Chevys, etc. Yes, much of this will be good for U.S. corporations who make these products, but we must be prepared to see a greater demand for oil and other natural resources as this occurs. As a result, I continue to believe the natural resource stocks, ETFs and mutual funds are an excellent investment option long-term. Simply put, based upon what you know, do you really believe oil will be under $60 a barrel five years from now or that gasoline will be $2.21 a gallon? If you don’t, then we are in agreement on why we should consider natural resources in your portfolio.
We need a second stimulus package?
Ironically, Warren Buffett, the billionaire founder of Berkshire Hathaway and one of the richest men in the world, stated this week that the economy is not in recovery mode and a second economic stimulus package might be needed. As much as I admire Warren’s investment acumen, I believe he is “completely” off base on this issue.
Mr. Buffett has stated that their first stimulus package was the similar to “half a tablet of Viagra and then having also a bunch of candy mixed in — it doesn’t have really quite the wallop.” This may be true! It has been reported that only 10% of the $787 billion stimulus package has actually been spent. Secondly, there has been ongoing criticism even before Congress approved it that most of the actual “stimulus” in the package would not be spent until 2010 and 2011 and the majority of the spending would not “stimulate” for the economy.
Fortunately, Mr. Buffett’s opinion on this issue is not shared by many. The following is a link to a Wall Street Journal article specifically addressing this.
WSJ.com – Few Economists Favor More Stimulus
Just recently, the Indian stock market fell 5.8% amid concerns their proposed government budget will add to the country’s fiscal deficit. Investors understand that increased government spending diverts valuable resources away from the private sector and ends up imposing even more taxes on labor and capital.
A major study of 18 large economies titled “Fiscal Policy, Profits and Investment” by Alberto Alesina of Harvard and three colleagues appeared in the 2002 American Economic Review. This paper, found that the surest way to make economies boom can be through deep cuts in government spending–the exact opposite of the “fiscal stimulus.”
Ireland, for example, slashed government spending by more than 7% of GDP from 1986 to 1989–nearly as much as the 8.4% of GDP the U.S. spends on Social Security and Medicare combined. The Irish economy suddenly switched from a 0.2% pace of economic growth in the early 1980s to annual real GDP growth of 7.2% from 1989 to 2001. With GDP doubling every decade, government debt dropped from 125% of GDP to less than 40%.
By contrast, Japan spent trillions on “stimulus” schemes after 1991, doubling the ratio of national debt to GDP. Amazingly, they are doing it still. Japan’s “lost decade” of economic stagnation is now approaching two decades with no end in sight.
By contrast, because of the huge debts piled up by “fiscal stimulus” schemes, Japan felt compelled to add new taxes on consumer spending, land, securities trading and capital gains. The following is a link to an interview with a managing director of an independent research firm and his opinion of a second stimulus plan.
http://finance.yahoo.com/tech-ticker/article/275367/America
All political beliefs aside, it is my intent that you find the attached links helpful and useful. My goal is for you to be able to read and hear information that will better allow you to understand the economic and political policies being bantered about and the possible implications to your investments.
Even though Mr. Buffett may think a second stimulus is something to consider, which I am in complete disagreement with, it was encouraging to read that Mr. Buffett still believes, even after all this economic and stock market turmoil, that America’s best days lay ahead of us. This includes investors and their portfolios. I am total agreement with that.
Fed and state governments are looking for more taxes continued…
Finances are tight for Mr. & Mrs. America and also for the Federal and state governments. Just this week California sent notices to 2,000 vendors, who supply the state with food, supplies, machinery, etc., to cut their contracted rates by as much as 15%. California is in such dire financial straits they cannot wait until the contracts renew to ask for new terms.
Separately, I read an article in today’s Wall Street Journal regarding the state of California changing a company’s “business classification.” By doing so, the company will be taxed at a much higher rate. This may not seem like a big deal. However, what makes it a “big deal” is that in 1994, the state of California lost a lawsuit with this business and was instructed not to change the company’s business classification. Now the state is taking the stance of not only ignoring or violating the ruling, but also retroactively backdating this business classification change to 2004.
The company’s founder noted in the article that if he would have lost the court case in 1994, then he would have moved the business to another state which he deemed correctly classified and taxed his business. However, since he won, the company remained in California employing people and paying taxes up through today. Unfortunately, the owner is now backed into a corner and is suing the state to comply with the court’s ruling. He has stated that if his original victory in court is reversed, then he will move the entire company out of the state.
The Federal, state and even local governments are now squeezing legitimate tax-paying businesses for more money. Many taxpayers may say – so what, they need to pay their share. Unfortunately, if you tighten your grip too much on a business and individuals, they will eventually say – “I’ve had enough” and move.
In the spirit of collecting more taxes, below are links to two related videos regarding the IRS going after Swiss Bank UBS for taxpayer records.
http://finance.yahoo.com/tech-ticker/article/277731/IRS-%22Turning-Over-Ever
In the years ahead, there will be a new zeal for collecting all income taxes that the IRS deems due it. As such, the old motto that the rich don’t pay taxes and they just funnel it to offshore accounts will no longer ring true. I believe as the trend for more tax revenue continues, and the bar / income level for the designation of who’s technically “rich” will continue to be lowered and many of you reading this article will be considered “rich.” You may think that’s absurd; however, the best thing you can do now is plan and be prepared for the tax implications that come with that designation.
It’s not the end of the world, it just means that the best course of action is to be smarter and work more closely with me, your tax professional and estate attorney. This is why it is very helpful when you allow me to talk directly with your tax professional and estate attorney to keep them updated, and not overlook any financial, tax or estate planning strategies that could benefit you.
Is derivative regulation over-reaching ?
There is an outcry for the government to increase regulation of the financial markets, which is some ways is needed. However, much of the current mess was created by exotic “derivative” investments created by Wall Street such as credit default swaps. Unfortunately, many companies use derivatives in their day-to-day businesses to hedge against price increases. Airlines (e.g., Southwest Airlines) may use derivatives to hedge against higher fuel costs, manufacturing companies (e.g., Ford) may use derivatives to hedge against higher steel or metal prices, and food companies (e.g., General Mills) may use derivatives to lock in prices for wheat, corn, orange juice, etc.
Financial companies, such as large banks, brokerage firms, insurance companies, etc. created, bought, sold, and invested in derivatives. However, the type of derivatives they used and the dollar amount they traded is completely different from what I described above. For example, my purchasing 10 gallons of bottled water as a hedge or a backup against my water going out at home in the middle of summer is completely different from me foolishly speculating and buying a contract or betting on the price of 1 billion gallons of bottled water.
In a rush to put controls in place to curb what caused this mess; we should not damage or create a new system that unfairly paints all derivatives with the same brush. If we do, then all the businesses I mentioned above will find either increased uncertainty if they are not allowed to hedge against product cost increases, or the cost of protecting themselves due to regulation increases dramatically. Either scenario will raise prices for the end user who is us the consumer.
Events Update
Deb Kunz will facilitate a Strategic Life Planning workshop on July 16th. For more details please click the attached link:
Quotes
“Just because things are not going perfectly does not mean they are not going well.”
Al Groh, football coach University of Virginia and former coach of NY Jets
“Don’t believe the world owes you a living; the world owes you nothing–it was here first.”
Robert Jones Burdette, clergyman and humorist
“Learning is the best of all wealth; it is easy to carry, thieves cannot steal it, and tyrants cannot seize it; neither fire nor water can destroy it; and far from decreasing, it increases by giving.”
The Naladiyar
Tony Moeller, President
Integrity Investment Advisors, LLC
12721 Metcalf Ave., #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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