JULY 15, 2012 THIRD QUARTER COMMENTS
EXILED FROM MAIN STREET
STOP BREAKING DOWN
Stocks fell 10% into early June, a month historically weak for stocks and many broke 200 day moving averages. The S & P 500 then rallied 7% and finished with the strongest June since 1999 and 2000. The presidential election will increase market volatility and dampen investor sentiment but valuations are compelling, earnings expectations modest and sizable cash balances remain on the sidelines.
The demand for dollars has been exceeding the supply. Middle East countries and European companies were buying ten year Treasury debt yielding 1.53%, the lowest recorded rate in two centuries. So far this year, the Treasury has auctioned $1.076 trillion of notes and bonds and for each dollar borrowed, $3.16 was offered. To fight deflation, the Federal Reserve has been buying 61% of the total net issuance of our debt but money is not going through the system fast enough to create any velocity, meaning, inflation will remain low and the recovery will remain slow.
TORN AND FRAYED
The Federal Reserve says the median net worth of the American family
fell 39% from 2007 to 2010.
February 2008: Congress rejects a budget that increased spending by
3%, for one that increased 18%.
Wealth destruction and credit contractions occur in depressions. Without credit, money does not grow.
YOU CAN'T ALWAYS GET WHAT YOU WANT
Government officials have limits paying salaries so generous benefit packages were granted in exchange for votes. With no taxpayer representation, public service employees received pension and health care plans, sick days, vacation and overtime, benefits virtually nonexistent in the private sector, whose costs are not seen until years after those government officials making the commitments leave office.
Assumptions were made based upon the bull markets of the 80’s and 90’s that a portfolio allocated 60% stocks and 40% bonds could earn a 7-8% total return over time. If bonds yield 4%, stocks must rise 10% to earn that 8%. Most pension plans are allocated in this manner and few are getting much satisfaction finding a quality 4% yield in a world flooded with cheap dollars.
Frank Ziedler was the last socialist to head a major US city as Milwaukee’s mayor during the 1950s and wrote in 1969 “The rise of government unions can mean considerable loss of control over the budget, and tax rates because they put a competing power in charge of public business next to elected officials”.
LET IT BLEED
On New Year’s Day, taxes are expected to increase for everyone with income, dividends, capital gains, or estates. New corporate, payroll, and alternative minimum taxes, will hit the economy and along with 21 new taxes or fees, penalties or mandates that may exist for Obamacare. Forcing any tax increase on a fragile economy with no job growth will only increase the deficit and not add to revenues.
Most of the recent tax breaks went to lower and middle income Americans who can expect to send an additional $4,000 on average next year to Washington DC. While it is true the rich will pay more in taxes, that will not put any extra money into anyone’s pocket nor help them find a job.
The C.B.O. expects the economy to grow 4.4% next year but if the largest tax
increase in human history and $110 billion in accompanying spending cuts are
not stopped, the economy will shrink 1.3% in the first half of 2013 and grow
0.5% all year.
WHEN THE WHIP COMES DOWN
Governments in the U.S. and Europe are interfering with private banks, by forcing them to buy government debt. If the debt goes bad, the banks fail, like the last time government forced banks to lower lending standards in order to support the housing market.
After the dollar left the gold standard, Saudi Arabia agreed to accept only US dollars for oil. As other OPEC members followed, commodities began to be priced in dollars. To facilitate trade, central bankers kept larger reserves of dollars on hand, which the Federal Reserve printed without much inflation and this allowed Americans to import more than they exported, consume more than they produced, and spend more than they earned.
As demand increases for the Chinese Yuan, dollar demand will decrease and reserves will be sold causing the dollar to lose value and inflation to return. This will set the stage for our next financial crisis involving escalating federal debt with a less valuable currency. Time is not on our side.
The free market is an intricate system of voluntary economic social and cultural interactions, motivated by the needs and desires of individual and community. It operates under rules of cooperation and serves a harmony of interests that support a civil society of ordered liberty.
Government could never produce on a sustainable basis the abundance of food, housing, medicine and energy we need but the free market does. Bureaucrats could never design a more productive system which creates an unlimited array of consumer goods that add comfort, value and security to improve the quality of life for more people.
From Greece to Egypt, Wisconsin to Xinjiang, Penn State to Katie Holmes individuals are demanding freedom from domination. Useless, corrupt inefficient ideas and systems which do not contribute to the growth and prosperity of the organism will fade away and die, allowing newer ideas and systems to regenerate in their place. Punishing people with excessive taxation, spending, inflation and regulation will not contribute to anyone’s economic or political freedom and so these barriers must be removed.
Without capital, there is no business. With business, there are no jobs. Without
job’s, there are no taxes.
Since 2007, the number of pawn shops in Florida has doubled. In San Francisco, the repo business is booming for yachts. Bankruptcy attorneys, foreclosure administrators, food stamp card makers, unemployment office workers, and regulators are all doing well.
Economic policies are needed that encourage growth with a strong dollar, and contain real tax, tort, regulatory and entitlement reform. As the largest economic power in the world, we are the most logical choice to pull the world back to prosperity and will do so again as soon as we toss these last remnants of socialism onto the trash heap of history.
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