Final not to be continued.
One of our more communicative readers questioned this 3 part series on the economy.
He wanted to know why we would take on a controversial subject like stimulus and government actions and policy. After all we are dedicated to providing such good investment strategy and tactics. I began my answer with a simple question, did he agree with our analysis to date or not. He said he agreed and also learned a lot. Well I replied our goal is to inform and educate our readers. Government policy can have a really big impact on the markets and as investors it is important to understand this and the implications of the actions of the government. If you compare the available types of invest-able instruments over the past few decades you will notice many have disappeared and many are relatively new. This does not mean they were bad and the new ones are good it just means that markets are dynamic and tax implications and regulatory oversight can have a big impact. Estate taxes, retirement plans, gains tax, loss treatment, etc., are all addressed by government policy. It was once explained to me that the role of corporate management is to make profits and avoid paying taxes on the profits. I think estate planning is no different. The trouble is that the planners are always planning for an environment that is unknown. Tell me what the tax rate will be on retirement savings, the age that the savings can be tapped for someone retiring in 35 years and I’ll be shocked if you are right. This is a dilemma that 30 year olds are facing as they enter into their asset building years. Bottom line government policies do impact the investment markets.
How can a Government stimulate an economy?
First step is A) provide incentives for growth.
Second step is B) stop spending money unnecessarily.
STEP A – Provide incentives for GROWTH:
1) Establish a stable environment for investing
2) Allow for a liquid market to exist
3) Give companies and investors an incentive to invest
4) Stop meddling on the free markets
1) Establish a stable environment for investing
Provide a tax system that is known. This was somewhat accomplished in December of 2010. The fact that the prior decades tax rules had expired and there was no clear solution for the future helped the market decline.
2) Allow for a liquid market to exist – liquidity is the grease for fluid market operations. The lower the taxes, stamps, fees, reporting, restrictions and the higher the convertibility and openness of transactions the more liquid the market. This applies to internal and external capital. You can have the most liquid domestic investment markets but if you do not allow capital to flow into and out of your currency/local market you cripple the overall liquidity. Countries that have transaction restrictions, block their currencies or tax transactions the less liquid their markets. The countries that are at risk for this also suffer liquidity constraints. Keep the markets and flows free.
3) Give a) investors and b) companies an incentive to invest – the single most important element.
a) Stable governments and regulations are key. Keep legislators at bay and the regulators focused on letting the markets operate freely and efficiently. Develop policies to reduce cash hording. When real rates are high, lower them. Negative interest rates are not unheard of, they are just not familiar. Negative real rates are not unusual, they are just not recognized. Charge cash hoarders to keep money in savings. Why not? If it costs money to keep savings, savers will have to decide if they want to save or deploy their money elsewhere.
b) Incentivize growth. Government does not create jobs, business does. Provide incentives for companies to grow. Payroll taxes are the single most important indicator of job creation. The higher the payroll tax receipts the lower the unemployment rate. Governments should reward companies for increasing payroll taxes. Allow companies to offset portions of new payroll dollars against taxes. Why not? If an unemployed worker is earning $15,000 in benefits, why not allow a hiring company this amount in benefit in the form of a tax credit? If an unemployed worker is hired with a salary of $75,000 a year and paying 20% in gross taxes (ie: $15,000) the result is $60,000 in additional multiplier. Not to mention less of a strain on the unemployment cash pool. The corporate tax offset of $15,000 has a zero sum impact as it opposes the income tax payments. Did we mention the unemployment cash pool relief? Think there is a stimulative impact? LOOK AT THE GRAPHS BELOW…….
Image: Deutsche Bank (Read more: http://www.businessinsider.com/corporate-tax-receipts-2010-9#ixzz1BY208vbD )
(Via Deutsche Bank, Corporate tax receipts suggest businesses still expanding, Joseph LaVorgna, 27 September 2010 http://www.businessinsider.com/corporate-tax-receipts-2010-9 )
Link http://bonddad.blogspot.com/2010/10/closer-look-at-withholding-tax-receipts.html
4) Stop medaling on the free markets – no more bailouts! The markets need to trade based on “clearing prices”. A clearing price is: “The price assigned to an asset after buyers have completed the bid and ask process. The clearing price represents the highest negotiated price that the buyer is willing to pay and the lowest price that the seller is willing to take.” (from InvestorWords.com). A company’s stock price should reflect the value of a company. If company is operated poorly or exceptionally, its stock price should reflect its strength. Keep government out of the business of business. A perfect example, “The Department of Justice investigates roughly 100 price-fixing cases each year. In many cases, these investigations result in indictments. Those cases would, if justified, result in lower prices for consumers. But, economist Michael F. Sproul, in an examination of 25 price-fixing cases for which adequate data were available, found that prices actually rose in the four years following most indictments.” (Principals of Mircoeconomics, 16.1. Antitrust Laws and Their Imterperation” Rittenberg and Tregarthen http://www.web-books.com/eLibrary/ON/B0/B63/080MB63.html).
Dr. Sproul is a brilliant economist as well as a wonderful person and proves thee fallacy of a topic that belongs on myth busters. Let’s keep government where it belongs and out of the business of business.
The recent bailout of some of the auto industry is an example of meddling. “President George W. Bush's administration, only weeks before leaving office, gave GM and Chrysler $17.4 billion in loans after legislation to speed loans to the companies failed in Congress. The Dec. 19, 2008, terms signed by GM and Chrysler required them to reduce their debt levels, negotiate wage and benefit cuts for auto workers and submit detailed restructuring plans by Feb. 17, 2009, showing a path to "long-term viability, international competitiveness and energy efficiency." (GM-Chrysler Bailout: Was It A Blank Check? KEN THOMAS | 09/20/10 The Huffington Post).
“required them to reduce their debt levels, negotiate wage and benefit cuts for auto workers”
Kind of like the Latin American thing discussed in Hey Moe I - all over again – do as I say not as I do
Remember that other American auto manufacturer Ford? They did not receiver bailout money and continue to operate in this un level playing field. The issue is that the government bailed out the competitors that failed to be competitive. Ford miraculously survived without subsidies. GM received about 20-25% of the value of F and a bankruptcy from the US Government. What happened to F? It’s stock price dove from $5 to $1.5 and recovered to $17.5. The markets love a winner! And by the way, while in addition to celebrating it’s first slug of US bailout money GM executives had to make a quick exit from the US Government bail out party to go to China to celebrate the opening of their 8th manufacturing plant.
B) Second step is STOP SPENDING MONEY UNNECESSARILY.
Also know as budgeting within means. If income is $1.00 do not spend $2.00. Deficit control is very important. In Hey MOE I, we mentioned Latin America and the turn about after years of lecturing. Confidence in investors is important and just with companies, governments need to keep their fiscal houses in order. Step back from the debt trough and behave within your means!” We are advocating a balanced budget amendment, just fiscal discipline. At times it is necessary to exceed income and times it is necessary to save.
There is a distinct difference between spending and investing. We believe investing is what governments need to do. If money is spend there is no tangible benefit, if it is invested there is a benefit. The example would be spending money on a big party (spending) or investing money in better roads (investing).
Dick Army and Matt Kibbe wrote an Opinion article published in the Wall Street Journal on January 19, 2011, entitled, “What Congress Should Cut Let's scrap the Departments of Commerce and Housing and Urban Development, end farm subsidies, and end urban mass transit grants, for starters.”
This article outlines some pretty specific targets that they justify eliminating. It is aggressive but unrealistic. The main point is that it offers some advice and offers up some sacred and protected departments and programs. (Link to article : http://online.wsj.com/article/SB10001424052748703779704576073750780454850.html?mod=ITP_opinion_0#articleTabs%3Darticle).
In summary:
The solution lies in fiscal and monetary policies. Let the markets operate, support the economy and keep the finances in order.
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