Pie in the Sky – John Browne Commentary January 27, 2011Posted by Admin in Market Commentary.
Tags: debt, deficit, economy, federal spending, Fox Business, freeze, john browne, mangru, obama, president, report, state of the union, white house
Pie in the Sky
By John Browne
Following the huge gains made by Republicans in the midterm elections, it was widely expected that President Obama would use the State of the Union address to signal a major policy shift toward the center of the political spectrum. On the surface, at least, he appeared to do just that, hinting that he took budget management very seriously and that Americans should be prepared for shared sacrifice. However, as the final applause still echoed in the House chamber, many astute pundits were left trying to make sense of the many contradictory policy prescriptions the President proffered.
Classical political maneuvering dictates that when clouds are grey, politicians must offer good news, tell jokes, and remind us warmly of our childhood (or in Obama’s version, America’s triumph over Russia in the Space Race). Disclosure of specific measures should be avoided at all costs. President Obama followed these tactics closely.
While he did address plans to cut non-defence, discretionary federal spending – a small fraction of the overall budget – the President also announced his intention to increase spending on several existing and new initiatives. The scope of the new initiatives will surely eclipse the modest cuts pledged.
The President was careful to refer to all his spending plans as “investments.” The word is used in order to illicit a pleasant feeling among voters who instinctively favor capitalism over socialism, not because any thinking person expects these resources to be better allocated than they would have been by the market. Governments don’t make investments because they aren’t subject to profit-and-loss feedback. Governments provide public goods for which no profit can be measured or expected – or else we would just have the private sector take care of it. This disingenuous use of the word investment disguises the fact that the President simply intends to borrow even more money to spend on public-sector jobs.
The essential point is that while jobs in the private sector create wealth, public sector jobs actually consume wealth. When I was a Member of the British Parliament, I represented a county that spent the least amount per pupil on education of anywhere in the entire country. Yet, the achievement level of the students was by far the highest. It was vivid proof that it is not the amount of money that is crucial to success, but the quality of the spending. If the President were to lower taxation, cut the number of government regulations, and replace a political atmosphere of uncertainty with one of certainty, he might stand a chance of reviving wealth creation.
More seriously, the President made no mention of the massive debt problems facing US state governments, such as California and Illinois. The potential eruption of these debt and currency problems could well dominate investment strategies for 2011.
Yesterday, the Congressional Budget Office issued a highly embarrassing assessment that the federal deficit for 2011 would rise from the previously projected $1.1 trillion to $1.48 trillion. At a stroke, this nullified the President’s debt reduction plans. The CBO also pointed out that Social Security posted a $45 billion deficit in 2010 and will bleed more than $600 billion over the next ten years. I assume these estimates to be conservative. It is clear that the President, and the rest of Congress for that matter (with the possible exception of Congressman Paul Ryan whose austere recommendations have been ignored by most of his fellow Republicans), are dancing around the bonfire of our sovereign credit and hoping that their twirls will distract us from the conflagration.
Also yesterday, the Federal Reserve’s policy statement claimed that its massive stimulus plans are working, and that it will maintain both QE II and near-zero rates well into 2011. If the economy were indeed improving, as Messrs. Bernanke and Obama claim, why would the Fed and the Treasury need to keep administering life support? Clearly the White House and the Fed have little confidence in their own assertions; so, how should average investors react to more promises which are highly unlikely to be kept?
Rather than buying into Washington’s scripted recovery propaganda, investors should focus on the bottom line. Low interest rates are distorting the value of money and the key investment relationship between risk and reward. One side effect is that investors are being incentivized to favor equities over fixed income. A lack of viable alternatives has likely played an unsung role in supporting the current stock market rally.
Investors would be well-advised to retain a jaundiced view of all political statements, especially those of central bankers and politicians positioning themselves for the next election. In 2011, investors should focus their eyes not on the sky, but at the brick wall our Union is fast approaching.
John Browne is a Senior Market Strategist at Euro-Pacific Capital. He’s been a member of English Parliament, an advisor to Prime Minister Margaret Thatcher, and currently serves as Lead Panelist for The Mangru Report. You can view all of his commentaries by CLICKING HERE NOW.
Tags: business, cost, deficit, Fox, FSA, government, healthcare, hsa, insurance, mcdonald's, news, obamacare, Richard S. Bernstein, spending, tax, The Mangru Report, w-2
The Unseen Costs of Obamacare
By Richard S. Bernstein
Chief Executive Officer,
Richard S. Bernstein & Associates Inc.
Last week, I received two visits from employees, both with the same question: “You mean I’m going to have to pay income tax next year on the health insurance benefits you give me?”
The only answer I was able to give them was: Not yet.
It has been six months since Congress passed the Patient Protection and Affordable Care Act, yet still, we continue to find and learn new things about how the “Obamacare” health care bill will affect the average American.
What my two employees recently learned was that, beginning in January 2011, every American who receives health insurance through his or her employer will see that insurance benefits show up in his or her W-2 form. For the time being, that doesn’t mean they are paying taxes on this benefit – only that they are disclosing the value of that benefit to the government.
Raise your hand if you believe this won’t lead to a new tax? After the midterm election, of course.
Meanwhile, many of the Americans who can least afford a new expense arelikely to see one, unless Congress repeals another facet of Obamacare. McDonald’s Corp. this week announced plans to drop the low-cost, effective health care plan it offers to nearly 30,000 hourly restaurant workers if that clause – which mandates that a certain percentage of revenue has to go to claims rather than administrative costs – is waived. If that happens, those hourly workers – all of whom likely fall into the group of Americans that Obama promised not to raise taxes on, as they make less than $250,000 a year – will find themselves paying significantly more for health insurance.
While this isn’t precisely a tax increase, it creates the same effect: it takes money from Americans’ pockets, many of whom are living paycheck-to-paycheck.
This is a real effect of Obamacare that will affect their quality of life; even more than that, it is a real effect of Obamacare that will decrease Americans’ spendable income – and that will be felt throughout our economy.
I say this as a person who works in the insurance industry, and who strongly believes that our nation’s health care system rode off the tracks many years ago. In some places, Obamacare will help put us back on track: that the bill has removed lifetime limits on insurance coverage; that it has prohibited insurance companies from rescinding coverage, or from discriminating against Americans with pre-existing conditions – these are good things that have been a long time coming.
But, like a young woman preparing for the prom, the cost of changing our health care system isn’t as simple as paying for the ticket. That young woman needs
a dress, shoes, accessories – all things that come with an extra cost. The same is true of our health care bill – everything comes with an extra cost.
And before Americans go to the polls this November – where most will, without a doubt, have health care on the brain – they should understand those costs.
They should understand that employers like McDonald’s Corp could drop their affordable health care plans.
They should understand that the cost of both drugs and hospital visits have gone up since Obamacare’s passage, at least partially because drug companies and hospitals don’t know what the future holds, and want to ensure a cash reserve if their finances take a dive under the new health care laws.
They should understand that, if they currently use a Health Savings Account (HSA) to purchase over-the-counter drugs, allowing them to write off those medications on their taxes, that practice will end under Obamacare.
They should understand that taking money from their HSA for non-medical purposes will no longer come with a 10 percent penalty; now, that penalty will be 20 percent. And they should understand that their Flexible Spending Accounts (FSA) will be capped at $2,500. So the payroll deductions that currently go into Flexible Spending Accounts tax-free will become capped under Obamacare. And in today’s medical world, $2,500 doesn’t go very far.
In all, there are more than 20 examples like this – new, higher taxes that will go into effect under Obamacare, some as soon as January 1, 2011.
And that’s only what we’ve found so far.
Richard S. Bernstein is one of the nation’s top insurance advisors to high net worth individuals, businesses, and charitable organizations. He’s been featured in many national publications and has joined The Mangru Report on Fox Business as a featured panelist. You can find out more about Mr. Bernstein by visting his corporate website www.rbernstein.com
A Candid Appraisal of the Recovery – John Browne Commentary October 1, 2010Posted by Admin in Market Commentary.
Tags: bernanke, debt, deficit, economy, elections, euro-pacific capital, eurozone, fed, gdp, global, GOP, john browne, markets, monetary policy, recovery, taxes, The Mangru Report, U.S.
A Candid Appraisal of the Recovery
By John Browne
Over the last two weeks, seemingly good economic news offered some shreds of optimism to a stock market that was desperate for a pick-me-up.
The week before last, the National Bureau of Economic Research declared that the US recession had ended back in June 2009. At the beginning of last week, news came in that month-on-month retail sales had risen by 0.4 percent. Combined with successful government debt auctions in the eurozone, increasing expectations that Republicans will take back the House (thereby blunting the leftward drift of Washington), and hopes that a new round of quantitative easing will pump up growth, mainstream analysts are developing a feeling of near-euphoria.
Although it hard to begrudge the punch drunk for grasping at a little hope, investing is a dispassionate endeavor that calls for close and realistic analysis. In that spirit, let’s dig deeper into the recent ‘good news.’
First, the single month’s rise in retail sales was a blip on what has been a long-term downtrend. Furthermore, retail sales in August typically get a large boost from seasonal ‘back to school’ spending. This year, retail sales were boosted further by temporary tax incentives and vendor discounts.
Second, the successful auction of debt from worrisome eurozone countries, like Ireland, only served to further camouflage the ongoing risk of sovereign default by these states. None of them have committed to a comprehensive program of austerity and market liberalization – Ireland maintains a ‘too big to fail’ doctrine while Greece is on the verge of riots from its so-far modest efforts at privatization. None of the PIIGS would have had successful bond sales if Germany hadn’t been pressured into becoming a ‘sovereign of last resort’ for the whole currency area.
Apart from health of the weakest nations, a more important issue is understanding how sovereign debt is analyzed by investors in the first place. Those who consider buying government debt have for many years relied on backward-looking measurements such as debt-to-GDP to analyze the investment quality.
But that’s only half the picture, and oftentimes it’s even less than that. It does not include off-balance sheet items such as unfunded pensions, social security payments, or health obligations. For the US, I estimate this total debt amounts to some $134 trillion – nearly ten times the ‘official’ figure.
On a deeper level, using the public debt-to-GDP ratio to assess sovereign solvency implies that governments have access to the entire annual production of their economies. In reality, they have access only to that portion which is taxable. As taxes increase, there are natural limits imposed by increasing inefficiency and avoidance behaviors. Therefore, ‘net GDP,’ the portion available to the government for debt service, is significantly smaller than the gross GDP of the nation.
With real government debts, including off-balance sheet items, far larger than officially recognized and net GDPs far smaller that top-line GDP, the solvency of many sovereigns should be considered dubious at best.
For example, the debt-to-GDP ratio of the United States is currently 65 percent, which puts the country towards the solvent end of the debt spectrum among developed Western nations. However, the real debt-to-net GDP ratio is a staggering 358 percent, making the US the most insolvent nation in the group, behind even Greece!
In the interest of brevity, I will only touch on the fact that the above number is actually still an underestimate. It does not account for the portion of gross GDP claimed by state and municipal governments to service their debts. After all, all levels of government tax the same base. So, the effective portion of GDP available to the US federal government is even smaller still.
The third problem with the late round of ‘good news’ is that while a GOP sweep of House races looks likely, it is unlikely to make a large impact on policy. It is doubtful that the small number of freshman GOP Representatives will be able to win over their more mature, big government-minded colleagues. Any pending GOP ‘small government’ revolution will be heavy on talk and short on accomplishments.
It should come as no surprise that the Republicans’ “Pledge to America” lacked specific commitments for cost-cutting. Republicans are terrified of becoming the party of austerity, and the next Republican President will want to avoid being seen as ‘Hoover 2.0’. Therefore, any structural changes will come slowly – and perhaps too late.
Finally, whatever actions the Fed takes in the name of further stimulus will have the same unintended consequences as all previous stimulus efforts. Long-term sustainability will be sacrificed in favor of a short-term boom. Since World War II, the underlying strength of the US economy has allowed the central bank to get away with this strategy, as the economy simply outgrew the inefficiencies caused by monetary manipulation. But what happens when we are in a period of secular decline?
So we see that Wall Street is again playing the part of Pangloss. Unfortunately, their purported inklings of a renewed rally in the US markets do not stand up to candid appraisal.
John Browne is the Senior Market Strategist for Euro-Pacific Capital and a featured panelist on The Mangru Report on Fox Business. To view his previous commentaries please click here.
Tags: bernanke, Biden, budget, D.C., dan mangru, debt, deficit, fed, federal reserve, gdp, geithner, mangru, mangru report, obama, report, trillion, Washington, wnd, worldnetdaily
by Dan Mangru
On a warm D.C. Friday evening, our pals over at the U.S. Treasury, led by our revered Treasury Secretary Tim Geithner, put out a little report that they didn’t want you to see. After all, who’s looking for news on a Friday night?
In that little report, they just happened to mention that U.S. debt will rise to at most $13.6 trillion (as if the government has never underestimated a time or two).
For all of you 110 million taxpaying Americans, that’s $123,636 each, and that’s probably just the low estimate.
But it gets even better. By 2015, based on our current path of spending, out debt will be a paltry $19.6 trillion.
For those keeping score, that’s $178,181 for each taxpaying American, assuming that there are 110 million taxpaying Americans by 2015.
You see, our buddies in Washington, D.C., named Obama, Biden and Geithner want as few Americans as possible paying taxes.
Currently 47 percent of taxpayer-eligible Americans do not pay income taxes and that number is rising steadily.
So, let’s say if that number creeps up and only 100 million Americans are paying taxes, then each taxpayer will have a bill of $196,000 even. Considering this is the federal government we are talking about let’s just round it up to an even $200k.
For most taxpaying Americans, this means that you will owe more than what you take in during any given year, which sounds about right considering that by 2015 our debt will be 102 percent of our GDP, meaning that we will owe more than what we collect.
(Editor’s Note: To read the entire article please CLICK HERE NOW.)
Tags: bailout, bernanke, business, Capital, commentary, dan, deficit, Dollar, equities, finance, financial, gold, inflation, investments, mangru, spending, taxes, U.S.
It’s probably not a very politically correct thing to say. But when I saw this piece of news a short time back it was the first thing that came into my mind.
I saw the headline on Bloomberg: “Bernanke Says U.S. Should Tackle Debt.”
Apparently our friend, Federal Reserve Chairman Ben Bernanke, is warning that U.S. budget deficits threaten the nation’s long-term economic health and should be addressed soon.
Yeah, Can you believe it?
Now you probably understand the title for this article.
Nobody has done more to increase the deficit of the United States in our entire history than Mr. Bernanke.
Can you say bank bailouts?
Ben Bernanke and his partners in money printing have orchestrated the biggest financial spending spree in U.S. history. To date, Bernanke, Treasury Secretary Tim Geithner, and their associated partners have doled out a whopping $4.6 trillion of your hard earned taxpayer dollars to Wall Street banks and toxic mortgages. Even worse, according to sourcewatch.org, there’s $14 trillion that the U.S. taxpayer is at risk for because of these bailouts.
Editor’s Note: For the complete article CLICK HERE NOW.