Broker Check

February 1, 2013


Fun Fun Fun

          Like the lyrics in the Beach Boys’ song, Fun Fun Fun, “And she’ll have fun fun fun til her daddy takes the T-bird away,” this is the way our federal government has acted.  But one day an adult, daddy, will show up.

          The fiscal cliff was allegedly averted by an interim tax deal, which mainly addressed tax issues and created more spending.  Whereas the Bowles Simpson Commission, which was created by President Obama to come up with solutions for the deficit crisis, recommended $3 of spending cuts for each $1 of additional taxes; John Boehner asked for $1 of spending cuts for each $1 of additional income; Obama wanted 24¢ of spending cuts for each $1 of additional taxes; the Biden McConnell deal which Congress approved obtained 2½¢ of spending cuts for each $1 of additional taxes.  The public, you, and I are the losers.  I guess this is Obama’s version of balancing spending cuts with increases in income.

           Contained well within this bill was a provision to allow those poor Hollywood producers to expense costs incurred in economically depressed areas of the U.S. (of course, they won’t hire local people because this is a unionized industry!) and save $430 million.  This is what former Senator Christopher Dodd got for his new position as chief lobbyist of the Motion Picture Association and a result of those George Clooney et al dinners to fund-raise for Obama.  $78 million to benefit the owners of the Michigan International Speedway, $62 million to benefit Starkist Tuna in American Samoa (owned by Mr. Pelosi).  $222 million for Bacardi rum, money for Amtrak, $2.2 billion for bio fuels tax credits and $12 billion for the wind energy tax credit.  The foregoing was necessary to “bribe” Senators (on both sides of the aisle) to vote for the deal.  Wall Street Journal 1/3/13 p. A-12.

Cost of Capital Rises

 In order to have a good economy, individuals must be willing to risk their capital to start new businesses.  In the Reagan years because the cost of capital was reduced, a who’s who of great American Companies was born.  In the first four years of Obama, we have Facebook, Twitter, and Solyndra.  In 2013, the cost of capital rose 58.6% when the capital gains and dividend tax went from 15% to 23.8% (20% and 3.8% Obamacare Investment Income Surtax).  It is axiomatic that when you raise the taxes on something, you get less of it.  If you get less capital going into businesses, less jobs will be created and the country will be the poorer for it.  Oh yes, the unemployed will now be structurally unemployed (or call them long-term unemployed).

Told You So

          We planned for this.  We have only two thoughts for our clients.  We try to protect their assets and try to grow their assets.  In our November 2008 Newsletter, I stated the following:

           “I do not believe the Boomers will vote to deny themselves the benefits they believe they are entitled to.  I believe there will be political problems in the government allocating a finite amount of money either to Old Boomers or investing in the younger generations.  I believe the likely result may be for the government to raise taxes to pay the promised benefit.  A rise in taxes has the tendency to contract the economy because wealth is transferred from the productive private sector to the less productive government sector”

          In order to read how we suggested you to invest in the current economic climate, please read the entire November 2008 newsletter.  Subsequent to that newsletter, a substantial number of stock market analysts have come to agree with, what was then, an unusual position.

The Great Depression

           was really two recessions.  One started in 1930, the second was created by President Roosevelt in 1937, when taxes were raised on businesses and the wealthy, and war was declared on the “economic royalists.”

          The problem we have today is that Obama is using the same playbook in order to increase government in our life.

          The Great Depression ended when due to World War II Roosevelt’s attention was diverted from his war on business.

Sarbanes Oxley Causes Companies To Have US

          Six courageous corporations escaped from the control of Congress by delisting their shares from the New York Stock Exchange.  Now the ADRs of Allianz, BASF, Danone, Publicis, and Wolseley trade over the counter where they are exempt from the law.  Savings for a big firm fleeing a US exchange might run to $10,000,000 per year and they can lower their audit fees by approximately 45%.  In the past nine years, 76 ADRs are no longer listed on US exchanges while unlisted ADRs have increased by 1116.

          Sarbanes Oxley was the congressional answer to the Enron and WorldCom scandals.  The law majestically decrees it is illegal for corporate executives to cheat and steal.  In doing so, Congress dramatically raised the cost to do business on a listed American Exchange and to be subject to the filing demands of the Securities of Exchange Commissions without making Wall Street a safer place. 

          It looks like some companies voted with their feet to save their shareholders’ money.  Make Your Stocks Sarbox-Free, Forbes 1/21/13 p. 56.

Race To The Bottom

          The world is awash in debt.  The last time this situation existed was after World War 1 when European countries and the U.S. were trying to deal with the debt accumulated to fight the World War.  An excellent book detailing the history of the 1920s and 1930s and how individual countries reacted is “Currency Wars” by James Rickards.  In the book, Rickards recounts that each country responded in turn by devaluing their paper currency in a race to the bottom.  It culminated in the U.S. prohibiting the ownership of gold after people sought ownership of it as a way to outfox the government’s attempt to cheapen its currency and devalue the worth of the currency held by its citizens.

          Recently, in an attempt to imitate history, Japan’s new Prime Minister has stated he will devalue the yen.  The U.S. is printing paper currency and the U.S. dollar continues its slide against the currencies of the world other than the Euro.  Norway and Sweden express concern.  Russia bemoans the situation and calls for a replacement of the U.S. dollar as the world’s reserve currency, a not unprecedented step, since France called for the same thing.  In the 1920s the British pound sterling gave way as the reserve currency to the U.S. dollar.

          The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room.  The risk as each country tries to boost exports; it hurts the competitiveness of other economics and invites retaliation.

          We suggest you read the book in order to get an insight to that troubled time since there is no one living today who was an adult then.

          The countries of the world would appear to be in a race to the bottom in devaluing their own currencies.  As a personal situation we suggest you might want to take another look at holding some gold as an investment against the world’s actions.

          As always, if you have any questions about these or any other matters, do not hesitate to call us.

           Remember, We’re Here For You!