2010Oct17 Week In Review: Can a people tax themselves into prosperity?

Economy:

 

Friday morning, Chairman Bernanke explained why the Fed was prepared to start another round of Quantitative Easing (QE2). Inflation is insufficient for sustained growth or adequate job creation. The Fed wants to avert deflation, virtually at any cost, since there are no policy solutions to reverse it.

 

His dour assessment did not reflect that the Empire Manufacturing Report was the best since June or that September’s year over year retail sales growth was the best since April and the best year/year since 1999. This week’s economic reports continue the recent trend of more positives than negatives. This would indicate justifiable support that a “second dip recession” is, at least, being delayed unless the Fed is not telling us all we should know.

 

Theoretically, QE2 will lower financing costs, support higher prices for stocks and real estate and boost credit sensitive spending and decrease the savings rate. That has been the result over the past three decades. However, demographic changes are not solved with monetary or fiscal policy. Boomers are the advancing guard of austerity as the “new normal” that government at all levels has yet to fully accept.

 

Health care:

 

Facing the implementation of new federal healthcare laws, insurance companies have been adjusting their business operations to reflect the “new normal” where a myriad of new agencies will oversee their rates, coverage and underwriting. One of the major justifications is government’s lower administrative costs and lack of a profit motive. Easily forgotten is last year’s 60 Minutes investigation into Medicare fraud which, in Florida, is a bigger business than drug trafficking. You don’t have to be a physician, deliver services or even have a patient to collect large sums from Medicare.

 

Charges of industry profiteering are unfounded. Profits of the 14 largest insurers combined can’t match the $60 BILLION stolen from taxpayers through Medicare fraud. Will it be any less after adding 88 million people? Companies profit motives give them an incentive to investigate and deny fraudulent claims, and that requires higher administrative costs. Higher than $60 Billion? Not likely.

 

More insurers facing new mandates are seeking exemptions similar to those granted to McDonald’s, NY Teachers Union and others. Mandating an increase in claims payments requires premium increases or exiting the business.

 

Policies have always been available “across state lines.” Availability has been subject to state insurance commissioners’ review of an insurer’s financial stability and actuarial soundness of its policies and premiums. State imposed, well intentioned, but unprofitable, mandates for uniform benefits cause companies to withdraw state offerings. Less competition and mandated benefit cloning results in fewer consumer choices and higher costs. If we don’t like it, we still can appeal to our state legislators and vote for a change in the commissioners office. We don’t have that recourse with federal healthcare.

Real Estate:

 

Real estate continues to suffer through persistent devaluation as properties for sale increase. The average time from delinquency to foreclose is now 15 months with a high in New York of twenty six months. Decisions by Bank of America and others to halt foreclosures reduces available inventory and may temporarily slow further price declines.

 

Delinquencies are expected to rise for another two years as mortgage terms begin to reset both rates and principal payments. Is there any hope for an earlier resolution? Yes, but slim at best. Delinquencies at Fannie and Freddie are closely tied to unemployment. SHAZAAM! Income reduction from unemployment or under employment impairs ability to make timely payments. Government intervention to prop up property values is more wasted time and money without private sector job growth.

 

Stock Market:

 

Modern Portfolio Theory (MPT) and mountain charts of rising stock prices reassure us that risk will be rewarded in the end without any assurance of how far away the end may be. A protracted bull market created a confirming feed back loop that many investors and their advisors still cling to.

 

 

The losses of the gold standard in the 70s under Nixon and technological advancements have created an unprecedented environment of global imbalances. The time required with MPT to have imbalances corrected is unknowable and likely intolerable for either individual investors or pension plans.

 

Where in the world can you find a government’s economic policy focused on the long-term? QE2 is certainly not a long-term fix. The massive expansion of sovereign debt in developed countries is debasing currencies with the U.S. right up front. We discussed this with Rodney Johnson from the H.S. Dent organization on this week’s radio show. Listen to the recording.

Our stock and bond markets are being supported by the Fed’s actions which are not intended to be long-term. Chairman Bernanke has told us that we have never been here before. How does the Fed unwind its positions? Even they do not know. In this “new normal,” portfolios must be re-aligned with shorter term objectives and a willingness to abandon positions however well reasoned they were at the time of acquisition.

 

Our primary asset allocation model favors some domestic sectors plus international equities. Investing in international assets that are not tied to the US Dollar are a de facto currency investment that should have extra benefit as the US Dollar continues to decline in the current era of QE2. Commodities, while not close to replacing either of our currently favored asset classes, have been improving and have surpassed fixed income, currencies and cash for alternative asset exposure and are a hedge against possible inflation.

 

“When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes

Our plan is “the plan will change.” What is your plan?

 

If you would like a free relative strength analysis of your portfolio’s sectors and positions, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.