Tax Cuts Equals Growth … and We Need Growth

Our country has a debt problem.  Will tax cuts help solve it?  We have a budget crisis in Washington in which our political leaders cannot fulfill their budget responsibilities on behalf of the country.  The Banking Crisis of 2008 … the political decisions of the Obama era … the daily drama that is the Trump Administration … these issues and more have prevented the public from focusing on a ticking time bomb that could affect our way of life just as much as conflict with North Korea, and dwarf the financial Armageddon we faced with the market collapse in 2008.

Are tax cuts the economic growth cure all?

Economic growth, which we will refer to as GDP growth, has been the hallmark of the past American century.   Growth in the private sector increases net revenue in the tax receipts to the government that we collect, and helps the government pay its bills.  It goes without saying that the historically awful 1.9% growth of the Obama era was simply not enough to meet the demands of an ever-growing Federal government.  Furthermore, Congress lacked the discipline (historically nothing new) and in many areas the Obama Administration simply violated the law and the Constitution to keep spending money illegally (shutdown threats, Obamacare subsidies).

Trump has made several promises both on the campaign trail and as president that suggests a return to the normal budget process, and tax and spending policies which could help foster significant economic growth and provide a “fairer” tax system.  But so far, Congress has been slow-walking the process.  Some believe that many Republicans wish to sabotage the Trump presidency by not doing anything.  Even worse, if true, some Republicans may simply be big-government liberals who prefer the current budgeting failures.

Needless to say, this is a challenging environment to pass, and benefit from, pro-growth Tax Policy.  But if we could pull it off, we could be looking at GDP numbers which could turn the tide on our debt crisis, reverse the Obama-era stagnation, and help fund the government for years to come.

I. What is the History of Pro-Growth Tax Policy?

  1. Pro-growth tax policy doubles the economy every 18-20 years. Three and a half to four percent economic growth doubles the economy roughly every 20 years.  That’s extraordinary.  While the top tax rates were between 70-90% from 1945-1973, those rates only hit a few hundred people nationwide.  With lower rates at the middle-income level, and a post-war dollar policy tied to gold, America sustained a growth rate of 3.3% during this time.  The same 3.3 growth rate occurred during the low tax era beginning with Reagan.  From 1982-2007 the US again averaged 3.3% growth.
  2. High tax rates and multiple brackets lead to stagnation.  Keynesian policies of high government spending, high levels of government debt, and substantial increases in government regulation, stagnated the economy in the 1970’s and recently again during the Obama era, with devastating effects for employment and retirement savings.
  3. GDP goes up when tax rates are lowered, and tax brackets are flattened. Not only is tax reduction a boon for economic growth, the resulting free market expansion has always led to increased revenue for the government to pay its bills.  Tax receipts go up because there are more transactions to tax, more people paying more payroll taxes.  As an example – tax receipts during the Reagan era (1981-89) by 60%…….the Nixon/Ford/Carter era they grew only 40% (1972-80).  Yes – you can increase government revenue by simply taxing and taking more from the people.  But you only get GDP growth, increases in tax revenue, AND a healthy free society from reducing taxes and flattening the tax code.

According to Peter Ferrara of the Heartland Institute, there are several policy decisions the Obama Administration pursued to get the WRONG outcomes for tax collections and economic growth.  They included:

 II. What NOT to do for Robust GDP Growth:

  1. Raise the top tax rate of every U.S. tax, with the exception of the top corporate rate, since it was already one of the highest in the world.
  2. Impose massive new regulations on health care, finance, and energy production.
  3. Raise all federal spending with the exception of defense, and create a debt without tracking the costs and benefits of the expense.
  4. Support unprecedented Federal Reserve monetary policy even after the crisis which led to the policy has abated.”
  5. Weak dollar policy through massive money printing and bank bailouts.

 This was the previous Administration’s agenda.  This was a textbook case on how NOT to grow an economy.

So, the opposite is true, right?  Well… yes.  The Reagan prescription for solid economic growth is the same today as it always been, because it is a free market, capitalist solution to our economic growth and debt woes.

III.       What we SHOULD do for robust GDP growth:

1)            Cut taxes and GDP will grow.  Reagan cut tax rates and restored incentives for production and capital investment.  He did this with a 25 percent tax cut for every taxpayer, and his 1986 tax reform together reduced the top income tax rate from 70 percent to 28 percent.

2)            Deregulate the marketplace across multiple industries.  Deregulation reduces the challenges for business start-ups as well as existing businesses to produce, expand and grow.

3)            Cut government spending.  Reagan cut government spending which is contrary to Keynesian economics, as government spending, deficits and debt subtract from rather than add to the economy.  While deficits went up during Reagan, this had more to do with a Democratic congress not cutting as much from the budget fat as Reagan requested.

4)            Strong dollar policy, tight fiscal and monetary policies.  Strong dollar monetary policy helped eradicate double digit inflation and rampant unemployment within three years of taking office.  This also led to an unprecedented expansion of global investment in the U.S. economy, and led an 18-year expansion of American GDP growth.

Economic growth requires flat, fair and lower tax rates.  It is the hallmark of the free market system – you keep what you produce.

Economic growth does not just benefit the individual, but it also is necessary to help improve the bottom line for government revenue, and to help us meet our unprecedented financial obligations.

The Republicans have released their Trump influenced tax plan.  They haven’t passed anything yet since the election.  Let’s hope they get tax reform passed… and soon.

Do You Invest on Emotion or Logic?

As reported in the USA Today and many other media outlets, American economist Richard Thaler, a professor at the University of Chicago, won the Nobel Prize in Economics this year for his theories and contributions regarding “behavioral economics.”  Thaler’s life-long studies have revolved around how psychology and economic decision making intersect.   Thaler’s conclusions are well-known in the number of books he has written on the subject: “….that people’s emotions, biases and lack of self-control often end up hurting their bottom line.”

Do You Invest on Emotion or Logic? - Richard Thaler

Thaler’s studies have the most relevance to your money and how you use it.  In summary, Thaler contends and the data he provides supports the idea that we could be far wealthier, and much more financially safe, if we could control our emotional decision making and be more focused on the logical decisions we should be making with our money.

Sounds like Spock from Star Trek.

And Thaler makes that comparison.  He was quoted as saying:

“…it is about the way actual people behave as opposed to the way economists think people behave – (like) people who are highly rational, unemotional creatures — kind of like Spock in the Star Trek TV series… The people I study are humans that are closer to Homer Simpson.”

“We humans don’t always choose the right thing,” he continued. “Sometimes we over-eat. Sometimes we exercise too little. Many of us have trouble saving enough for retirement.”

 He is right on the money when it comes to your money.

I. How Investors Make Huge Financial Mistakes, Based on Thaler’s Theories Regarding Behavioral Economics:

  1. The ‘hot-hand’ fallacy. A classic error people make, Thaler explained in his cameo appearance in the movie The Big Short, is “thinking whatever is happening now is going to continue to happen in the future.”  “It is called the hot hand fallacy,” he said, the “basketball player who has made 5 shots in a row, somehow the team keeps feeding him the ball, because he has the ‘hot hand,’ even though statistically, the chances of making it are lower and lower each time.”   Obviously, much of the investing world was guilty of this particular behavioral shortcoming during 2008 banking crisis and the dot.com collapse.  Do we not see the same “irrational exuberance” all around us today?
  2. Believing what you own is worth more than what you don’t. Thaler uses Enron employees as the perfect example.  Advisors tell clients to not overly invest in the stocks of their own company, yet many Enron employees had up to 90% of their portfolio in Enron stock.  By 2001, the company was bankrupt and many retirement portfolios had been wiped out.  “Buy and Hold” failed in 2008.  There are other strategies, from diversification to safe-money principles, that better serve your portfolio than holding on to what you have.
  3. Mental Accounting can work against financial planning. Mental accounting is when people divide up liquidity for certain specific purposes.  The example used is the husband who has $25 budgeted for the week for coffee and incidentals.  Because he pays the bill for several co-workers, he has spent his allotted coffee money by Wednesday.  Most people then do not get coffee on Thursday and Friday since they have “spent” their budget on that item.  This is a good aspect of mental accounting.  But it can work against you as well.  The couple with $10,000.00 in the bank assume that they can then borrow $10,000.00 for unneeded items or intangible items such as an extravagant trip.  They “feel” like they have $10,000.00 in the bank, but in reality they have zero net worth since it is off-set with bad debt.

Bottom line – Thaler’s studies have produced mountains of evidence that investors too often use emotional inputs to make financial decisions that are usually wrong, and if they had instead applied logic, they would have pulled out of the market before a major correction impacted their investments.

Mr. Spock hit it right on the head:

“Humans, I find their illogic and foolish emotions a constant irritant.”

Do You Invest on Emotion or Logic?

So, what should an investor do regarding their money?  Can you possibly eliminate emotion from the decision-making process?

II. How to Take “Emotions” Out of the Investment Decision Making Process:

  1. Don’t focus on minute to minute returns. Investments with longer time-horizons or principal guarantee features can take emotion and worry out of retirement planning.
  2. Have a healthy sense of history. Black Monday 1987… Friday the 13th Mini-Crash 1989… Asian Market Crash/Global Downturn 1997… Dot.com Bubble 2000… 9/11 Crash 2001-02… Banking Crisis 2008 (really 2007-09)… Flash Crash 2010… It can’t happen to you?  It can’t happen again?  Irrational exuberance, hubris, you have lived long enough to know that some of your money should be protected right now, and that falling prone to Thaler’s “hot-hand fallacy” is a huge investment risk.
  3. Get protected now before it would be too late. Safe, simple, with a reasonable rate of return?  Sound familiar?  At some point, an investor must realize that their earnings over their work life deserves to be protected from market loss.  In 2008, many investors were wishing they had heeded safe money advice.  In principal protection investment vehicles, you get some of the gains, and more importantly, you endure none of the losses.  The principal protection investment vehicle should be a priority when you are in the 8th year of a bull market.  History says the clock is ticking.

As mentioned above, Thaler’s appearance in the movie The Big Short was cinematic genius His theories were on global display in the Banking Crisis of 2008.  The movie provides many examples of gross excess, and the few who saw the collapse coming.  What was self-evident was that as the crash approached – no one listened to those who were providing the warnings.  What’s different now?

The next market downturn may not be a crash, it may just be an old-school business cycle correction.  Either way, shouldn’t you have some or all of your portfolio protected from those market losses?  Logically, you know what you need to do. Our advisors help people protect and grow their money every single day. Give us a call at 877-912-1919.

Investing in the Era of Trump

Investing in the Era of Trump

The stock market, and the economy, have given us signs of hope here at the beginning of the Trump Presidency.  The data has been overwhelmingly positive since the November election.  It seems that investing in the era of Trump has started off with a bang!  Just consider a few data points:

I. The Positives of Investing in the Era of Trump:

  1. The Stock Market is soaring! It has been up approximately 4000+ points since Trump’s election, and that is roughly a 22% jump in the market in less than a year!  The market has been up 6 of the 8 months of his Presidency.  It has included deregulation, the expectation of tax reform, and much more is expected.  Tax reform alone includes significant changes such as: (a) Corporate rate from 35% down to 20%; (b) Immediate corporate depreciation instead of 5 year schedule; (c) Individual rates will go from a 7 bracket structure to three:  12, 25 and 35%; (d) higher standard deduction to offset the lowest rate going from 10-12%; (e) expanded Child Care Tax credit…..  his tax reform plan has the market excited, and if it passes, we could see even more market gains.
  2. Unemployment rate at 4.4%. It is a little up from 4.3% in August.  Still, it is at modern lows and what would be considered full employment by economists.  It is way down from 4.9% he inherited from the previous administration.  The number is not the best number to judge employment – we have said many times during the Obama years that Labor Participation rates are at historic lows… they were and are, at 62.9% today.  But job creation has been robust since the inauguration with anticipation of the “Trump Bump” from tax reform and de-regulation, as mentioned before.
  3. Rising GDP is real and growing. Gross domestic product (GDP) grew in the second quarter 3.1%, and seems poised to continue upward.  The current average for the year is 2.6%, higher than President Obama’s 8-year average of 2.1%, and trending in the direction Trump predicted.  Non-financial sector corporate profits increased 5.9% year over year in the second quarter.  GDP growth is occurring without any of Trump’s agenda being passed, and only on the hope we will see it before 2018.  That is impressive, but certainly fragile as growth based on “hope” will eventually need to see his agenda enacted.

Oil prices are going up, but still well below the highs.  Manufacturing jobs have increased 1.7% since the inauguration, instead of their usual decline.  Sitting here today – increasing GDP, soaring stock market, improving employment… happy days are here again, right?

Well yes, but …

 While many analysts have stated that this market seems “immune” to any outside force slowing it’s climb, that doesn’t mean we should not recognize the obvious risks to continued stock market appreciation.

 II. The Risks to Your Portfolio While Investing in the Era of Trump:

  1. North Korean Menace. The Korean Peninsula sits between the South China Sea and Japan, conflict could cause disastrous results for world trade.  China and Japan are #1 and #4 in trade with US…….South Korea is 6th.  Combined, those three countries represent almost $1 trillion in trade annually with the US.  Both Trump and North Korea have ratcheted up the rhetoric, making it more difficult to back down.  The placement of forces on the Korean peninsula given the volatile circumstances makes for great risk of strategic mistake, and tumbling into war by accident.  War impacts trade routes, and with massive casualties, could cause a significant negative impact to US stocks and the world economy as a whole.
  2. Unprecedented Hurricanes and natural disasters. We have always had natural disasters, but their frequency this year has been a change as compared to the last decade or so.  You would think hurricanes would negatively impact markets – but Irma, Harvey, Maria… they did not reverse the continual market trend upward.  But there are hidden and not-so-hidden costs that can have long term impact on the market.  GDP will eventually feel the weight of these costs, since the economy is hammered in the areas hit by the hurricane, and that has a ripple effect throughout the country.  Oil is an example – the refineries were shut down in Houston and oil prices headed upward as a result… higher oil prices, higher gas prices, lower disposable income, less consumer spending – that’s bad.  And of course – deploying the military for natural disasters makes us less able to respond to global events as they occur.
  3. Terrorism. The horrors of domestic terrorism were brought home this week in Las Vegas.  Our hearts go out to the victims of this horrific tragedy.  Markets kept going up nonetheless.  It doesn’t seem like terrorism, or any tragic event, can stem the tide of these historic market highs.  But over the long haul, costs are adding up. Insurance… security… a change in how people attend events… consumer spending… all will have an impact on corporate bottom lines.
  4. Other Foreign Policy Issues. Iran, which we have a nuclear deal Trump is threatening to pull out of.  And for good reason – it was an awful deal not ratified by the Senate and has made Iran even more powerful in the Middle East.   Iran is a problem that will not go away anytime soon.  Then you have the EU and global banking.  Just consider the timeline of crisis in Europe: (a) the 2008 global crisis; (b) Greek debt crisis in 2010; (c) PIGS crisis that followed which added Ireland, Portugal and Spain to the list of banking and economic collapse in 2013; (d)            Brexit 2016; (e)                Current Spain riots for secession in Catalonia… when you read that list, do we feel like they have moved past their issues in the EU?  Lest we forget Russia in the Ukraine and Syria.

 So, what to do with all of this information?

 On the one hand, the market appears “immune” to the pressing geo-political and economic issues of the day.

On the other hand, you know, deep down, the party (i.e. the market going up every day) can’t go on forever.

We are already in the 8th year of the recovery… driven by the artificial stimulus of the Fed and the easy money of the previous administration. The market has NOT been driven by determinants such as the next Apple product, a breakthrough in food production, or a new hotel chain… simply driven by market stimulants.

 Now we have positive changes that could be heading our way on the fiscal policy side with tax reform and deregulation… but we have massive geo-political issues that should impact markets and global economics as well.

It is possible that now is the time to diversify your portfolio into products that will enjoy the gains of the market, but at the same time, given all the potential risks and geo-political uncertainty, provide you with downside protection when the next bear market begins. Learn more with no cost and no obligation by calling your Ty J. Young Inc. advisor today at 877-912-1919.