Government Makes Good Financial Decisions?

Government Makes Good Financial Decisions?

The country is moving through an uneasy and unexpected post-Cold War period.  Many have commented on the hyper-polarized world we live in, and the fast pace of events which surround us.

It is also an era of empowered individuals … while government continues to intervene and control, we also see the tools of capitalism spreading information, wealth and prosperity like never before.

Nonetheless government can, and still, does big projects on a big scale … for better and for worse.  Considering the size and scope of government action in relation to our money involves taking a look at our top 5, best and worst, government actions involving your tax dollars.

I. Top 5 Government Financial Decisions That Were Great For Our Money:

  1. Jackson’s closing of the first federal bank”: President Andrew Jackson may not have been a man of the people, but he was surely a man for the people.  Enduring a nasty mud-slinging campaign that would make modern campaign consultants blush, Jackson was elected as a “populist” (sound familiar) and went on to dismantle the second national bank and allow the charter to expire without renewal.  This was described in the historical record as the “Bank War”, as Jacksonian populists did not want the country to be beholden to the “bankers and the speculators.”  This is considered a great decision because it reduced, at the time, volatility in the value of the US currency, as the national government was rife to print money on a regular basis.
  2. Kennedy tax cuts”: President Reagan wasn’t the first to endorse the “Laffer Curve,” or rather – “supply-side economics.”  Democratic President John F. Kennedy cut the tax rate 20% and was quoted as saying:  “The paradoxical truth is that the tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut rates now.”  Tax revenue and GDP soared after Kennedy’s tax cuts.
  3. “Stealth Bomber Project”: A defense project … spending money … really?  Yes, stealth tech made its way through the commercial economy and its 1980s technology remains state of the art some 30 years later.  Stealth allowed less expenditure on more costly systems and the overall investment made us save money, advance technology, and protect America at a lower cost.  That was a great investment.
  4. “The Apollo Program”: Yes, again, spending money, not saving … but the return on investment has been extraordinary. Velcro … microwaves …. microwavable food … LED lights … ear thermometers … anti-icing technology for planes … radial tires … firefighter equipment … enriched baby food … cordless vacuums … solar energy cells and technology … the list goes on and on.  The public prestige of a “can-do” America was easily matched by the practical commercial gains from the project.  Tax money invested wisely, with a significant rate of return.
  5. “The Reagan Tax Cuts”: No political philosophy, no policy prescription, nothing in the field of economics matched Ronald Reagan’s historic tax cuts in 1981 and his Tax Reform Act – passed with Democratic support – in 1986.  By reducing marginal tax rates from 70% to 28%, Americans kept more of their money, jobs exploded, GDP exploded, economic growth exploded, businesses expanded, American businesses were infused with entrepreneurial spirit and vitality, and … tax revenues increased as more economic transactions and wealth creation led to more money to tax!  Minus the crash in ’87, and the recession of ’92 caused by George H.W. Bush’s tax increase, and you had essentially 18 years of uninterrupted wealth and economic growth.


II. Top 5 Government Financial Decisions That Were Terrible For Our Money:

  1. “Going off the Gold standard”:  Inflation, rising interest rates, economic stagnation, “stagflation” … going off gold and letting the American dollar float relative to every other currency was the Nixon Administration’s last gasp at funding the Vietnam War AND domestic spending at the same time without fiscal restraints.  The recessionary 1970’s were proof of how bad the decision was … our modern $20 trillion debt is confirmation.
  2. “2009 Stimulus Package”: Almost $1 trillion borrowed US dollars, passed without a single bi-partisan Republican vote in the House, was to help the economy recover from the “Great Recession” which started in 2007 but was best known from the 2008 banking collapse.  However, it quickly became known for what non-Keynesian economists predicted:  a boondoggle of a failure.  “Shovel Ready Projects” were not so shovel ready … Solyndra payouts to Democratic Party donors … sub-2% growth … this should have been the final nail in the coffin for Keynesian economic theory.
  3. “Smoot-Hawley Tariff Act”:  While the Great Depression seemingly started from varying economic events leading up to the Stock Market Crash of 1929, the consensus view among economists was that “The Tariff Act of 1930,” commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, greatly expanded and exacerbated the effects of the depression, and most likely extended the economic pain and misery for the years that followed.  The act raised U.S. tariffs on over 20,000 imported goods and reduced the US Gross Domestic Product by more than half.
  4. “George Bush’s TARP Bailout”: Some of you are reading and saying to yourself – “worse than Smoot-Hawley?”   TARP (Troubled Asset Relief Program) bailed out bankers who advanced products to clients that were not credit-worthy, knowing they had the implicit guarantee of a government bailout through the Fannie and Freddie underwriting of mortgage notes.  The government encouraged, and in many cases required, the bank’s loan to risky borrowers.  The bailout took taxpayer money – borrowed from China – to salvage failing banks and not one bank President or leader lost their jobs or were held accountable.  We never changed our banking practices, and we simply borrowed our way out of a crisis.   Moral Hazard on steroids …. debt well into the future … no one held accountable … we have yet to learn, or pay the price, for the banking collapse of 2008, and TARP covered up everyone’s bad decisions.
  5. “Creating the federal income tax”: Federal income taxes existed in the 19th century primarily to fund the Civil War.  But they expired after the conflict.  Another income tax was passed in 1894, but in 1895 the Supreme Court ruled the tax unconstitutional (Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895), affirmed on rehearing, 158 U.S. 601 (1895)).  So, in 1913, the public and the Congress finally passed the 16th amendment, allowing for a Federal US Income Tax.  How did society and government function before they had an income tax?  Needless to say, federal income taxes have led to a lessening of personal wealth, and a limiting of personal freedom.  Combined with our current debt load, the evidence has shown it has simply empowered leaders incapable of balancing a check book.

Our current Congress and President passed needed tax reform.  And as we know, cutting taxes has always brought in more revenue to the government.  At the same time, tax reform without government reform – cutting Congressional staff, cutting Congressional pay, reducing executive branch costs, streamlining government – it is only one half of the fiscal equation.  We are enjoying a record stock market and high-flying consumer sentiment.  But our structural fiscal problems, and debt load, is not being addressed.

The good and bad of government decision making will have profound affects on the market, and on your portfolio.  One way to avoid that volatility is utilizing principal protection products … safe, simple, and reasonable rates of return.  Call now! 877-912-1919

Please Don’t Say Recession?

Please Don’t Say Recession?

Years of concern over deficits and paying the debt seem to be moving to the forefront. But not just government debt.  While markets continue their historic run, and warning signs have proven not to be a threat to market gains as we have seen in the recent past, there are several recent warning signals whose track record of preceding an economic downturn (i.e. recession) are almost 100%.  As the economy recedes, stocks will go with it.

Last week we discussed the upward movement of oil and how it sends a mixed signal to where the economy may be going next … but it is usually an inflationary signal which ultimately hurts consumer spending.

This week, three critical variables could play a huge factor in where the economy will go for 2018, and whether or not the dreaded “R” word makes its return.


I. What are three critical variables that could hurt the economy, and which could drive stocks lower for the remainder of 2018?

  1. “Budget deficit and unemployment going in opposite directions for the first time since World War II”: Not since World War II have we seen the unemployment rate going down … and the budget deficit going up!   Goldman Sachs lists this inversion as the most dangerous trend for the economy this year, and almost assures us of breaking 3.5% on the Fed funds rate.  Needless to say, servicing the debt becomes problematic as the Fed funds rate goes up.
  2. “Yield curve inversion on the near horizon”: The spread between the 2-year Treasury note and the 10-year Bond is at its lowest since 2008 … only 40+ basis points.   If the spread turns negative, this is called a “yield curve inversion.”  Bottom line, the last 7 times the yield curve has inverted, we entered a recession the next quarter.
  3. “Checking account balances and savings are highest since 1991”: Typically, when people believe things are going well, they spend more and save less.  When they fear things are going badly, or that they will in the near future, they save for the proverbial “rainy day.”  As of May 1st, the average checking account balance in the United States is $3,700.00!!!.  That number was last seen in 1991.  The median average for US checking accounts is typically around $2,300.00, and it shrunk to its lowest on record in 2007, at $900.00 on average.  Yes, Americans have cash on hand.  The problem is, if history is a guide, that shows fear, not confidence, in the future.


II. What are three factors that support continued economic expansion and stock market growth in 2018?

  1. “Trade fears are diminishing”: While there are major sticking points to NAFTA renegotiation, and Chinese/American competition can alter the entire global marketplace, there is a sense among most analysts that any trade complications is baked into current stock prices.  US industries, so far, seem to be taking trade conflict in stride.
  2. “Low unemployment means businesses are confident”: For the first time since December 2000, there are as many job openings as those counted as unemployed.  That is an unprecedented accomplishment for President Trump and his policies.  Businesses are confident, and that means businesses are hiring.
  3. “Market remains on a winning streak”: Sometimes momentum can propel stocks, and economic expansion, all on its own.  We may be in such a period, since there are headwinds in front of us as described above yet we keep seeing record numbers across the economic spectrum.

There are more headwinds, and also more positives, than just one blog can cover.  But it is enough to see that certain variables have a near full-proof record of predicting economic downturns and knowing the right time to “time” the market is a difficult risk to measure.  Having your money safe in the first place is one way to mitigate against such risk.

Call now! 877-912-1919

Oil Is Up … Is That Good?

Oil Is Up … Is That Good?

Oil prices have been rising steadily since late 2017 and have reached their highest level since $107 per barrel in June 2014.  With President Trump’s decision this week to terminate the JCPOA – Joint Comprehensive Plan of Action – which is known as the Iranian Nuclear treaty, oil moved above $70 a barrel.

This is the primary driver of rising oil prices this year – fears related to the US cancelling the agreement with Iran, and what that would do to production and finance related to the industry.  But it was, and is, not the only driver of higher oil prices as there is a litany of geopolitical brush fires that are impacting price:

1)            Saudi Arabia’s quarantine of Qatar and its proxy war with Iran in Yemen;

2)            Sanctions on Russia which inhibits Russian production;

3)            Chinese claims of sovereignty in the South China Sea – driving up insurance and transportation/energy demand;

4)            Multi-front war in Syria;

5)            Virtually no production from Libya thanks to its failed-state status;

6)            Collapsing production in the failed-state of Venezuela;

7)            US fracking entrepreneurs getting out of the game when prices were lower;

Price elevation in oil has occurred in spite of the unprecedented strengthening of the dollar throughout 2018.  Usually oil prices go up when the dollar weakens, but not this time, as tightening by the Federal Reserve and small, slow, but noticeable rate hikes has made the Larry Kudlow mantra of “King Dollar” come back to life.

Additional rate hikes are expected, as well as continued strength in the US economy.  This should keep the dollar elevated throughout the remainder of 2018.  But it won’t be the only variable that impacts the price of oil.  What are the pros and cons for the US economy of higher oil prices?

I. What are the Pros of higher oil prices?

  1. “Energy company stocks will keep going up”:   US energy can profit from rising prices, as it increases the stock value of American energy companies – anywhere from transportation to large multi-national oil companies like Exxon.
  2. “US refineries will increase profits”: US refineries remain the highest caliber and most productive in the world, despite their aging physical infrastructure.  Higher prices mean greater profits for refineries, and therefore higher stock prices as well.
  3. “Growing economy”: Oil prices cannot go up, and stay up, unless there is continued demand.  Continued demand for energy products means we have a healthy, growing economy.

II. What are the Cons of higher oil prices?

  1. “Pocketbook issue – it can hurt consumers”:  While the “pros” can suggest a growing economy that benefits stocks which can be in your investment portfolio, the daily bread-and-butter issue of disposable income, money in your pocket, will be a negative for all but the upper income groups.  Higher gas prices is less food, less movies, less money to spend on everything else.
  2. “Weakens over-all economy”:  Like with consumers, energy stocks can benefit, but overall, the cost of doing business goes up as the price of energy goes up.  If businesses are spending more on energy, that is reducing profit … reducing pay increases, reducing hiring, you name it and there will be less of it.
  3. “Strengthens our enemies Russia and Iran”:  Higher prices increases the revenue to our enemies – Russia and Iran.  It’s that simple.  We can sanction Iran’s oil production and ability to sell their oil on the open market, but sanctions can only be effective to the extent we have partners willing and able to help us enforce them.  In both cases, neither government has to care what their public thinks, since they are not democratic and not beholden to public opinion.

Oil drives markets.  It does not matter that the United States is near energy independence, since energy markets like oil are fungible.  The rising price of oil can and will have an adverse effect on your portfolio, and on the larger economy.  Avoiding that volatility impacting retirement money should be a primary objective of financial planning.

Call now! 877-912-1919