BUD BREWER
One Man's Opinion
Minimum Wage vs Econ 101
JUST WHAT THE HECK IS GOING ON IN THE MARKETS?
After the close of trading on Friday May 17th, with the market indexes reaching new highs, I couldn’ help but ask myself the question, What the heck is going on? Buyers seem uninhibited to pour money into stocks. In the meantime, U.S. Treasuries are selling at prices that offer the lowest yields I have ever seen in my lifetime, 50 years of which were serving investors as their investment advisor and then as Trustee for family trusts. It is true that the Federal reserve is pumping money into the system and I suspect those who are selling their Treasuries to the Federal Reserve are becoming reluctant to put any more of their proceeds back into U.S. Treasury securities due to the pathetically low yield available in that market. So perhaps and maybe even more probably sellers of their Treasaury issues to the Fed are reinvesting their proceeds in high grade common stocks trying in some way to get some reasonable income return on their investment. Although experienced traders and market investors are beginning to feel very uncomfortable with the pace of appreciatiion in stock prices, they are reluctant to begin going against the trend as, being short in a wild bull market is probably the most uncomfortable feeling one can experience. In addition to bond yields and mortgage rates at their lowest in decades, we have a commodity market in which prices don’t seem to be reflecting shortages or feeling inflationary pressures. As a matter of fact, the price of gold has fallen over 500 points from its high in the past two years suggesting that instead of inflation we may be in a period of deflation. Oil prices are fairly stable although gasoline is at its high or near high as the refineries trasfer over to Summer blends adding some costs that are not reflective of crude oil prices. The breakthough in technology in recovering oil from shale is being said to offer a high probability that the U,S.A. may become not only self dependent for oil in the next decade or so but also may become a controlling partner in OPEC along with evolving into a net exporter of the black stuff. Maybe if true, this is the key to what is happening in the markets. How would the U.S. consumer react to the probability that energy becomes abundant and prices begin to decline in real terms. I think it could have an extraordinary impact on airline travel, housing, office construction, etc. These are but a few industries that could become dynamic in an economy where energy prices decline. If that is a possibility, it may be the beginning of a new highly productive growth period in our economy as well as many countries with whom we do business.
The worry I have had over the past 5 years of the Obama Administration is based on my concern over the amount of debt this Administration is creating with no apparent idea about how to cope with the consequences of budget deficits in amounts exceeding $1Trillion per year and that doesn’t include the projected deficits we are going to experience from demographic factors effecting the solvency of the Social Security System and Medicare. And this doesn’t even include the fiscal problems that will develop from Obamacare (The Affordale Health Care Act). When you take into effect the unfunded liabilities of these programs along with the pension programs for the public service unions, the figure becomes pretty staggering. So how do we protect our wealth from the consequences of too much debt and uncontrolled spending by both State and Federal governments in an environment where the currency is being debased, interest rates are reflecting abnormal interdiction in the bond markets and the economy is poking alolng at a 1-2% growth rate while unemployment is still well above the level at which the Fed has said it will cease to buy U.S. Treasuries and maybe begin to sell some of its $3.5 Trillion worth of assets on its balance sheet?
It appears that a judgment has been made by many investors that the safest place to be at a time when corporate managements are focusing on productivity rather than growing the top line revenue, that profits are likely to increase by amounts reflecting the effectiveness to achieve improvement in their margins. By generating strong cash flow they are able to increase their dividends rather than seek new markets to enter or explolit. They are able to pay down debt and increase their capital base to assure the ability to expand when the time comes that opportunities are out there. The Consumer Confidence Index is rising sharply, the housing market seems to have bottomed and is improving somewhat so in my opinion the holding of equity securities may be the better way to protect assets from any continued threat to devaluation of the dollar, but given that the Dow Jones is way above its 200 day average, I wouldn’t be surprised to see a quick sharp correction to the recent advance. If that happens it should give investors the opportunity to increase equity percentages in their portfolios. In the meantime it seems reasonable to shorten up any bond position or just sell them and go to cash and hopefully get a chance to rebalance into equity at lower price this summer. If the Federal reserve decides to slow or even stop its treasury securities buying program ($80 Billion per month), the bond market should sell off sharply and interest rates rise. Such a change would cause stocks to decline too but that is what we are waiting for so it would be a welcome event.
I believe the stock markets may become increasingly volatile during the summer months, especially since the stock averages are selling at a large premium to their 200 day average, but at the moment I think it is a mistake to sell equity and reposition portfolios into cash or short term fixed income securities. I believe we may experience a sharp decline in U.S. Treasury Security prices at some point in the coming months. The realization of that could have a temporary negative effect upon stock prices but whereas bond prices will likely continue to be weak as interest rates come in balance, stock prices should recover and reflect the opportunities of growing earnings and dividends. For that reason, I will continue to hold disproportionate percentage of assets in common stocks, junk bonds and money market funds. The junk bond market would also get hit sharply by a collapse in the bond market but the decline will be offset to some degree by the adjustment in coupon rates on new purchases. The junk bond portfolios I prefer have average maturities of 4-5 years so if the junk bond issuers are doing ok, the risk seems manageable and the yields are 7% or so which would enable the investor to recover some or all the loss in market prices over a reasonable period. In the meantime the cash flow should rise from higher coupons on reinvested maturities. Money Market funds are yielding zero interest so I will keep only that amount necessary to provide working capital liquidity in them, perhaps 10% or so.
Well we will see how this works out. I hope my assumptions are reasonable and are probable or should I say possible. At any rate this is my strategy for the coming months but I will reserve my right to change course if I discover new or unexpected information.
One Mans Opinion– Bud Brewer
Great Issues of the Day
April 15,2013: I am one of those who suffer from waking up early in the morning and have difficulty getting back to sleep. So rather than sit there looking at the ceiling, I turn on the TV, and since I live in Reno, Nevada, I am able to tune in on New York City Morning talk shows like Morning Joe or watch The Business Channel pre market discussion on CNBC. I find The Business Channel to be an important source of information that is essential for the ongoing evaluation process for my investments. One gets multiple levels of perspective on markets, currencies and fiscal condition of countries and economic sectors all over the world. Many of the guests on Squawk Box, the name of the show, have deep perspectives on important factors affecting security prices and fiscal condition of developed countries in the world. While this information broadcast is going on another show that I enjoy watching in my semi-conscious condition is that hosted by Joe Scarborough. It is a political discussion each morning of the issues of the day. Presented as a news and discussion program, it leans so far to the left that one wonders how every Starbucks (the Show’s sponsor) coffee cup doesn’t slide off the table. The Show’s co-hosts are Scarborough and Mika Brzenzinski along with Willie Geist. While Scarborough presents himself as a Republican and conservative voter, the show’s guests, semi-permanent guests and co-host are well into the left wing thought process. I watch the show primarily to learn what the Liberals are thinking and to get better perspective of Democratic mind set. So far during this second term of President Obama, there has been little cogent conservative points of view on any of the public news channels, particularly this one whose champions are Keith Obermman and Chris Mathews. So, what do you think are the major subjects discussed on this show for the past three months? Not surprisingly, the topics getting the most minutes of discussion are Gay Marriage, Gun control, Women’s rights, otherwise known as abortion, the New Pope Francis’ move to bring less hierarchy and more common man touch to the Vatican, The joint Congressional Committee’s plan to deal with illegal Immigration, Hillary’s run for President in 2016, and of course the question: how is the Republican Party going to survive as a political party.
I suspect most conservative thinkers get pretty disgusted listening to such bias thought about the importance and substance of what the show’s guests think America’s problems are, but I listen primarily to try and understand just why they believe these issues are so critical as to require 3 hours of conversation each morning repeating the well-known verses of liberal thought. It is difficult to appreciate how these repetitious talking points really address the principal problems of the average American citizen. Based on their stated views, there is a fundamental underlying belief by the guests like Mike Lawrence, Chris Mathews, Mike Barnicle, Andrea Mitchell, and Keith Obermman that the power of individuals who are leaders of our largest corporate entities exercising less constrained action operating their companies in free markets is inherently dangerous and unfair to the ordinary citizens of this country. Their points of view are easily embraced by a large constituency of voters who are slowly becoming the majority in this country. In a number of specific cases, there is evidence to support that contention, especially in the financial sector as we saw in the housing industry during the decade 2000 to 2010. However, that period notwithstanding, the extraordinary creativity and fundamental talent for bringing people, capital and organization together to generate useful products and services that are available at reasonable prices to global consumers is second to none here in the United States. What is misunderstood, unfortunately, by a growing majority of people here in America is the relative contribution to that productivity that is provided by our national and state governments. By that I mean that while the Government’s role in our economic growth is not immaterial, it isn’t the engine or power plant of the commercial success. The government does provide an oversight responsibility involving safety, welfare, and peaceful environs. The government does assure that our commercial transactions operate under the rule of law. It does provide work rules that assure safety and wellbeing of individual businesses and corporate workers. It does provide common use benefits of roadways, air traffic control and right away for the rail industry. Superimposed over those services are the entities created by entrepreneurs who have vision and ideas for serving the needs of individuals and industry. These individuals benefit from the natural economic flow of financial gain either from compensation for their services or more typically from the economic growth in value of their relative ownership in the corporate or private enterprise for which they contribute their knowledge , unique skills or operating experience. I have had the good fortune to be acquainted with a few of these business or artisticly skilled giants and I truly do admire them for what they contribute to our great Nation.
Because most of us gain our individual perspectives on how the world works from the Media, it is understandable how and why some of our citizens truly don’t believe that accumulation of wealth by a segment of our people is fair and equitable. Most of these individual’s minds or conclusive opinions are conditioned by the constant views of talk show hosts on radio and TV or news magazine writers. Our Universities have a mixed political agenda but it is more common today for students to be attracted to the economic theories all for one and one for all who are in need. This progressive perspective seems reasonable to those who have yet begun to be in a position to generate value in the economic world. But it has been thus for decades and we shouldn’t get too steamed up about the reality that the young and inexperienced individuals are impressed by a theory that has as its objective the achievement of greater economic equality among the people of this and other nations. The mantra is: “Individuals should not have to bear the discomfort of their incompetence.” Society should share the benefits its members achieve from the creation or production of values with those who suffer deprivation of general skill, or the will to learn. It is these individuals who are becoming a voting force in our political spectrum. President Obama has successfully marshaled huge numbers of them to come to the poles and vote for the candidate who will make their lives just a little bit easier. At least that is what they believe the President’s progressivism will do. In fact this government will do just the opposite. By encouraging its new constituencies to just give them the power to increase taxes on those who are producing increasing amounts of wealth in this country, the government is spending more and more money on administration of programs deemed to be for the wellbeing of the population as a whole, but in fact the programs instigated by this government are repressive to the middle class and below, while those who are talented, have unique skills and extraordinary experience just continue to demand and receive economic benefits for that which they produce. The burden of government is crushing the middle class. The disparity in life styles is expanding and will continue to do so until the general public begins to believe that there really isn’t a free lunch. Everyone has to work for what they have or they will have less and less as time moves on.
One Man’s Opinion—Bud Brewer
Free Market Capitalism vs. Social Capitalism
February 12, 2013: I listened to the Presidents “State of the Union Speech” for a while last night until I began to feel sick to my stomach watching the audience stand up and sit down like Yo-Yo’s on a string whenever a theme or demagogic statement was expressed that pleased them. This traditional event should be scrapped at least in its present form, particularly that march down the aisle by the President and those self-perceived elite from both parties making small talk among those Members who have camped out all day only to assure good seats to get their face on camera for the folks back home. After several minutes of wasted time doing this dance, the President finally got to the Podium, told us the Country is in great shape and began to lay out his agenda for how he wanted the Government to make investments (spend taxpayer money to fix 70,00 bridges on our Interstate highways) and cut the deficit (raise taxes upon the wealthiest and sell U.S. Treasuries to the Federal Reserve) for the “good” of the Country. I heard these themes and others designed to make some voter somewhere happy notwithstanding the probability that the President is more interested in increasing the power, control and responsibility of the Presidency and his Administration over the American people. They call it Social Capitalism, a not new economic approach which includes a system of open markets, but markets that are unambiguously regulated by an activist state. In Obama’s Social Capitalism we have the state anxious to intervene ostensibly to reduce inequity that would otherwise be produced by those same markets if they were free. When I was a young teenager growing up in the San Fernando Valley, I and most of my friends were able to find work after school and on Saturdays, thus allowing us to make some money (and I suppose keep out of trouble). I earned a paltry 40 cents an hour stocking shelves in a Woolworth type odds and ends store (we called them “Five & Dime” stores). Other youngsters sacked groceries in the food markets or bussed tables at a local resteraunt for something close to the same wage. Now there is concern about employers not paying enough for part time low level jobs. These jobs are normally held by teenagers going to high school or college allow them to make some money to either save for later needs, help meet current expenses or enjoy a movie or a ball game they otherwise would not be able to afford. The President thinks anyone earning a “Minimum Wage” should not take home less money than an amount that would be at or above the poverty level and so he wants to raise the base minimumwage rate to $9.50 per hour. Well that should solve the problem, instead of the current 22% unemployment rate of teenage and slightly higher aged students, that rate will rise some to 25 or 30% as employers revalue the worth of their helping young people enter the work force or do part time work. Business owners will just restructure responsibility of other employees in their company to include what would otherwise be done by a minimum wager. It is already being done. That is what interdiction in and disruption of the magic of free markets does. Minumum wage is a job killer and raising its level just kills jobs faster. You can’t legislate the value of work. Only the worker applying his skills can affect the economic value of what he does for any organization.
It is not unreasonable to have some form of regulation, order and control of markets in order to get the full benefits of traditional capitalism as embodied by Adam Smith’s description of the “Invisible Hand” of the marketplace. But the “Invisible Hand” should be free to the greatest extent possible to create market efficiencies for all participants in the marketplace. However, the very essence of competition is that there cannot be any ties. Some Liberal thinkers believe that free markets are by definition, unfair. They think that the result favors one or the other and that means that one of the participants is being exploited. But the truth is that motivations of the parties to a free market transaction are not necessarily the same. A buyer may have need caused by shortages while a seller may have little or no need caused by excesses. Each party makes a value judgment about what it is worth to them to satisfy the need to acquire or the need to reduce any excess. This valuation determines the economic price at which the transaction will take place and the variable degrees of urgency that are demonstrated by the two or more parties to that transaction.
Social Capitalism is adopted supposedly as a proper economic structure by those who believe that individuals are incapable of making value judgments let alone voluntary decisions to acquire or to not acquire a given product or service deemed generally to be or not to be fair value and then to enter into a transaction if a need exists. Governments such as the Obama Administration, embracing Social Capitalism, go so far as to preach what the appropriate needs by individuals should be for goods and services and then set in being a law or regulation to control and or influence if and how that presumed need shall be made available and what the end price to the public will be, e.g. price regulation, product tax, fees, subsidies, etc. A special bureau is normally set up by a socialist type government to standardize certain proper use levels and then submit that information to a planning Department of that same government who then issue contracts for the growth and purchase therefore of all kinds of product or services based upon this “expert” analysis.
Sounds like an efficient way to manage and allocate capital for the production of a society’s needs doesn’t it? Well unfortunately for the Social Capitalist, the problem that stifles production and distribution in such a system is the inefficiencies of its bureaucratic management structure. When decisions regarding current investing for future distribution of goods and services are centralized and made typically based on past experience or completely out of date data or unsupported opinions and perspective, it is not an infrequent experience for the services and products in the system that are in the greatest supply to have little demand for them and the services and products that are in greatest demand to have too little supply available.
An economy with a government moving toward greater emphasis on social services, targeted sectors of society rather than society as a whole, we are threatened to lose our seed capital that comes from personal savings, discretionary income and increased productivity of individual effort. This is caused by the burden of taxation, regulation and fees along with basic inefficiencies of the bureaucratic structure created by too much power at the top.
Social Capitalists believe that in every market transaction someone wins and someone loses, that is the process. Some call this a Zero-Sum game. That simplistic perspective however does not take into account what the buyer does with the product or service that he bought and it doesn’t take into account what sellers do with the proceeds of sale. Nevertheless Liberal thinkers believe that the government has the responsibility to go beyond providing a safe and honest marketplace. They believe that they need to set standards for how one side or the other wins and the loser loses. Winners in a transaction are winners because of what they do subsequently with the product or service, not by how much higher a price they received for a subsequent sale of it. It is not useful to consider whether or not a seller took his proceeds and made bad subsequent investment. Who is to say the judgment was a bad one. It is only important that the decision was his and was not fettered by some government overseer who professed to know better what the seller should do with his capital.
It all comes down to whether or not the American citizen is capable to assume responsibility for their own wellbeing, to practice good behavior, undergo continuous self-education and learning so they might make better judgments regarding those things that are important to them. We need a government to see that the playing field is in good condition and that there are lawful activities being carried out on that field, but we do not need and should not have the government playing the game.
One Mann’s Opinion- Bud Brewer
“Pomp and Circumstance”
January 21, 2013: Today, America celebrated the inauguration of Barack Obama to his second term as President of the United States. On such a day, the music, “Pomp and Circumstances Military Marches” written by Sir Edward Elgar, set the tone for recognition of a special event that takes place every four years, the change or renewal of Power vested in a single person who is to lead the country. Taking the Oath of Office this year, our President said:–”I do solemnly swear that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States.”
As I watched the event, however, I was struck by the vision of Senators, Representatives, members of the Supreme Court, the Administrative Secretaries and those former Presidents glowing in the moment. Yes it is “Pomp”, the demonstration of power granted to a few souls who hopefully will exercise it in that way that recognizes” Circumstance”, the needs of the people to feel free in a market economy. Following the swearing in on the balcony in front of the Capitol Building, the “dignitaries” retired to the central hall to be served lunch and listen to toasts to the President and to each other. Somehow this special group of men and women seem so distant from the people on the street waiting to watch the parade of vehicles and marching bands moving back toward the White House. Sitting comfortably in their big black specially equipped limousines, all the dignitaries, the political elite and their sponsors wave lovingly at this crowd of perhaps one plus million people plus, largely black, who are wrapped up in overcoats and scarfs trying to protect against the bitter cold. Having waited several hours for this moment to see their President, they are getting impatient as the President, ocassionally gets out of the car and walks a while, stopping from time to time to dawdle with loving fans along the route before scurring back to the warmth of his $380,000 black Cadillac. Watching this splendor, I found the President’s remarks strangely vacuous of potential policy changes that could have a positive effect upon the serious problems we face. He repeated his hope to “invest” in new sources of alternative energy, no matter their level of economic efficiency. His claim that entitlements like health care and social security are a basic human right; their realization by every human member of society is essential. He implied that personal responsibility is no longer a requirement of the people of America. This attitude fits in with his seeming complete disregard of any expectation or goal for achieving a balance between revenues and expenditures of the government. One finds it easy to realize what is wrong when you watch the pattern of excessive spending for personal pleasure and comfort that members of our government have come to believe is perfectly proper for people of their position. This observation is not reserved for Democrats. Politicians from both parties have demonstrated complete lack of empathy to the general population’s standards of propriety for their political leader’s behavior. With the current economy struggling and unemployment still close to double digit, it is difficult not to resent all this Pomp and Circumstance yet it just may be necessary to keep us all from falling into a state of despair given the reality of our concerns for the fiscal condition of the American economy and the future well- being of our next generations. One Man’ Opinion- Bud Brewer 
How The President will Balance the Budget
January 2, 2013: Most Americans believe that the wealthy should pay a larger percentage of their income ( or as the President says, a” fair share”) to fund the cost of government. President Obama has voiced over and over that we need to “invest “more dollars in education, special job training, repair and replace much of the infrastructure. He says that he will not approve or sign legislation that could modify the voracious appetite for and costs of providing Medicare, Medical and Social Security and of course “Obama care”. He speaks of protecting the poor or less well off by assuring continuation and upward adjustment for spending wants of those needing unending amounts for child care, unemployment benefits, food stamps, and general welfare subsistence for those living below the poverty line. On top of these burdens to fund what appear to be reasonable wants faced by the tax payer are the costs of National Defense both against foreign and domestic terrorists acts for which the government is paying over 20% of its current rate of tax receipts. All these programs have constituencies that push and push for more funding and the politician who says no will create an enemy seeking to replace them. This is why even under a more conservative government, the debt of $16 Trillion, growing at almost 8-10% per annum, and the potential rising interest expense on it as rates return to normal is America’s most serious problem. Unless we are willing to accept a step back in economic activity, commonly called a recession, or God forbid, a Depression, a solution to the problems faced with this 800 pound Gorilla in the room is bound to be punitive one way or the other to everyone. If our way of life is to prevail, everyone must have skin in the game! We seem to have reached the point of no return on squeezing more money out of the income producing people of the country. It seems we will have to accept some downward revisions in entitlements, and reduce other government services.
But there is one solution to this problem that I unhappily predict President Obama and his court of financial Jesters will discover soon and then they will begin the process to implement it. It is based on the simple concept of what is now offered to the seniors living in a home that has significant appreciated value but they no longer earn enough to afford a desired life style. It is called a “Reverse Mortgage”. The President will repeat over and over, the statement that the wealthy don’t pay their fair share of the cost to run the government. Eventually he will shift gears to propose a tax on the ownership of or use of capital assets. The argument will be made that although this is a negative tax, it is no different than the tax that States, counties or cities assess upon the real estate property in their jurisdiction. I predict that before the term of this Administration has expired we will see a proposal for a tax of 1% or 2% on gross assets of all kinds held by the individual and each corporate entity as shown at market or FMV on their annual federal tax return. According to Wikipedia, the gross domestic assets of the people and institutions of the United States as of 2009 were $131 Trillion. A 1% tax on such assets would generate a prospective $1.3 Trillion and the burden would fall specifically on those with higher amounts of wealth, just those who this Administration claims are not paying their “fair Share. After all, they will say, this is exactly the same justification community members feel is appropriate for funding their neighborhood, county and metropolitan financial needs, why should it not be used to generate incremental tax revenue to serve national needs and balance the budget? I can think of a 1000 reasons!
One Man’s Opinion-Bud Brewer
A Realistic Look Ahead
When I read something that was written by a respected professional investor that coincides so very well with what I have been thinking and doing for the past two years, I think it appropriate to quote it in its entirety rather that just paraphrase it in my own words. The author of this treatise, pictured below, is Gordon Crawford, an investment analyst and portfolio manager for Capital Group, my former employer. Gordon took his MBA at the University of Virginia graduate school, now Darden Business school. He is retiring from Capital Group after serving that company for 40 years as a portfolio manager in their giant Growth Fund of America, their non U.S. Small Cap World Growth Fund and their New World Growth Fund. Gordy’s career at Capital parallelled mine for his first 30 years but being about 20 years younger, he will have been a giant pillar of Capital’s Investment capabilities for over 40 years come this December 31st. My clients enjoyed their share of the investment results produced by Gordon and they were much better off for it.
I picked off this narrative from American Fund’s Website created by a public interview of Gordon this last month. The excerpt I have copied to this blog page is a section of that interview and so well expresses my feelings and investment outlook that I have decided to reproduce it here as an insert to today’s “One Man’s Opinion”
“ For the last 30 years, the major developed democracies of the world have been living beyond their means, building up massive amounts of debt and making health care and pension promises they can’t possibly keep. They are just borrowing money, as individuals and as governments. Alexis de Tocqueville wrote that a democracy can never last. The reason is that, once voters figure out 
that they can elect people who will grant them largess from the public treasury, all they will do is choose politicians who will grant them largess from the public treasury. So he concluded that it will inevitably end up in a wrecked fiscal policy and the end of democracy.
I think we have been building toward that in the last 30 years. The global financial crisis was a giant wakeup call for the United States, Western Europe and Japan. It’s a call that has largely gone unheeded. Very little has been done to address the debt issue. The world’s major central banks have helped kick the can down the road by flooding the system with liquidity, blowing out their balance sheets. It has helped keep everything afloat and given us a false sense of security.
We are saddling our grandchildren with a ridiculous amount of debt. It’s a scandal, really, and we are just not doing anything about it. My generation has decided that they are going to grant themselves all this largess, and they are going to pay very low rates of real taxes and borrow the difference, so we’re heading for a disaster. There is a piper that must eventually be paid. I don’t know if it’s going to be this year or five years from now, but eventually we are going to have to get real about bringing some discipline back into the system.
So that’s what I am very concerned about. I think even if we muddle through, we are going to be facing five or 10 years of very low global growth in the developed world, as opposed to the growth we’ve experienced for the last 30 years, which we all know now was achieved through leveraging up the system. And the outlook for emerging markets? The emerging markets are in better shape. They have lower levels of debt at the household level, at the corporate level and at the governmental level. Asia went through a terrible period in the late 1990s, and they all got religion. Most of those countries have a debt-to-GDP ratio of 40%, not 100%. Their consumer populations are relatively unlevered. They have growing populations. They have large middle classes moving up the disposable income ladder. They are all different, but I think it’s a fair bet that if you look at GDP or some other metric for Brazil, India, China, Russia, Indonesia and other countries today and then look again 20 years from now, those countries will account for a much bigger part of the global economy than they do today. If you can invest some money there and not look at it every day, 20 years from now I think you will be happy to have had assets in emerging markets. My world view informs everything I do. I am a tailwind investor. I love finding what I think will be an enduring secular trend. It might be the growth of cable TV in the early days, or the Internet today. There have been plenty of times when I felt a whole industry was attractive, like cable, and we owned virtually every company in it. I prefer good management, but even with bad management, if there is a strong enough tailwind, it can lift the entire industry.
I am never going to be 100% in cash. That wouldn’t be appropriate, and it’s not what our shareholders want from us. So I am always trying to find great companies like Amazon and Google — companies that have compelling products and services, that are taking so much global market share that even in a struggling developed world they are growing rapidly and profitably. I have steered away from companies that don’t have that dynamic. I want companies that can do well in a poor environment. In the emerging markets, I like companies that are focused on middle-class consumers in domestic markets, as opposed to exporters, which I think are going to have a difficult time.” Gordon Crawford
What Gordon has enunciated so well is the basis for my concern about the effort to preserve wealth for family and heirs. One answer to the scenario he paints is the financial repression I have referred to in my previous blogs. The current dancing around the real problem we face by both the President and the Congress is most assuredly going to put significant downward pressure on the economic wellbeing of the American people and the economy as a whole notwithstanding a few areas where extraordinary exceptions will take place. It is laughable if not sickening to listen to our government representatives and the leader of our country talk about how they are protecting their constituencies wellbeing by proposing legislation that will raise revenue a hundred billion dollars or so and reduce government expenditures by another $100-200 Billion all the while the government is spending $1.5 Trillion more than it is taking in. The disingenuous commentary is expressed in the cumulative amount of taxes and spending cuts over a ten year time horizon so the increase sounds like it is going to bring the deficit back into balance with revenue. Hogwash! Even if tax revenue expectations were dynamic, that is raises in rates would not affect the election of realizing gains or continuing income levels themselves, the net difference in the deficit will not prospectively fall much below $1 trillion a year for the next ten years and that would make our national debt balloon to 125-140% of GDP. That is a recipe for disastrous price inflation as the value of the dollar goes down
We have suffered a collapse of the housing market value as expressed in consumer balance sheets. Now we are going to devalue the dollar itself so savings accounts, insurance annuity accounts, pension benefits as well as savings deposits are being and will be devalued. It is uncertain how long it will take for this point of view to become more than a low probability but it will come, that is sure. What can we do about it? One conclusion I have come to is that any investment in the U.S. Dollar directly or indirectly will depreciate over time. Any investment in land, real property or essential commodities will be likely to retain their relative value if not appreciate for perception that they will maintain their relative real value. Companies with simple business plans and adequate resources will be likely to retain real value. Companies in Global industries serving consumer needs in developing countries are likely to retain some part if not all real value and may even appreciate in real value if efficiencies can be maintained due to increased use of and availability of technology.
The US economy is likely to poke along at a relatively slow rate for a long time, perhaps a decade. Legislation to deal with the entitlement mentality of the American individual will have to be rationalized and I am not sure that can be done without a revolution of sorts. We are headed for the shoals of a fateful journey and we can only hope that sensibility will overcome the seeming dearth of understanding by our government of just how serious this situation will become. The Fiscal Cliff is not an iceberg in the tranquil waters of slow economic growth. It is a series of waves in the continuing flow downhill until the individual voter begins to understand: “There is no such thing as a Free Lunch”.
One Man’s Opinion- Bud Brewer
FINANCIAL REPRESSION
December 8, 2012: For all of my adult life, I have believed that ordinary people with a modest education could create wealth by saving a small portion; say 15% of what they earned, and investing a large part of it in interest bearing savings accounts and good solid corporate or municipal bonds along with some equity in high quality corporate stock. The luxury of having a nice portfolio of bonds and common stock along with income producing cash reserves would allow me to take advantage of opportunities as they came and do it in a timely fashion. I must say for me and my family this has worked pretty well. But, is this practice going to allow my children and grandchildren to achieve the same or similar results over their lifetime? Regrettably, I fear that a significant adjustment to that save and invest strategy is going to be required and that new strategy may be so volatile that it won’t provide the kind of secure and confident feeling that most investors of my generation felt putting away money in a balanced portfolio of stocks, bonds and a cash savings account.
There is a financial reality present in the world today. Developed and developing nations have governments that are spending too much money relative to the revenue that their economies are capable of supporting over a long term time frame. This is like a family where the daily needs and wants are financed in part by current cash earnings and in part by assuming debt to be paid back monthly over various time periods from 30 days to 30 years for something useful over many years like their home or their family automobile, for example. This seems to have been a good use of leverage since for the past 40-50 years, when our economy among others in the world had growth rates of 4-6% per year on average. Some part of this growth was created by banks and agencies of the Federal Government making capital available at moderately low interest rates thus stimulating entrprenuers to start or expand companies using debt capital. This enabled businessmen with sound business models to create companies in consumer industries and create good jobs providing fundamental needs of the family. The huge pent up demand during the World War II resulted in large consumer spending as veterans as well as civilians began to spend the accumulated dollars invested in war bonds and savings accounts acquired to help finance the War. This natural stimulus was a major cause of strong economic growth in the 1950 and 1960s. Even though there was a military arms race between America and Russia at the time, most Americans enjoyed economic opportunity and public confidence was very high. However, it wasn’t too long before banks and independent finance companies began to push the consumer to increase their use and convenience of their various credit cards to buy now and pay later. Outstanding consumer balances on credit cards is almost $900 Billions dollars today.
Like the consumers whose incomes were rising and with our economy growing during the post World War II years, politicians governing our country began to realize that voters were receptive to Federal legislation that provided current financial benefits to an increasing portion of them and fund these goodies by small increases tax rates or rely on growing incomes to generate higher total revenues. It wasn’t long before our politicians saw that if they promoted legislation assuring the retired or elderly, the invalid, the unemployed or the less advantaged people, a government paid benefit, those people would vote to elect them or to retain them in office. These Beneficiary groups were relatively small 40 or 50 years ago but they were strongly motivated to vote for anyone who promised to provide them financial benefits from the U.S. Treasury or financial security in retirement which would be paid for by those who continued working. Thus began a slow but steady increase in the polarization of the American people toward the extremes of big government dependent services versus smaller and fiscally more efficient government combined with personal financial responsibility. The election of 2012 demonstrated how far the American voter has come toward expecting greater and geater benefits from their government. This includes many of the high income executives or managers of many of our largest corporations. Whether by condition or exploitation of the offers, these segments of the voting population are becoming preponderantly more supportive of increased government controls, regulations and entitlements funded increasingly by having to borrow more money. We therefore have a National debt growing at rates which will cause it to surpass our GDP within a year or two and will be adding one Trillion plus dollars to it every year thereafter for as long as the eye can see. To give some perspective, here are Three charts:
Cultural Change?
November 7, 2012: Tuesday’s presidential election results showed that the American voting public has not only become more permanently diverse in its makeup, but also in its mindset. Obama bet, and won, on the assumption that the electorate would retain much of the age, ethnic and racial diversity he brought out in 2008. But across the country, voters affirmed changes in social policy that show a greater polarization and social culture change along with it.
The trend is troublesome for Republicans, who nominated in Mitt Romney a candidate who was more moderate than his rivals for the GOP nomination. Like it or not, the country is becoming more secular and conservatives have done a poor job selling the propriety of personal responsibility and respect for meritocracy. Although we are still a work culture, there is a threat to the moral values with which we were raised and the seeming symbiotic attitude that accepting unemployment benefits as an alternative to working is ok.
Younger voters and minorities came to the polls at levels not far off from the historic coalition Obama assembled in 2008. Voters also altered the course of U.S. social policy, voting in Maine and Maryland to approve same-sex marriage, while Washington State and Colorado voted to legalize recreational use of marijuana. Think about that. How can anyone in government be proud of these new social accomplishments?
But in the heartland, the conservative Christian tradition still runs deep as the red states supported Romney by heavy percentages. However there are movements by voters in Iowa and Colorado and New Mexico that reflect secular and demographic changes that will require conservatives to do a lot of work to regain majorities in those states. Minnesota voters defeated a proposed constitutional amendment to ban gay marriage. In Iowa, where opponents of gay marriage ousted three state Supreme Court justices two years ago, a fourth judge beat back a similar attempt Tuesday and Republicans intent on pursuing a constitutional ban failed to gain the single seat they needed. Why Gays can’t just accept the act of entering into a legal union that grants certain rights as they relate to authority, healthcare and property transfer, is beyond me.
On social issues, exit polls conducted Tuesday for the Associated Press found a public more apt to take the liberal position. For example, roughly 60 percent of voters said abortion should be legal in all or most cases, the highest share since the mid-1990s. If the protection of life wrongly created as a result of recreational sex becomes such a nuisance, what’s next, termination of anyone over 80 years of age requiring excessive health care?
The reality of the numbers of very young voters caught Republican strategists by surprise as they were banking on an electorate more monolithic and more conservative than four years ago. And it foreshadows changes over the next generation that could put long-held Republican states onto the political battleground maps of the future. Clearly, when you look at African-American and Latino voters, they went overwhelmingly for the president and that certainly brings into question, was their vote based on racial circumstances or are they just more likely to support liberal causes.
The exit polls showed that voters mirrored the makeup of the electorate four years ago, when Obama shattered minority voting barriers and drove young voters to the polls unlike any candidate in generations. White voters made up 72 percent of the electorate – less than four years ago – while black voters rose from 11 to 13 percent and Hispanics increased from 9 percent to 10 percent and they both went for Obama by huge margins. Conservatives will have to get more white voters to participate in the future or they will not have any chance to win the presidency. Black voters went 91% for Obama and 71% of the Hispanic vote went for the President. No one can say there isn’t a new and growing racial divide in the electorate who will drive the demographics in the future. These exit polls suprisingly showed that 51% thought that Obama would be better for improving the economy. What?
Obama carried Virginia, the heart of the Old South, in part by having increased his record support from black voters there in 2008, which reached 18 percent, to more than 20 percent. Obama won in 2008 by carrying several long-held Republican states, including North Carolina, Virginia and Indiana. And while Romney easily carried Indiana, the fact that Obama held Virginia and North Carolina points to a long-term demographic shift that survived the pressures of the poor economy.
Obama carried every contested state except South Carolina by aggressively registering first-time voters. He matched his share of the youth vote from 2008, and nearly matched his support from seniors. Voters were more ideologically polarized than in 2008 or 2004. The share of moderates (defined as a group made up largely by Liberals who don’t want to be called one) dipped slightly to 41 percent, while 25 percent called themselves liberal, the highest share saying so in recent surveys of voters as they leave their polling places. Thirty-five percent called themselves conservative, about the same as the previous two presidential contests.
So, what do we do about this? First we should not become so dissolutioned that we give up our principles or fail to voice our opinions loud and clear regarding what and how we feel our communities should plan and operate. A new election will occur in 4 years and by that time we will most likely have more disappointing economic data and increased need for leadership that understands how the world works. We need to actively participate in the debate that will be prevalent at schools, clubs and at social functions. Remember a government that has entitlements as the main value it offers will eventually run out of money as no one will lend them capital and the tax base will collapse. Time is on our side although it would have been nicer to have change take place Tuesday. Keep the faith!
One Man’s Opinion- Bud Brewer
Seven Serious Issues of this Election
Problems Facing America:
1. Social Security pay-outs under the present program are not sustainable
2. Medicare spending for retired persons is greater than prospective receipts.
3. Housing market continues lethargic and still overvalued relative to income levels.
4. Global Terrorism targeting USA even after 11 years fighting wars against Al Qaeda.
5. The President’s campaign to demean wealth is leading to class warfare.
6. Corp managements are defensive and reluctant to invest or expand due to uncertainty of Dodd-Frank regulations.
7. Even with a potential economic recovery, investor’s lack of confidence and their general uncertainty about the effects of the Federal Reserve’s monetary policies and their potential effect on the dollar and inflation have both business people and investors reluctant to take much risk. The effect of Dodd Frank legislation, uncertainty about the cost path for health care, potential commodity inflation and the eventual rise in interest rates are further deterrence.
The sub-prime mortgage fiasco and subsequent housing collapse and bank failures during 2008-2009 and the market decline caused national income levels to fall below historical norms as a percentage of GDP. At the same time tax receipts from individuals and corporate returns have fallen to 15% of national income, well below historical levels (18-19%). The President’s effort to restore economic growth by throwing billions of dollars (40-50% of which is borrowed)at various work projects along with increasing spending on new administrative agencies’ stimulative programs for entitlements have now reached 25%+ of the GDP.
President Obama’s extraordinary preemptive move to take over the administration of the reorganization of the bankruptcy of General Motors was a serious intrusion by the Administration into financing what should have been a private sector operation under the laws of Chapter 11 of the Federal Bankruptcy code. Promoted as a job saving exercise, this may have sounded like a good idea to save jobs but it was and is an undesirable government intercession in the free market that sets a bad precedence.
The long term question is: Does the American Economy, operating with a nominal level of growth, produce sufficient revenue from individual and corporate Income taxes to generate enough revenue to support the following level of services.
a. Medicare health services
b. “Obama care” Health Services
c. Medicaid health care services subsidies for low income citizens of the 50 states.
d. Social Security payments to the elderly based on current formula,
e. Food stamps to 40 million people,
f. Welfare support to the poorest of our citizens,
g. Pell Grants and educational tuition loans for college students.
h. maintenance of a world class military force operating on a global theater?
i. Liberal retirement benefits for those serving in government and public service positions.
Most everyone agrees the federal budget is out of control. Annual budget deficits that averaged $300 billion during the Bush Presidency have risen to $1.4 trillion over the past 3 years. This is not merely a short-term effect of the recession. The nonpartisan Congressional Budget Office (CBO) concludes that the President’s last budget proposal, (rejected by the Congress), would triple the national debt over the next decade. Continuing today’s spending and tax policies would likely produce annual deficits of nearly $2 trillion within a decade – and that’s assuming peace and prosperity. This is unsustainable, and a recipe for economic implosion.
Fixing long-term budget deficits requires first diagnosing their cause. Low tax rates are not the problem if they contribute to economic growth. Conservatives believe that they do, Liberals believe the economy is static balance of production and income ratios, so they believe tax rates are nothing more than an allocation or redistribution ratio of national income in order to pay for the general good of the citizens as a whole. But history has shown that regardless of tax rates, revenues have remained at about 18 percent of national income for the past half-century. Due to the current recession-induced dip in the economy, tax revenues have fallen to 15% of national income, but they are expected to return to that level within the decade – even if all tax cuts are extended.
Spending is another story. Historically 19-20 percent of national income, federal spending is now at 24 percent and soaring toward 26 percent of national income by the end of the decade. The CBO projects spending to rise to 32 percent, perhaps even 36% of National Income by 2030. In reality, the economy probably would cease functioning well before then.
Clearly our long-term deficits result from steeply rising spending as a percentage of National Income, not just recession driven falling revenues. And nearly the entire spending expansion can be traced to Social Security, Medicare, Medicaid, and the resulting interest costs on the burgeoning national debt.
Much of this cost increase is driven by simple demographics: 77 million retiring baby boomers are beginning to collect these entitlement benefits. In each program, current taxpayers finance current recipients. This system can be sustained as long as there are enough workers paying taxes to support the benefits of each retiree. In 1960, five workers supported each retiree. Today, that ratio has fallen to 3-to-1, on its way to just 2-to-1 in 2030. In other words, by 2030, every married couple will be funding their own retiree. The burden will be enormous, especially since escalating health care costs also inflate the Medicare and Medicaid tab.
How enormous? Social Security and Medicare face a $38 trillion shortfall over the next 75 years. CBO calculates that simply paying all benefits currently promised would eventually mean putting the middle class in a 63 percent tax bracket, and upper-income families and small businesses into an 88 percent tax bracket. This is a recipe for disaster.
Over the next decade, Washington must address the $21 trillion projected cost of Social Security, Medicare, and Medicaid. The more popular spending cuts, such as foreign aid ($0.5 trillion over the next decade), corporate welfare ($1.0 trillion), war spending on overseas military operations in Afghanistan ($0.5 trillion) and even Obama Care ($1.0 trillion) don’t begin to offset those entitlement costs. (Some of those cuts may be necessary, but they are not sufficient). And Social Security, Medicare, Medicaid, and interest costs on our rising debt are set to double again in the 2020s.
The tax side is no different. Repealing the 2001 and 2003 tax cuts for those earning more than $250,000 annually would raise just $0.7 trillion over the next decade. Repealing them for everyone – including low-income families – would raise at most $3 trillion or only one-third of the accumulative deficits. Worse, these tax hikes would reduce investor capital, individual consumer spending and therefore kill jobs. And does anyone believe Washington would use new tax revenues for deficit reduction? Every tax increase to-date signed by this President has gone toward new spending instead.
Reform must be bold, yet it need not impoverish seniors. Gradually adjusting eligibility ages, reducing benefits for upper-income seniors (while strengthening minimum benefit levels to keep low-income seniors out of poverty), and converting Medicare into a premium support system based on choice and competition (similar to what members of Congress enjoy) can rein in entitlement costs. Reforming the tax code to eliminate or reduce much of individual and corporate deductions for upper income tax payers might even maintain tax revenues in spite of lower overall rates. The benefit is of course the expectation that the economy would be stimulated and experience increases in growth.
Driven by entitlement costs, the national debt is set to reach extraordinary levels. The question is whether we will roll up our sleeves and reform these programs, or continue to wait in vain for some magical, pain-free solution. The very future of the economy hangs in the balance.
My Question to the supporters of President Obama is: What has this President said or proposed that leads you to believe that he understands the seriousness of the problem and is ready and willing to do what is necessary to right the ship? Do you really think American entrepreneur spirit is enhanced under his leadership? Do you really believe castigating those who have accumulated wealth and increasing their tax rates is going to motivate them to want to take the risk of committing their capital to investments that are necessary to create jobs and rejuvenate economic growth? What actions has he taken over the past 4 years that are consistent with those called for to resolve the financial cataclysm that we face?
In my opinion, he has done nothing to lead the Congress toward a cooperative effort to address the seven basic problems facing America as described above. In fact, one could say his inactions and or mis-actions have exacerbated these problems.
One Man’s Opinion—Bud Brewer