Capital Ideas Newsletters


Winter Musings

January/February 2013

So the “fiscal cliff” came and went, and now we are looking at the political confrontation concerning raising the debt ceiling—O.K., that is now delayed for three months.

What was actually accomplished at the beginning of the year was a small step in reducing the deficit. What is truly required are reductions in spending, coupled with a sensible consumption tax.

As reported in The New York Times, spending on health care through Medicare and Medicaid (and other major social insurance and entitlement programs) are first and foremost, responsible for the growth in government spending. “Essentially, all the increase in spending relative to the size of the economy, and the potential tax base, has come from entitlement programs. About half of that increase, in turn, has come from health care entitlements specifically.” There is no question that as a nation, we must address these costs or we will go broke.

The idea of taxing savings and investment as opposed to taxing consumption totally undermines what we truly want to accomplish as a nation. Even though household debt has fallen, tax policy continues to favor both personal debt and corporate borrowing, while penalizing equity investing. Just take a look at high yield bond issuance last year versus equity issuance.

Banks were relieved of some of the capital burdens imposed by Basel III and are able to use assets that are “less desirable” as capital. This will help banks lend more during these challenged times, which is good news short term, but could spell trouble longer term — just another game of “kick the can” down the road.

Morgan Stanley cut 1,600 more jobs as the shrinking of Wall Street ranks continued. Commentary on the causes ranged from excess capacity to excessive compensation. Seems to me that by firing 1,600 people, the remaining staff will do just fine.

It appears that municipal credit is generally on the mend. This can be good news for infrastructure projects on the local level—sorely needed for sure. Have you been to JFK airport? Is it not a national embarrassment? Friends and clients from foreign countries continue to tell me how disappointing it is to land in one of the premier cities in United States and find a disorganized and dysfunctional airport, especially when compared to the modern airports in Asia and other international destinations.

South America seems to be gaining a lot of attention as a tourist destination as well as for its rich national resources. Peru, as an example, has been exporting copper and gold to Asia. Its gross domestic product rose 6.7% year on year in October 2012, as reported by the Financial Times.

Japan’s stock market is surging as the yen has been weakening — if debasing a currency and printing money (the way of the Western Nations) are the ultimate remedies for political irresponsibility, then the ultimate ending usually is inflation. When, is the question?

Over 90% of what the U.S. Treasury lent to businesses through TARP has been repaid. We tip our hat to TARP—well done. Those who were against TARP as those who were against the bailout of Mexico and Chrysler should have known better. They are examples of what government must do in a financial crisis.

As the market indexes surge, the housing market is finally also showing very positive signs. The pendulum swings no matter what the government does with taxes, because time heals most, if not all wounds.

As long as you remain balanced in your approach to risk — depending on age, risk tolerance and cash flow needs, you can expect good long-term results. The key is to stay the course!

Luck never made a man wise, so keep your wits about you. As has been said many times before, be greedy when others are fearful and fearful when others are greedy. Our job is to keep focused on the balance.

Ernest Hemingway said, “There is nothing noble in being superior to your fellow man. True nobility is being superior to your former self.”

Stay Warm.

Join Our Newsletter