Forecasts & Trends : CBO

CBO Warns of Recession in 2013

Gary D. Halbert — Tue, 29 May 2012 21:26:00 GMT

IN THIS ISSUE:

1. US Economic Recovery Remains Tepid

2. Encouraging News on the Housing Market

3. Why is the Economic Recovery So Weak?

4. How the Recovery Went Wrong

5. CBO Warns of Recession in 2013

Overview

The non-partisan Congressional Budget Office (CBO) has calculated the expected negative effects on the US economy if the Bush tax cuts expire at the end of this year. Their numbers just released last week are eye-opening! To give us some perspective, US Gross Domestic Product rose by 2.2% (annual rate) in the 1Q of this year.

The CBO now forecasts that if the Bush tax cuts expire at the end of this year, GDP in the first half of 2013 will plunge to -1.3%. Think about that. We don't know what the economy will do for the rest of this year, but the consensus expectation is that GDP will probably average around 2.5% for 2012, barring any negative surprises. So a drop from around 2.5% this year to negative 1.3% in the first half of next year – if the Bush tax cuts go away - is HUGE!

For all of 2013, the CBO forecasts GDP growth of only 0.5% – if the Bush tax cuts go away, and even that may be too optimistic. I wrote at length on this news from the CBO in my blog last Friday. I will give you a link to that blog posting at the end of today’s E-Letter so you can read it.

What we want to focus on today is why this economic recovery is so weak. We will look at the latest economic reports and ponder why they aren’t stronger. We’ll look at the latest news on the housing market and find that there are some signs of improvement. I will also bring you an independent analysis of why the recovery is so weak (and what caused it) that I think you’ll find very interesting. It’s a lot to cover in one letter, so let’s get started.

US Economic Recovery Remains Tepid

It has been over a month since we last took an in-depth look at the economy. Since then, many forecasters have become concerned that the economic recovery might be stalling. The economic reports over the last month have been a mixed bag, as we will discuss below.

Let’s start with the latest GDP report which was announced on April 27. The Commerce Department reported that 1Q GDP slipped to 2.2% (annual rate), down from 3.0% in the 4Q. Growth in the 1Q came largely from consumer spending, exports and inventory rebuilding. The decline from the 4Q was due to lower government spending at all levels and lower non-residential fixed investment. The next 1Q GDP revision will come out this Thursday. Most forecasters expect the 1Q GDP estimate to be lowered slightly (1.9%- 2.0%) on Thursday.

The Consumer Confidence Index reported this morning fell, surprisingly, to a five month low in May. The Index fell from 68.7 in April to 64.9 this month. This followed monthly declines in March and February. The University of Michigan Consumer Sentiment Index for May, which came out on Friday, showed improvement in confidence, rising from 77.8 in April to 79.3 in May. These two readings can be contradictory from time to time, but it is clear that consumer confidence has waned a bit in the last few months. I don’t see a big change in consumer confidence between now and the election unless the economy turns decidedly stronger or weaker.

One measure of confidence that has improved significantly was the Conference Board’s CEO Confidence Index. This index moved up from a reading of 49 in the 4Q to 63 in the 1Q. Currently, 59% of business leaders foresee an improvement in economic conditions over the next six months, up from only 32% in the 4Q.

As noted above, consumer spending has improved this year but only modestly. Retail sales rose 0.1% in April after rising a brisk 0.7% in March. Personal income rose 0.4% in March (latest data available) following an increase of 0.3% in February. Personal income for April will be out on Friday and should show another modest increase.

Durable goods orders rose 0.2% in April following a much worse than expected drop of -3.7% in March. Industrial production rose 1.1% in April following a decline of 0.6% in March. Factory orders fell 1.5% in March (latest data available) following a rise of 1.1% in February. The ISM manufacturing index rose from 53.4 in March to 54.8 in April. The ISM report for May will be released this Friday.

On the inflation front, the headline Consumer Price Index has trended lower over the past three months and was unchanged in April. Over the 12 months ended April, the CPI rose 2.3%. Wholesale prices (PPI) actually fell .2% in April.

On the jobs front, the official unemployment rate dipped to 8.1% in April, the lowest since February 2009. However, only 115,000 new jobs were created last month following 154,000 in March. The dip in the unemployment rate occurred primarily because almost 350,000 people stopped looking for work in April and are no longer counted as unemployed.

The number of unemployed fell to 12.5 million in April, down from 12.7 million in March. The number of long-term unemployed (27 weeks or more) remained at 5.1 million. The labor force participation rate fell to 63.6%. All in all, the April unemployment report was another disappointment.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Encouraging News on the Housing Market

New home sales rose a better than expected 3.3% in April with 343,000 units sold versus 332,000 in March. Existing home sales and housing starts were both up by a similar percentage in April.

According to the latest quarterly report by the National Association of Realtors (NAR), median existing single-family home prices are firming in many metropolitan areas, while improving sales and declining inventory are creating more balanced conditions.

NAR reported that the median existing single-family home price rose in 74 out of 146 metropolitan statistical areas based on closings in the 1Q from the same quarter in 2011, while 72 areas had price declines or were static. In the 4Q of 2011, only 29 areas were showing gains from a year earlier.

Lawrence Yun, NAR chief economist, said there is some volatility in the price performance. “Home prices are more volatile than normal because of sudden upswings in buyer activity in some localities, and also are affected by the prevalence of distressed sales,” he said. “Home prices lag sales activity because the transactions were negotiated mostly in the previous quarter. Given the steadily dwindling supply of inventory and notably higher listing prices that are being negotiated today, prices are expected to show further improvements in the near future.”

Yun said a big part of the story is housing inventory. “We now have broad shortages of lower priced homes in much of the country, with very tight supply in Western states for homes through the middle price ranges. This is good news for many sellers who wish to list now, or for those waiting for prices to improve.”

At the end of the1Q there were 2.37 million existing homes available for sale, which is 21.8% below the close of the 1Q of 2011 when there were 3.03 million homes on the market. There has been a sustained downtrend since inventories set a record of 4.04 million in the summer of 2007.

The national median existing single-family home price was $158,100 in the 1Q, which is 0.4% below $158,700 in the 1Q of 2011. (The median is where half of the homes sold for more and half sold for less.) Distressed homes – foreclosures and short sales which sold at deep discounts – accounted for 32% of 1Q sales, as compared to 38% in the 1Q of 2011.

Total existing-home sales, including single-family and condo, increased 4.7% to a seasonally adjusted annual rate of 4.57 million units in the 1Q, as compared to 4.34 million in the 1Q of 2011. “This is the highest first quarter sales pace since 2007,” Yun said. “With strong market fundamentals, total home sales this year should rise 7 to 10 percent.”

First-time buyers purchased 33% of homes in the 1Q, about the same as in the 1Q of 2011. The share of all-cash home purchases in the 1Q was 32%, about the same as this time last year. Investors, drawn by bargain prices and who make up the bulk of cash purchasers, accounted for 22% of all transactions in the 1Q.

Regionally, existing-home sales in the Northeast jumped 8.6% in the 1Q and were 6.6% above the 1Q of 2011. The median existing single-family home price in the Northeast declined 3.2% to $226,300 in the 1Q from a year ago.

In the Midwest, existing-home sales rose 5.5% in the 1Q and were 11.7% higher than a year ago. The median existing single-family home price in the Midwest increased 0.8% to $125,300 in the 1Q from the same quarter in 2011.

Existing-home sales in the South increased 2.1% in the 1Q and were 4.1% above the 1Q in 2011. The median existing single-family home price in the South rose 1.2% to $143,600 in the 1Q from a year earlier.

Existing-home sales in the West rose 5.9% in the 1Q and were 1.4% higher than a year ago. The median existing single-family home price in the West slipped 0.9% to $196,200 in the 1Q.

While the NAR’s latest quarterly report had some very encouraging news, let us not forget that 72 of the 146 metro areas continue to see falling or flat home prices and sales levels. While just over half of the areas reported improvement in the 1Q, the housing slump is still not over. Average home prices were down 2.6% from a year earlier in March according to the latest Case-Shiller home price index released this morning.

Why is the Economic Recovery So Weak?

This is the question that millions are asking. We’ve added $5 trillion to the national debt since President Obama took office, with much of it aimed at stimulating the economy. The following editorial from Harvey Golub writing in The Wall Street Journal addresses the reasons for the slow recovery as well as any I have read:

“How the Recovery Went Wrong

Of the 11 recoveries in the last 60 years, this one is at or near the bottom in job growth and every other economic indicator.

President Obama, in speech after speech, proudly makes the following point: Although we inherited the worst recession since the Great Depression, we have generated net new jobs every month, and while we need to do more, we are going in the right direction.

Of course, recoveries always go in the right direction—that is, things get better over time. But merely going in the right direction is an incredibly low performance standard. Moreover, since deep recessions are generally followed by more robust recoveries, this should have been one of the strongest recoveries ever.

So what went wrong? All the available Keynesian levers for achieving economic growth have been pulled, yet the recovery is one of the weakest since World War II. The problem lies with the way the "stimulus" was carried out, the uncertainty of looming higher taxes, and the antibusiness rhetoric and regulatory strong-arming of this administration.

First, exactly how weak has this recovery been? The Federal Reserve Bank of Minneapolis tracks economic performance for each recovery and compares gross-domestic-product growth and job growth, the two most important indicators of economic performance. Over the past 60 years, there have been 11 recessions and 11 recoveries.

Sadly, this recovery is near the bottom of all 11. Cumulative nonfarm job growth is just 1.9% 34 months into recovery, the ninth-worst performance and well below the average job growth of 6.5%. Cumulative GDP growth is just 6.8% 11 quarters into this recovery, less than half the average (15.2%) and the worst of all 11.

But wouldn't things be even worse without massive fiscal and monetary stimulus? It's true that monetary policy by the Federal Reserve has resulted in extraordinarily low interest rates, almost zero for the past three years. Normally, low interest rates would result in increased borrowing by individuals and businesses, generating increased economic activity. Its positive effects in this recovery, however, have mainly been to help the government borrow more cheaply, large banks recapitalize quickly, and homeowners refinance at low rates.

Uncertainty regarding ObamaCare and higher taxes on businesses and individuals has discouraged the type of borrowing and lending that low rates generally encourage. Near-zero interest rates have also resulted in historically low yields on savings and encouraged riskier investments. In effect, we have subsidized increased spending by penalizing savings.

Fiscal policy, under the control of the president and his party, increased expenditures by about $700 billion per year since 2008 and launched a spending package of about $800 billion (along with various "targeted" temporary tax reductions), all of which resulted in an increase in national debt of over $5 trillion. In other words, we borrowed $5 trillion, for which we will pay interest for who knows how long, in order to stimulate the economy now.

There's little doubt that this level of spending—$5 trillion in an economy with an annual GDP of about $15 trillion—has a temporary stimulative effect. The question is, was it a good investment? For the most part the money was spent poorly and we will get very little future value from it. Billions were spent to reward favored constituencies like government employees and the auto industry. Billions more were spent on training programs that don't work and unemployment insurance that reduces incentives to actually find work. Little went toward building infrastructure or other assets that will help the nation create wealth over time.

So, yes, we are going in the right direction—but far too slowly to create reasonable economic growth and needed jobs. By their very nature, recoveries involve people and businesses making investments and spending money and borrowing to do both. However, for rational people to spend or invest requires confidence in the future. The "animal spirits" so necessary for a true recovery have been dampened by this administration's policies and rhetoric.

Indeed, this administration has been overtly hostile to business across the economy except for progressive favorites like electric cars or wind and solar power. It has tightened regulatory screws on the coal industry and all other fossil-fuel providers, enacted health-care "reform" based on false estimates of its likely costs and effects, unleashed a hostile National Labor Relations Board on businesses, and passed financial regulations in the form of Dodd-Frank along with hundreds of other regulatory actions that put increased burdens on the private sector. Meanwhile, the president has yet to pass a budget or announce a plan to rein in government expenditures.

The president has said, over and over again, that he wants to increase taxes on businesses—small and large—and on financially successful individuals. He doesn't quite articulate the point that way, but that is the effect. After all, he says millionaires and billionaires aren't paying their fair share. He forgets, or simply does not know, that the top 1% of earners actually pay as much as the bottom 90%, and the bottom half pay no income taxes at all.

In this negative environment, businesses are less willing to invest in the future, and individuals are less willing to spend what they can. Meanwhile, savers and retirees have seen much of their income decline because of low interest rates. The massive costs of all the stimulus have been wasted because of the heavy counterweight put on the economy by the administration's antibusiness and pro-redistribution policies.”

Mr. Golub, a former chairman and CEO of American Express, is the chairman of Miller Buckfire and serves on the executive committee of the American Enterprise Institute.

CBO Warns of Recession in 2013 if Bush Tax Cuts Expire

As noted at the beginning, the Congressional Budget Office warned last week that if the Bush tax cuts expire at the end of this year, GDP in the first half of 2013 will likely plunge to -1.3%. That’s a recession folks! This new forecast from the CBO was a real shocker. I wrote about this in detail in my Blog on Friday. You need to read this now!

If you have not signed up to receive my weekly Blog, that means you’re missing key information that is not included with my weekly E-Letters that go out on Tuesdays. My Blog is free and I encourage you to sign up today.

Hoping you had a great Memorial Day weekend,

Gary D. Halbert

CBO’s New Forecasts & The Unemployment Report

Gary D. Halbert — Tue, 07 Feb 2012 21:39:00 GMT

IN THIS ISSUE:

1. CBO’s Latest Long-term Economic Forecasts

2. Economic Growth, Deficits, Unemployment Rate, Etc.

3. Federal Workers Owe $3.4 Billion in Back Taxes

4. More Encouraging Economic Reports

CBO’s Latest Long-term Economic Forecasts

At the end of January of each year, the non-partisan Congressional Budget Office issues a complex set of economic and budget forecasts for the next 10 years. The forecasts I will discuss below were released to the public last Tuesday, January 31.

These long-term forecasts are not particularly reliable because Congress and the President enact new laws periodically which can significantly change federal spending, tax policies, etc., etc. As such, we will focus today mainly on the CBO’s latest forecasts for FY2012 and FY2013, which serve as a useful guidepost.

Before we get into the numbers, let me warn you that the forecasts for 2012 and 2013 (especially) were disappointing to many, but should not have come as a surprise to my clients and regular readers of this E-Letter.

When the CBO creates these forecasts for such things as economic growth, federal spending, budget deficits, the unemployment rate, etc., they make two separate forecasts: 1) the “baseline” forecast; and 2) the “alternative” forecast.

The baseline forecast assumes that current laws remain in place over the next 10 years. The alternative forecast reflects expected changes that are likely to occur in the future. For example, the so-called Bush tax cuts are legally set to expire at the end of this year. The CBO baseline forecasts assume this will happen, whereas the alternative forecasts assume the Bush tax cuts will be extended. Based on the assumptions used, the baseline and alternative forecasts are usually quite different.

Economic Growth, Deficits, Unemployment Rate, Etc.

The CBO’s alternative forecast shows economic growth of 2.0% in GDP for FY2012. Regular readers will know that this number is fairly consistent with what I have discussed in recent weeks based on the various sources I use. No surprise there, at least for us. Yet the mainstream media seemed to be roundly disappointed in this forecast for 2012.

Making matters worse, the CBO’s projection for FY2013 was for growth of only 1.1% in GDP. That number was lower than even I expected for next year. The CBO cites the end of the Bush tax cuts at the end of this year, federal spending cuts due to kick in next year, the end of the payroll tax cut and the implementation of ObamaCare as just some of the reasons for the low growth projection.

Several questions jump out of the table above. In the top line (Real GDP), you can see the forecast of 2.0% for 2012 and the 1.1% for 2013. Then the table shows real GDP jumping to an average of 4.1% in 2014-2017 and then back to only 2.5% in 2018-2022. The jump in GDP to 4.1% in 2014-2017 is not consistent with the CBO’s summary analysis. In the text summary, the CBO says the following which seems to contradict the 4.1% forecast above:

CBO expects economic activity to quicken after 2013 but real GDP to remain below the economy’s potential until 2018. [Emphasis mine]

I guess it just depends on what the CBO considers the economy’s “potential” to be.

Another questionable assumption in the table above is the inflation rate over the next decade. You’ll notice that the Consumer Price Index (all items) is projected to fall from 3.3% in 2011 to only 1.4% this year. That remains to be seen. Then the CPI stays under 2% in all years to 2017. Then it rises only to 2.3% in 2018-2022. I don’t know about you, but that looks awfully optimistic to me.

As for the unemployment rate, the CBO had another surprise (again, not for my readers). The CBO expects the unemployment rate to rise again before trending lower in subsequent years. The CBO expects the unemployment rate to remain above 8% for 2012 and 2013. In the summary analysis, the CBO says the unemployment rate will not fall to 7% until 2015. Thus, the decline from 9.2% in 2013 to 5.6% in 2017 once again looks pretty optimistic to me.

Let us not forget, as the CBO points out in its latest report, if the Bureau of Labor statistics counted workers who have given up looking for work, or haven’t looked in the last month, the real unemployment rate would be nearly 10%.

Changing gears, the CBO’s forecast for this year’s federal budget deficit is $1.1 trillion. If accurate, FY2012 will mark the fourth consecutive year of trillion dollar budget deficits under the Obama Administration:

FY2009 $1.41 Trillion FY2011 $1.30 Trillion

FY2010 $1.29 Trillion FY2012 $1.10 Trillion (est.)

TOTAL $5.10 TRILLION

If the deficit is $1.1 trillion this year, that will increase the national debt, currently $15.3 trillion, to over $16 trillion. The CBO also reports that the national debt held by the public (not including debt held by government agencies) has soared to 72.5% of GDP from just 40.3% in 2008. That’s an enormous increase in just three years!

The CBO also projects that the federal budget will go up every single year but one (2013) through 2022, and it won’t surprise me if Obama’s 2013 budget is not larger as well. Specifically, the CBO projected that the budget will rise from just under $3.6 trillion in 2011 to over $5 trillion in 2022. This is the result of so-called “baseline budgeting.” So much for reigning in government spending!

Finally, let me throw in one other interesting factoid from the latest CBO report. The CBO reported that non-college educated federal workers are paid 36% more in total compensation than similar private-sector employees. Those with a bachelor’s degree average 15% higher than their private sector counterparts. I wrote in more detail on this wage disparity in my August 17, 2010 E-Letter.

To read the CBO’s latest long-term forecasts, go to: http://www.cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Federal Workers Owe $3.4 Billion in Back Taxes

Since we’re on the subject of federal workers and how well they are paid, I bring you the following news, especially since the only major media outlet to air this story was FOX News. A new report from the IRS revealed that thousands of federal employees owe the country more than $3.4 billion in back taxes. That number is up 3% from a year ago.

Certain employees in the Dept. of Homeland Security owe $37 million in back taxes. At the Treasury Dept. (where Secretary Tim Geithner had to pay $42,000 in back taxes), certain employees there owe $9.3 million in back taxes according to the IRS. In the House of Representatives, the number is $8.5 million in arrears. At the Dept. of Education, the number is $4.3 million. These are just a few examples.

But this latest IRS report must be most embarrassing for none other than President Obama. His big theme of late is that everyone should “pay their fair share” of income taxes. According to the IRS, some members of his own Executive Office staff are not only not paying their fair share, but are not even paying what the IRS says they owe.

The IRS report reveals that 36 of President Obama’s office staff owe the country a total of $833,970 in back taxes! Other published reports show that Obama’s White House staff consists of 457 aides. Many of them are highly paid. Nearly a third make more than $100,000 with 21 being paid the top White House staff salary of $172,000 plus benefits.

What, you haven’t heard about this? You’d think this would be all over the news. Yet as best I can tell, FOX is the only major media outlet that has touched this story. Imagine all the media flurry there would be if this were happening under a Republican president!

So the next time you hear President Obama call for the wealthy to pay their fair share (ie – higher income tax rates), you’ll know that he really should call on his own staff members and other federal workers who owe the government $3.4 billion in delinquent income taxes. Thanks to the IRS for making this information public.

Unemployment Report Better Than Expected, Or Was It?

Last Friday’s unemployment report came in better than expected, at least in the eyes of the media. But there was something you probably didn’t hear about from the report. I’ll get to that after the headline numbers.

In January, the unemployment rate fell to 8.3%, the fifth consecutive monthly drop. The number of new jobs grew more than expected at 243,000. The number of unemployed fell to 12.8 million in January, down from 13.1 million in December. The graphic below illustrates the highlights of the report.

U.S. employment picture

A look at the unemployment rate, change in the number of jobs, and unemployment by sector.

Source: Bureau of Labor Statistics, The Washington Post.

What the mainstream media failed to point out was the fact that the Bureau of Labor Statistics (BLS) adjusted the size of the civilian work force downward by a record 1.2 million people. Initially, many analysts (including yours truly) questioned how the workforce could drop so much in one month. However, upon further review, we see that the downward adjustment came as a result of the 2010 Census which found that there were fewer workers in the workforce over the 10 years ended 2010 than previously estimated.

Source: Bloomberg, ZeroHedge

What you also didn’t hear from the mainstream media is the fact that the Labor Force Participation Rate (those employed and those unemployed but actively looking for work) fell to the lowest level in 30 years last month to 63.7% (see chart below).

At the end of the recession (June, 2009), the labor force participation rate was 65.7%. In January 2012, it was 63.7%. The difference between these two numbers represents 4.8 million people who have given up on looking for work – since the recession ended.

If the Labor Force Participation Rate for January 2012 had remained the same as it was in December 2011, the unemployment rate would have risen by 0.2 percentage points to 8.7%, rather than falling by 0.2 percentage points to 8.3%.

Part of the decline in the participation rate was due to changed age demographics in the 2010 Census, but it was a significant decline nonetheless. Yet the media claimed this was the best unemployment report in over two years. Not!

Source: Bloomberg, ZeroHedge

Unfortunately, the number of long-term unemployed – those who have been out of work for 27 weeks or more – was little changed at 5.5 million, almost 43% of all unemployed. The number of people employed part-time because their hours had been cut back or because they couldn’t find full-time work rose slightly from 8.1 million to 8.2 million.

Moreover, the number of people the Labor Department classifies as “marginally attached” to the economy held steady at about 2.8 million. The government classifies those people who want to work and have looked for a job sometime in the past 12 months as marginally attached. They are not counted as unemployed because they have not looked for work in the past month.

The good news is that businesses overall are reducing layoffs and in some cases are actually hiring new employees across several industries. The bad news is that the workforce is 1.2 million people less than the BLS thought it was just one month ago. That new fact is largely the reason the unemployment rate fell to 8.3%.

More Economic Reports

The Labor Dept. reported last Thursday that initial claims for new unemployment benefits rose by only 367,000 in the week ended January 28. This was lower than expected. The four-week moving average for initial claims fell to 375,750. The trend is moving in the right direction.

Other recent reports were mixed. The Consumer Confidence Index actually fell in January to 61.1, down from 64.8 in December. This came as a surprise since the pre-report consensus was 67.0. The ISM manufacturing index and the ISM services index both improved in January. Personal income rose a solid 0.5% in December.

Leading indicators rose less than expected at 0.4% in December. Durable goods orders rose 3.0% in December, which was better than the pre-report consensus but down from 4.3% in November. Construction spending rose a better than expected 1.5% in December, while factory orders rose less than expected at 1.1%.

Overall, the latest reports continue to confirm that the economy is expanding but at a slow pace as evidenced by the advance estimate of 4Q GDP which came in at only 2.8%. We’ll get our next estimate of 4Q GDP on February 29.

Wishing you all the best,

Gary D. Halbert

Income Inequality and the Top 1%

Gary D. Halbert — Tue, 13 Dec 2011 22:12:00 GMT

IN THIS ISSUE:

1. Tax Rates, Inequality and the 1%

2. Is the US Tax Code Progressive Enough?

3. More on Capital Gains

4. Tax Breaks for Everyone

Introduction

As the presidential campaign goes into full swing, a few things have become crystal clear. First, the Republicans are dead set on pummeling each other in endless debates, creating ever-more opportunities for gaffes that the Dems and the mainstream press can capitalize upon. Why these candidates want to keep setting themselves up as the laughing stock of late-night TV I’ll never know.

Another sure-thing is that President Obama and some Democrats have chosen to hitch their wagons to the “Occupy Wall Street” movement and thereby make “haves” versus “have-nots” a central part of next year’s election. Class warfare has always been a staple of the Democratic Party, and Obama has elevated it to a rallying cry for the progressive faithful.

The Dems may be onto something. My August 23 E-Letter about Warren Buffett’s call for higher taxes on himself and other “coddled” billionaires hit a nerve with readers. While some agreed that Warren and his billionaire buddies could cut an extra check to the government if they want, others agreed with Buffett that the rich should be taxed at a higher rate.

Nationwide polls now also indicate that Americans are in favor of taxing the rich at a higher rate. A recent CNN poll found that 67% of all Americans support higher taxes for businesses and the wealthy. Perhaps more important, 69% of Independents felt this way. Since Independent voters are important in any election, this finding is very significant.

Republicans, on the other hand, argue that increasing taxes on high income individuals essentially targets many small business owners and therefore, jobs. Paying more in taxes to the government leaves less money to expand and hire new workers. Even so, an October Bloomberg/Washington Post poll supposedly found that 53% of self-identified Republicans actually supported higher taxes on households earning $250,000 or more per year. Other polls, however, still show the majority of Republicans are firmly against these tax increases.

The stage seems to be set for an all-out brawl on taxation next year. That being said, I think it is important to clarify some of the issues related to the “rich” who are so frequently mentioned in political speeches. To get us started, I have reprinted an excellent article that addresses a recent CBO report on taxation that has garnered a great deal of attention in the press, but as usual, it has a lot of flaws. Here’s the article (emphasis mine):

QUOTE:
Tax Rates, Inequality and the 1%
By ALAN REYNOLDS

A recent report from the Congressional Budget Office (CB0) says, “The share of income received by the top 1% grew from about 8% in 1979 to over 17% in 2007.”

This news caused quite a stir, feeding the left’s obsession with inequality. Washington Post columnist Eugene Robinson, for example, said this “jaw-dropping report” shows “why the Occupy Wall Street protests have struck such a nerve.” The New York Times opined that the study is “likely to have a major impact on the debate in Congress over the fairness of federal tax and spending policies.”

But here’s a question: Why did the report stop at 2007? The CBO didn't say, although its report briefly acknowledged – in a footnote – that “high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009.”

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top.Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce “inequality.” Of course, the same recessions also increase poverty and unemployment.

The latest cyclical destruction of top incomes has been unusually deep and persistent, because fully 43.7% of top earners’ incomes in 2007 were from capital gains, dividends and interest, with another 17.1% from small business. Since 2007, capital gains on stocks and real estate have often turned to losses, dividends on financial stocks were slashed, interest income nearly disappeared, and many small businesses remain unprofitable.

The incomes that top earners report to the IRS have long been tightly linked to the ups and downs of capital gains. Changes in the tax law in 1986, for example, evoked a remarkable response – with capital gains accounting for an extraordinary 47.7% of top earners’ reported income as investors rushed to cash in gains before the capital gains tax rose to 28%.

That was obviously temporary, but the subsequent slowdown in realized gains lasted a decade. Taxable gains accounted for only 16.7% of the top earners' income between 1987 and 1996. And the paucity of realized capital gains kept the top earners’ share of income flat.

When the top capital gains tax fell to 20% in 1997 and remained there until 2002, realized capital gains rose to 25.4% of the top earners’ income, and it explained much of the surge of their income share to 15.5% in 2000. Stock gains were more modest from 2003 to 2007, yet the tax rate on profitable trades was down to 15%, so realized capital gains rose to 26.7% of income reported by the top 1%.

True enough, capital gains are not the whole story, and the CBO’s report, “Trends in the Distribution of Household Income Between 1979 and 2007,” notes that “business income was the fastest growing source of income for the top 1 percent.” But that too was a behavioral response to lower tax rates.

In 1988, business income jumped to 16.5% of the reported income of the top 1%, from 8.2% in 1986. Why? As the CBO explains, “many C corporations . . . were converted to S corporations which pass corporate income through to their shareholders where it is taxed under the individual income tax.”

The CBO estimates top incomes from individual tax returns. So it looked like a big spurt in top income in 1988 when thousands of businesses switched to reporting income on individual rather than corporate returns as the top individual tax rate dropped to 28% from 50%.

In reality, it was just a switching between tax forms to take advantage of the lower individual tax rate. Such tax-induced switching from corporate to individual tax forms in 1986-1988 makes it illegitimate to compare top income shares between 1979 and 2007. [I’ll bet that no one in the mainstream press bothered to tell this part of the story. GDH]

After the tax rate on dividends fell to 15% in 2003 from 35%, the share of income reported by top earners from dividends doubled to 8.4% in 2007 from 4.2% in 2002, according to similar tax-based estimates from economists Thomas Piketty and Emmanuel Saez. Top earners held more dividend-paying stocks in taxable accounts rather than in tax-exempt bonds, or they kept dividends in tax-free retirement accounts.

In short, what the Congressional Budget Office presents as increased inequality from 2003 to 2007 was actually evidence that the top 1% of earners report more taxable income when tax rates are reduced on dividends, capital gains and businesses filing under the individual tax code.

[And here’s the meat of this article, in one paragraph, GDH:]

If Congress raises top individual tax rates much above the corporate rate, many billions in business income would rapidly vanish from the individual tax returns the CBO uses to measure the income of the top 1%. Small businesses and professionals would revert to reporting most income on corporate tax returns as they did in 1979. If Congress raises top tax rates on capital gains and dividends, the highest income earners would report less income from capital gains and dividends and hold more tax-exempt bonds.

Such tax policies would reduce the share of reported income of the top earners almost as effectively as the recession the policies would likely provoke. The top 1% would then pay a much smaller portion of federal income taxes, just as they did in 1979. And the other 99% would pay more. As the CBO found, “the federal income tax was notably more progressive in 2007 than in 1979.”

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Mr. Reynolds is a senior fellow with the Cato Institute. This op-ed is adapted from a forthcoming Cato Institute working paper, “The Mismeasurement of Inequality.”

Is the Tax Code Progressive?

The US Tax Code is designed to be progressive, meaning that the more money you make, the higher your tax rate. This is accomplished through tax brackets with increasing marginal tax rates applicable to income within that bracket. Liberals, however, complain that the current Tax Code is not progressive enough and that the wealthy should pay more.

The Tax Foundation recently published tax statistics from 2009 that tend to take the wind out of the sails of the liberals. The table is reproduced below, but here are just a few observations based on the data:

The top 1% account for 16.9% of adjusted gross income (AGI), but pay 36.7% of all income taxes;
The top 5% account for 31.7% of total AGI but also shoulder over 58% of all income taxes paid; and
The average tax rate on the top 1% is higher (24.01%) than any other group, despite lower capital gains and dividend tax rates. The bottom 50% pays an average income tax rate of only 1.85%.

Here’s the table:

The results are clear – even with access to lower rates for dividends and long-term capital gains, the top 5% and top 1% pay taxes at a higher rate than any other demographic group. What’s more, the top 50% of households pay almost 98% of all income taxes. That sounds progressive to me. Here’s what the Tax Foundation said about it:

“Although the 2001 and 2003 tax cuts were across the board (even though certain provisions within those cuts were targeted at various income ranges), the federal individual income tax remains highly progressive. The average tax rate in 2009 ranged from around 1.9 percent of income for the bottom half of tax returns to 24.0 percent for the top 1 percent. With the possible exception of the estate tax, the federal income tax is the most progressive tax in the United States, and these numbers show why.”

More on Capital Gains

As the above article notes, it’s very important to consider all of the various changes in tax laws before making any generalized comparisons. Nowhere is this more important than in tax rules governing long-term capital gains. With the revelation that billionaire Warren Buffett pays a lower rate of tax than his secretary, thanks to special rates on dividends and capital gains, these tax breaks have come under much more scrutiny.

Unfortunately, the only consistency of historical long-term capital gains tax rates is that they are inconsistent, changing every few years. Obviously, all of this change makes it very difficult to draw meaningful conclusions when reviewing tax data. Said another way, there’s little wonder that both sides of the capital gains tax debate can claim victory when reviewing the same data. All you have to do is drop a couple of years like the CBO report described above did, or extend your analysis back into the 1950s when exclusion amounts were common.

The debate is as follows: Democrats say that higher capital gains rates will raise additional tax revenue without harming the economy, while Republicans say that higher rates will not materially affect revenue but could hurt business investment and, in turn, jobs. Who’s right?

When reviewing the tax receipts since the tax law change in 1986, it’s difficult to argue that higher rates produce greater revenues. In fact, capital gains tax revenues tend to be higher when tax rates are lower, as a general rule. It is also significant that realized capital gains as a percentage of GDP generally follow the same pattern – higher when tax rates are low and vice versa.

So, while Mr. Buffett and his billionaire buddies presently pay a lower rate of tax on this income, they also tend to realize more long-term capital gains when rates are low, producing more revenue. Isn’t that the bottom line we’re looking for? When tax rates move higher, investors tend to hold onto appreciating assets rather than sell them, escaping the higher tax rate. So, based on actual tax receipts, the Republicans appear to be correct.

Those who argue against lower capital gains tax rates obviously can’t dispute the historical tax collections. However, they say that the jumps in tax revenue before a capital gains tax rate increase or after a rate cut are only temporary phenomena. Over the long haul, they argue, the lower rates will produce less revenue.

As proof, they trot out projections by the CBO and others which forecast that tax revenues will suffer over the long term if capital gains tax rates remain low. Yes, the CBO, that bastion of accurate budgetary projections highlighted in the article above! We all know the problem with CBO projections is the assumptions used. In the computer world, they have a saying, “garbage in – garbage out.” The same goes for the CBO.

Another argument used by those against lower capital gains tax rates is that most middle-income households do not benefit from tax breaks related to capital gains and dividends. According to an article from the Center on Budget and Policy Priorities, the Tax Policy Center has estimated that the top 5% of households by income receive 83% of total capital gains income.

We’re now back full-circle to the liberals’ desire to wage class warfare. Can you truthfully say that just because a tax break isn’t available to most middle-class taxpayers that it shouldn’t exist? The special tax rates for dividends and capital gains are there for a purpose (see below). If the purpose of the tax break is still valid, then that should dictate its value, not the demographic group that uses it the most.

As I have said before, the capital gains tax rates are designed to provide an incentive for investors totake risks necessary to invest in new and existing businesses. The chief risk is that they may lose all of their investment, something not considered by the tax-the-rich crowd.

Given the long-term history of capital gains tax rates, perhaps the best way to say it is that realized capital gains tend to seek the lowest level of taxation. Investors know that capital gains rates change with almost every administration, so they are likely going to be content to just hold onto their appreciated property during higher rates, awaiting lower rates that are sure to follow.

Tax Breaks for Everyone!

In all of the hoopla surrounding the tax-the-rich rhetoric, we sometimes forget that there are tax loopholes written into the law that benefit middle-class and even lower income taxpayers. A recent Washington Post Special Report notes that there are 172 total tax breaks written into the tax code. 116 of these are reserved for individual taxpayers. Here are a dozen of the more common tax breaks available to virtually anyone, along with their projected “cost” in terms of lost revenue for 2011:

Employer-provided health insurance & cafeteria plan exclusions: $146.6 billion
Employer retirement plan contributions and earnings exclusion: $105.8 billion
Home mortgage interest deduction: $93.8 billion
Medicare benefit exclusion: $63.6 billion
Earned Income Tax Credit: $52.4 billion
Charitable contribution deduction (including education and health): $43.5 billion
Annuity and life insurance gains grow tax-deferred: $25.7 billion
Real property tax deduction: $22.8 billion
Educational tax breaks (various): $17.5 billion
Individual Retirement Accounts: $17.3 billion
Gain from sale of principal residence (within limits): $16.5 billion
Medical expense deductions: $13.5 billion

(Source: Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2010 – 2014”)

These 12 tax breaks were expected to cost the federal government a total of $619 billion in 2011, or roughlyhalf of the estimated deficit of $1.3 trillion. Now compare some of the individual totals above to the cost of capital gains and dividend taxation, which was projected to be $84.2 billion in 2011 in the Joint Committee’s estimate. Even if you did away with all favorable tax treatment of long-term capital gains and dividends, it would amount to only a drop in the bucket when compared to the deficit and accumulated national debt.

That’s no-doubt why President Obama and others have already recommended chipping away at some of the tax breaks above for those with higher incomes. However, it won’t be long until the government’s insatiable need for money will begin to push down the threshold of who is “rich,” until we see the burden hit the middle class. Count on it!

Conclusions

In this week’s article, I have tried to make the point that, while the “tax-the-rich” mantra has a populist political appeal, it doesn’t always result in additional tax revenue. Thus, if the Democrats are successful in raising tax rates on the wealthy, they could end-up winning the battle but losing the overall war of reducing budget deficits and federal debt.

Yet recent polls show that Americans now generally favor taxing the rich. When you really get down to it, however, the issue isn’t necessarily taxing the rich, but rather “tax someone else other than me.” Most people are not in the top 1% and do not make a million dollars per year and may not know anyone who does, so they think those paying higher taxes are others who can obviously afford it.

The problem is that due to the flexibility many wealthy individuals (especially the top 1%) have in regard to how and when they realize income, the actual tax revenue generated may fall far short of what is needed to significantly reduce deficits. Where do you think they’ll look then?

One thing is for sure in this age of record large budget deficits: politicians will be looking for ways to raise taxes. The Democrats are already targeting beneficial tax breaks like home mortgage interest, employer-provided health and retirement benefits, charitable giving, etc., etc.

Once they figure out that the reduction or elimination of these tax breaks don’t create enough revenue to make a significant dent in the deficits, where do you think they’ll look then? Can you say, “tax increase on the middle class?” Case closed!

Very best regards,

Gary D. Halbert

On the Economy & the Fed - Now What?

Gary D. Halbert — Tue, 30 Aug 2011 20:09:00 GMT

IN THIS ISSUE:

1. Bernanke’s Speech at Jackson Hole

2. The Economy Continues to Disappoint

3. Has the CBO Become Irrelevant?

4. Welcome to Stagflation

5. Stock Market Mayhem!

Introduction

We touch on several bases in today’s letter. We begin with Fed Chairman Ben Bernanke’s key speech at the Fed symposium in Jackson Hole, Wyoming last Friday, which proved to be a yawner despite all the anticipation beforehand. Next, we look at last Friday’s disappointing GDP report which was revised lower, along with other recent economic reports.

Following that, we look at the latest long-term budget forecasts from the Congressional Budget Office. As I will discuss below, the CBO uses so many optimistic assumptions in these forecasts that one wonders if they are even relevant anymore. In any case, I’ll give you the latest numbers.

Next,I make the case that the US economy has now drifted once again into “stagflation” – defined as slow growth and rising inflation. Expect to hear more references to stagflation in the days and weeks just ahead, but you heard it here first. Finally, we look at the latest chaos in the stock markets.

It’s a lot to cover in one E-Letter, but I think you’ll find it all interesting. As always your comments and suggestions are welcome.

Bernanke’s Speech at Jackson Hole

Practically the whole world was listening as Fed Chairman Ben Bernanke spoke at the annual Fed symposium in Jackson Hole, Wyoming last Friday. For much of last week, there was great speculation as to whether or not Bernanke would hint of yet another round of “quantitative easing” or QE3. But by the time Bernanke actually spoke, most analysts agreed that QE3 was probably not in the cards.

As it turns out, Bernanke didn’t announce anything new. The stock markets fell immediately after the speech last Friday but recovered shortly thereafter and closed higher on the day. Bernanke referred to the Fed’s action earlier in the month when the FOMC vowed to keep short-term interest rates near zero until at least mid-2013, but that was old news.

Bernanke acknowledged that the economy has slowed down more than expected this year, but he maintained his view that near record low interest rates will promote economic growth over time. He also hinted that Congress may need to act to stimulate hiring and growth, but he did not make any specific suggestions. Other than that, the much anticipated speech was pretty much a non-event.

The Economy Continues to Disappoint

Economic news of late has continued to be mostly disappointing. Last Friday’s 2Q GDP report was revised downward to 1.0%(annual rate) from the previous estimate of 1.3%. That followed growth of only 0.4% in the 1Q, so the economy only gained 0.7% for the first half of the year, which was well below most expectations coming into this year.

Economists pretty much across the board have slashed their estimates of GDP in the second half of the year, with most forecasting growth of around 1%. Forecasts for 2012 growth are generally only in the 1-2% range, down from 3-4% predicted earlier this year.

The big question now is whether or not the economy has slipped into a double-dip recession. Technically speaking, the answer is no since a recession is typically identified as two or more back-to-back quarters of negative growth in GDP. We haven’t seen that yet, but if the 3Q and 4Q turn out to be negative, the National Bureau of Economic Research will declare that a recession officially began around the middle of this year.

Unfortunately, we won’t know that until late January of next year when the first estimate of 4Q GDP is released by the Commerce Department. While I’m not predicting that we have sunk into a recession in the 3Q – we just don’t know yet – but that hasn’t stopped a growing number of forecasters from declaring that we are in a new recession. And they could be correct.

The Thomson Reuters/University of Michigan index of consumer sentiment plunged to 54.9 from 63.7 the prior month. That was the lowest reading in 31 years, and was sharply lower than the pre-report consensus of 62. The big decline in consumer sentiment came just after the largest one-week slump in stocks since 2008. This is a very bad sign given that consumer spending accounts for apprx. 70% of GDP.

Just this morning, the Consumer Confidence Index plunged to 44.5 in August from 59.2 in July. It was the lowest reading since April 2009 and was significantly lower than the pre-report consensus. The Conference Board cited the debt ceiling debacle and the credit downgrade to AA as major factors in the sharp decline in the index. This report is a strong indication that the economy is falling into a double-dip recession.

On August 18, the Philadelphia Federal Reserve Bank’s index of economic activity in the mid-Atlantic region plummeted to a negative 30.7, down from a positive 3.2 in July and the lowest since a negative 30.8 reading in March 2009 -- in the depths of the last recession. The index measures various aspects of business activity in the region, including new orders received by companies, shipments of goods and employment trends.

Economists were stunned at the unexpected plunge in the index, and the Dow Jones promptly tanked almost 420 points (-3.7%) on the day. Numerous economists and analysts noted that previous declines in the Philly Fed index to August’s levels have only been observed in or immediately prior to recessions, with the exception of a brief period in 1995.

On the housing front, all of the latest reports were disappointing. New and existing home sales were down in July, as were housing starts and building permits. Unemployment news wasn’t any better. Weekly claims for unemployment benefits jumped back above 400,000 in the middle two weeks of August. The unemployment rate for August is expected to remain at 9.1% when it is released this Friday.

Fortunately, not all the economic news of late was bad. The Index of Leading Economic Indicators (LEI) for July was a little better than expected at +0.5%. Yet a closer look at the report revealed that most of the increase came from a drop in interest rates, and several internal components showed greater weakness in the economy. Durable goods orders rose unexpectedly by 4% in July. And consumer spending rose more than expected in July, up 0.8%, thanks largely to back-to-school buying.

Has the CBO Become Irrelevant?

The Congressional Budget Office updated its long-term forecasts for the US economy, deficits, national debt, etc. last week following the debt ceiling increase, and some analysts found the report encouraging. Encouraging?? I’d call it drinking the CBO’s Kool-Aid! The thing you must understand about these 10-year CBO reports is that they include a lot of assumptions, and most are overly optimistic in my opinion and that of many others.

For example, the CBO assumes that the economy will expand every year for the next decade, with no recessions. Never mind that we may already be in a double-dip recession. I know of no one other than the CBO and the Obama administration that believes we will get through the next decade without a recession.

Specifically, the CBO forecasts economic growth of 2.3% for fiscal 2011, 2.7% for FY2012 and 3.7% for FY2013-2016. Only the most optimistic economists have GDP estimates this high. The CBO projects that the US unemployment rate will fall to 8.9% by the end of this year, but will remain above 8% until at least the end of 2014. They might actually be about right on this projection, but that level of unemployment doesn’t square with their rosy forecasts for economic growth.

The CBO also assumes that the government will succeed in cutting federal spending by $2.5 trillion over the next 10 years as prescribed by the debt ceiling deal. This assumption is made even before the congressional Joint Committee to make these cuts gets started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The CBO also assumes that all of the Bush tax cuts will expire at the end of 2012, but even President Obama is not talking about eliminating all of the Bush tax cuts at the end of next year. For these reasons and others, the CBO’s long-term forecasts don’t carry nearly as much weight as in years past.

The problematic assumptions aside, the CBO forecasts that the federal budget deficit for fiscal 2011 will be $1.3 trillion or 8.5% of GDP. This is down slightly from the fiscal 2010 deficit but is still the third largest deficit in our nation’s history, all of which have occurred on Obama’s watch.

The CBO’s forecasts, projections and assumptions noted above are included in the agency’s so-called “Extended Baseline Scenario.” The CBO has another set of projections that are referred to as the “Alternative Fiscal Scenario.” This scenario includes some different assumptions including a long-term extension of the Bush tax cuts beyond 2012, limiting the alternative minimum tax, that federal revenues remain at their historical average of 18% of GDP, etc.

Under those assumptions, federal debt would grow much more rapidly than under the Extended-Baseline Scenario. With significantly lower revenues and higher outlays, debt held by the public would exceed 100% of GDP by 2021. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109% (post WWII) by 2023 and would approach 190% by 2035. Clearly, this is an unsustainable path.

The CBO notes: “Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course.” No kidding!

Welcome to Stagflation

Stagflation is a term that became common in the US in the 1970s when inflation was rising significantly while economic growth was slow. As best we can tell the term stagflation was first used in Britain in 1965. It was first used in the US when President Nixon imposed wage and price controls in August 1971 and again in 1973 during the oil crisis. The term was widely used in the late 1970s during the Carter administration.

Expect to hear more references to stagflation in the days and weeks just ahead. Earlier this month, we learned that the US economy grew at a very anemic rate of only 0.4% in the 1Q and 1.0% in the 2Q, both well below most economists’ expectations. Unemployment remains above 9%. With the latest meltdown in the stock markets, most forecasters now believe the economy won’t grow much above 2% in the second half of this year, if that.

Meanwhile, inflation is creeping higher. “Creeping” may not be the appropriate description since wholesale prices are actually soaring as I will discuss below. The Consumer Price Index rose more than expected in July, up 0.5%, versus the pre-report consensus for an increase of just 0.2%. For the 12 months ended in July, the CPI rose 3.6%. This is well above the Fed’s target of around 2%.

Wholesale prices have jumped by twice that amount over the last year. The Producer Price Index rose 0.2% in July, about in line with expectations. However, the PPI jumped a whopping 7.2% over the last 12 months. Increases in wholesale prices lead to subsequent increases in consumer prices. The increases this year have been most notable in energy and food prices.Stagflation is definitely back, as I predicted in these pages a year ago.

Note: The chart above does not include the latest CPI data for July which shows consumer prices rising at an annual rate of 3.6% as noted above.

As the chart illustrates, wholesale and consumer prices have risen rather dramatically since the end of the recession (shaded area). Yet most economists believe that the US remains in a deflationary period overall, what with the continued deleveraging in the housing markets and high unemployment. What they really mean is that credit remains very tight.

On one hand, rising prices are bad news for consumers; on the other hand, this may actually be good news for the Fed. The Fed implemented QE1 and QE2 in an effort to head off deflation.The recent increase in the producer and consumer price indexes may be an indication that the Federal Reserve’s policies are starting to work. However, the lack of economic growth at a time when inflation is increasing is not what the Federal Reserve wanted. They wanted both economic growth and higher prices, but what they are getting is higher prices and very little growth.

Stock Market Mayhem!

There are times when you hope your predictions don’t come true, and that has certainly been the case for me in the last several weeks. In my July 19 E-Letter, “Why Greece Matters to You and Me,” I printed the chart below of the S&P 500 futures, with the following warning:

“If the situation in Europe deteriorates further, I think it could be quite bearish for equities, both in the US and Europe. The last time that happened, stocks lost half their value on average in just over a year. Despite what happens in Europe, US stocks have picked an ugly spot to turn sideways to slightly lower. The S&P 500 Index has heavy overhead resistance at 1400 and above. Technically speaking, this is not a good level to stall.”

In that same E-Letter I warned: “… we are very likely facing another global financial crisis that could be sparked if Greece defaults on its debt. If this happens, I would expect the US stock markets to plunge again, perhaps as they did in 2008. And this could happen at any time. Most US investors are NOT prepared for this scenario and believe that US equity prices will remain in a bull market for the balance of this year and next.” [Emphasis added, GDH.]

We all know what has happened since. The S&P 500 plunged from near 1,350 to near 1,100 or an 18% loss in less than two weeks. On some days, the Dow Jones fell by 400-500 points. And we may not be done yet.

In the updated weekly chart of the S&P 500 below, you can see that the market fell from a classic “head-and-shoulders” chart formation that has been developing all year. In the chart below, you can see the left shoulder peak in February, followed by the slightly higher peak (head) in late April, and the right shoulder peak in late July.Top of Form

The stock markets have recovered somewhat from the recent plunge but the major trend remains down, in my opinion. I continue to believe that the equity markets will be most affected by the developments in the European debt crisis. The markets rallied strongly on Monday due to news that two Greek banks had merged, but the merger of two weak banks does not make a strong one.

The problems in Europe have not changed and it remains to be seen whether Germany will agree to take on the debt of the periphery nations, as well as Italy and Spain, vis-à-vis the creation of a new Eurobond. This is far from settled, and I believe there will be more bad news out of the Eurozone.

As discussed above, the US may be entering a double-dip recession, but we may not know for sure for a while. This uncertainty plus the continued problems in Europe are likely to keep pressure on US stocks for at least the next few months if not longer.

If the latest plunge in the stock markets has you rethinking your own portfolio, I invite you to call us at 800-348-3601 and speak with one of my experienced Investment Consultants. We can help you diversify your portfolio with the goal of limiting risks. Think about it.Very best regards,

Gary D. Halbert

CBO: U.S. Debt Crisis On The Horizon

Gary D. Halbert — Tue, 10 Aug 2010 23:05:00 GMT

IN THIS ISSUE:

1. The Economic Recovery is Faltering

2. CBO Warns of a Debt Crisis on the Horizon

3. Treasury Bond Yields Near Record Low – What Next?

4. Protecting Your Assets When Interest Rates Spike

5. Conclusions – Dangerous Times Ahead

Introduction

The non-partisan Congressional Budget Office (“CBO”) released a very troubling new report in the last week of July. The new report is entitled “Federal Debt and the Risk of a Fiscal Crisis” and warns that we will face financial calamity if we do not get our massive budget deficits under control.

The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it continues to ratchet up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

The CBO specifically warns that our out-of-control deficits could lead to the ultimate debt crisis when buyers of Treasury securities lose faith in the government’s promise not to default on these most trusted financial instruments. No kidding!

I have been writing about the perils of increasing our national debt year after year since back in the 1980s when I criticized President Ronald Reagan for doing so, and every president since him. The concern was that in 20-30 years, the ultimate debt crisis would come. Guess what: it’s now been 20-30 years, and even the CBO now warns that the day of reckoning is on the horizon.

This week, I’ll summarize the latest CBO report. After reading about it, you need to think seriously about how you will protect your assets when the day comes where US Treasury securities are no longer trusted – think sharply higher interest rates! This will be a continuing theme in the weeks and months ahead.

But before we jump into the latest troubling CBO report, let’s take a quick look at the latest economic reports, most of which have not been favorable. It has been several weeks since I wrote about the economy specifically, so let’s get caught up.

The Economic Recovery is Faltering

While it didn’t come as a surprise to my clients and readers, the latest report on 2Q Gross Domestic Product was weaker than expected. The Commerce Department reported the 2Q GDP rose only 2.4% (annual rate). That was well below the pre-report estimates of 2.5% to 3.0%. In fact, some forecasters had predicted growth well above 3.0% in the 2Q.

The news was not all bad, however. The Commerce Dept. revised its estimate of 1Q GDP from 2.7% to 3.7%, which was considerably better than the consensus estimate. Still, the trend is not good: 4Q +5.0%, 1Q +3.7% and 2Q +2.4%. With most of the latest economic reports looking negative, growth in the last half of the year could do well to stay in positive territory.

The Index of Leading Economic Indicators (LEI) fell 0.2% in June (latest data available) and has been down in two of the last three months. However, the LEI is still well above its recession low in early 2009. It remains to be seen if this is merely a pullback in the LEI, or if it is rolling over to the downside ahead of a double-dip recession.

Consumer confidence remains in a free-fall. After plunging sharply in June, the Consumer Confidence Index fell from 54.3 to 50.4 in July. Here is the official statement that accompanied the release of the Conference Board’s confidence index on July 27:

“Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

The Reuters/University of Michigan Consumer Sentiment Index also fell sharply again in July. The index fell from 76.0 in June to 67.8 in July. This report also cited the weak employment situation and continued weakness in home prices as the primary reasons for the fall in sentiment. They also warned that consumer spending could fall even more as a result.

Rasmussen reported yesterday: “Following the release of Friday’s government report on unemployment and job creation, consumer and investor confidence has fallen to the lowest level of 2010. Just 21% of Adults nationwide now believe the economy is getting better. That's down from 30% on Friday morning. The number who believe the economy is getting worse is now up to 54%.”

The Commerce Department reported last week that consumer spending remained low in June (latest data available). Personal spending was unchanged in June, reflecting a third straight month of lackluster consumer demand. Incomes were also flat, the weakest showing in nine months.

Not surprisingly, the US personal saving rate continues to rise. The government reported last week that the personal savings rate climbed to 6.4% of disposable income. That’s the highest rate since the early 1990s. Most Americans are clearly concerned about another recession, so they are saving more even if they are not making more. On a related note, consumer credit continues to be in free fall. It’s no wonder then that retail sales fell 0.5% in June.

On the manufacturing front, the ISM index fell to 55.5 in July, down from 56.2 in June. Durable goods orders fell 1% in July, when forecasters had expected a gain of 1%. The government reported last week that factory orders fell 1.2% in June (latest data available). On the positive side, industrial production rose a modest 0.1% in June.

Last Friday’s unemployment report for July was dismal, to say the least. While the official unemployment rate remained at 9.5%, the internals of the report were considerably weaker than had been expected. The economy lost another 131,000 jobs in July, and the June report was revised from 125,000 jobs lost to 221,000 according to the Labor Department report. The unemployment rate held steady mainly because 181,000 people stopped looking for work last month, and are no longer counted as unemployed.

On the housing front, the news was mixed. New homes sales beat expectations in June with 330,000 units sold according to the Census Bureau. Sales of existing homes fell, however, in June to 5.37 million units, down from 5.66 million units in May. And the number of buyers who signed contracts to purchase homes fell in June, down 19% from a year ago. Housing starts were also weaker than expected in June at 549,000 units.

Economists continue to adjust their forecasts downward for the second half of this year in light of the latest mostly disappointing economic reports. Congressional leaders in Washington are now talking about more stimulus (read: pork-barrel spending), and President Obama seems more than willing to go along – surprise, surprise.

CBO Warns of a Debt Crisis on the Horizon

On July 27, the non-partisan Congressional Budget Office issued a new report entitled “Federal Debt and the Risk of a Fiscal Crisis.” The report warns that we will face financial calamity if we do not get our massive budget deficits down in the years just ahead.

The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it goes up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

Most Americans glaze-over when they hear numbers about the debt-to-GDP ratio. Perhaps the following chart from the CBO will put it in some better perspective. As long-time clients and readers know, I have been warning about this problem for over 25 years.

Tracing the history of the national debt back through our history, the CBO finds that the national debt did not exceed 50% of GDP, even when the country was fighting the Civil War, the First World War or any other war except World War II. As you can see in the chart, the national debt declined sharply after World War II as the nation began paying off its wartime debt when the conflict was over.

By contrast, our current national debt is still going up and may end up in “unfamiliar territory,” according to the CBO, reaching “unsustainable levels.” They spell out the following economic consequences -- and it is not a pretty picture:

“Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that ‘crowding out’ of investment would lead to lower output and incomes than would otherwise occur.

In addition, if the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. Rising interest costs might also force reductions in spending on important government programs. Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.

Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the situation and sufficient time to make policy choices that could avert a crisis. [Emphasis added.]

But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy. When fiscal crises do occur, they often happen during an economic downturn, which amplifies the difficulties of adjusting fiscal policy in response. [Emphasis added.]

If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. [Emphasis added.]

That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who owned nearly half of U.S. debt held by the public in May 2010 (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses.” [Emphasis added.]

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Folks, this is some VERY STRONG language by the number-crunchers at the CBO!

Earlier this year, I reprinted the CBO chart showing their projected deficits over the next decade. Let’s take another look. As you can see in this table, the CBO forecasts the deficit to fall below $1 trillion in 2012 but it never falls below $724 billion, and then goes back to almost $1 trillion by 2017.

To be clear, the darker bars in the chart above represent the CBO’s “baseline” deficit projections before Obama released his 10-year budget forecasts back in February. The lighter bars are the deficit projections after Obama’s forecasts were released. Take special notice of the magnitude of the deficit increase every year compared to what the CBO previously projected.

If we include the then-record fiscal 2009 budget deficit of $1.4 trillion, our national debt will soar by almost $13 trillion by 2020. Here are the CBO’s latest deficit estimates through 2020, including the actual FY 2009 deficit:

FY 2009 $1.4 trillion	FY 2015 $793 billion
FY 2010 $1.5 trillion	FY 2016 $894 billion
FY 2011 $1.3 trillion	FY 2017 $940 billion
FY 2012 $914 billion	FY 2018 $996 billion
FY 2013 $747 billion	FY 2019 $1.2 trillion
FY 2014 $724 billion	FY 2020 $1.3 trillion

TOTAL $12.7 Trillion

Worst of all, the projections illustrated above may well be too optimistic. Most obvious, the CBO assumes there will not be a recession between 2010 and 2020. Really? They estimate that the economy will grow by an average of 3% in 2010-2011, and then grow by an average of 4.9% a year in 2012-2020. No recessions and nearly 5% GDP growth for nine years in a row is almost certainly a pipe dream.

With the global debt crisis still worsening, I don’t know anyone who believes these rosy CBO projections will be nearly accurate. If they are too optimistic, and I believe they are, we could be adding much more than another $12.7 trillion to our national debt by 2020. Frankly, I don’t believe the markets will allow this to happen.

Treasury Bond Yields Near Record Low – What Next?

As you can see in the chart below, the yield on the 30-year Treasury bond is incredibly low, currently at around 4%. But as you can see, it has been below 4% recently and may be headed to yet new record lows just ahead. There are a variety of reasons for this historic drop in interest rates but suffice it to say, for now, it is largely due to the sluggish economic recovery and the growing deflationary forces in the global economy.

Many investors do not understand how we can be running trillion-dollar deficits and exploding the national debt, yet interest rates are at or near historical lows. I will write in more detail about this in the weeks just ahead. But the main thing to keep in mind is: 1) these historically low rates won’t last for long; and 2) when they do start back up, they will almost certainly rise dramatically.

Protecting Your Assets When Interest Rates Spike

Whether you have a large or small investment portfolio, you need to be thinking about how you can protect your nest-egg if US interest rates spike higher. Why? If interest rates spike higher, that will be bad news for bonds and stocks. Most of us have stocks and bonds in our portfolios, so such a scenario could be doubly devastating.

But there are ways to help protect your portfolio from a spike in interest rates. Last week, I featured Hg Capital which has a Treasury bond strategy that invests both long and short, with the potential to protect you regardless which way long-term interest rates move. Think of it as a “hedge” if bond rates begin to move higher, as they inevitably will at some point.

We hosted an hour-long Internet “webinar” with the principals of Hg Capital last Thursday. You can view and hear that very interesting presentation at the following link:

Click here for the Hg Capital webinar replay.

I highly recommend that you listen to at least the first half of this webinar, whether you consider investing with Hg Capital or not. You need to be thinking about how to protect your bond portfolio should interest rates spike higher. Again, this is a theme I will be focusing on in the weeks and months ahead.

You may also want to take another look at Wellesley Investment Advisors, another bond advisor that I recommend highly. Wellesley invests in high quality, investment grade convertible bonds that have “put” and “call” options that provide additional flexibility when it comes to exiting the positions.

Most investors do not know how to participate in convertible bonds, so Wellesley can be a great diversification tool. More importantly, Wellesley’s excellent 15-year performance record has not been correlated to the performance of Treasury bonds or stocks in the past. I have a large allocation of my own money in this program, and I highly recommend it.

To view our recent webinar with Wellesley’s founder Greg Miller, click on the link below:

Click here for the Wellesley Investment Advisors webinar replay.

** If you cannot download the webinars, click on the following links to our written Advisor Profiles on these two professional money managers:

Click here for the Hg Profile.

Click here for the Wellesley Profile.

For years, most investors have been indoctrinated by the financial community to believe in the “buy-and-hold” investment strategy, especially when it comes to their stock holdings. As long-term clients and readers know, I have advocated for alternative investment strategies that have the flexibility to move out of the market from time to time, especially during bear markets.

Despite my persistent arguments, most investors remain in buy-and-hold strategies. However, with two bear markets in stocks in just the last decade alone, more and more people are now looking seriously at the “active management” strategies I recommend. So in addition to Hg Capital and Wellesley Investment Advisors, now may be the time to reconsider the actively managed equity programs I recommend as well.

As always, past performance is not a guarantee of future results.

Conclusions – Dangerous Times Ahead

Folks, I don’t know how to put it any more succinctly: the government’s own Congressional Budget Office is warning that we will face a serious debt crisis if we don’t get control of our trillion-dollar budget deficits soon. Believe me, government bureaucrats don’t make these kinds of inflammatory warnings unless they are truly scared.

Yet President Obama’s 10-year budget forecasts would have us almost double the national debt between now and 2020. This will be very bearish for bonds and stocks, in my opinion. Your investment and/or retirement portfolio has probably been hammered already by two bear markets in stocks in the last decade. If the CBO is right about a full-fledged debt crisis – one that takes down both bonds and stocks – it could make the financial crisis of 2008-2009 look tame.

All of us that have money to protect need to start thinking now about how we are going to do that. Buy-and-hold strategies, whether in stocks or bonds, will likely get hammered even harder if the debt crisis the CBO warns about comes to pass.

Whether it’s the active management strategies I recommend, or some others that may be out there, you need to be thinking about and planning for what may lie ahead, if and when we get to the point that investors (US and foreign) no longer trust the US government to make good on its debt. That will be the Mother of all debt crises.

Sorry to be negative but it is what it is,

Gary D. Halbert

SPECIAL ARTICLES:

CBO warns of a sudden “fiscal crisis” (official summary of the report)
http://www.cbo.gov/doc.cfm?index=11659

National debt set to skyrocket
http://blog.heritage.org/2010/07/29/cbo-warns-of-the-risk-of-a-u-s-fiscal-crisis/

Interesting Articles of Late

Gary D. Halbert — Tue, 06 Apr 2010 20:24:22 GMT

I do a good bit of the researching and writing of these weekly E-Letters during the weekends when I am not distracted by phone calls, meetings and other details of the office. Normally, I like to have my letters outlined and largely written by the time I hit the office on Monday mornings. This past weekend, however, was Easter weekend, and I didn't want to work during one of my two favorite holidays (and with my son home from college).

What I have done this week is to reprint some of the most interesting articles I have read over the last week. Each of the four articles below makes some excellent points and offers perspectives you may not have considered.

The first two articles are from well-known writers that have come to agree with me that we are headed for another financial crisis if President Obama continues his plan to double the national debt over the next decade. I trust you will find their perspectives on this critical issue very insightful (and alarming).

The third article is from Larry Kudlow, well-known economist and host of CNBC's The Kudlow Report, who argues that Obama's latest plan to use TARP money to bail out homeowners who are about to default is just plain wrong and unfair to those lower and middle class families who are working extra hard to make their mortgage payments. I agree.

The final article is a column by George Will of ABC News' This Week. As you may know, Obama plans to take up immigration reform very soon. After all, he needs a huge block of new voters since he has infuriated tens of millions of Americans with the ramming of healthcare reform down our throats. George Will makes a brilliant suggestion for how to solve the illegal immigration problem once and for all that I'll bet you haven't thought of.

Planting the Seeds of Disaster
by Robert Samuelson

WASHINGTON -- When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody's Investors Service -- the bond rating agency -- published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama's health care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.

Let's be clear. A "budget crisis" is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

Greece is now experiencing such a crisis. Until recently, conventional wisdom held that only developing countries -- managed ineptly -- were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.

Two weeks before the House vote, the Congressional Budget Office (CBO) released its estimate of Obama's budget, including its health care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.

To criticisms, Obama supporters make two arguments. First, the CBO says the plan reduces the deficit by $138 billion over a decade. Second, the legislation contains measures (an expert panel to curb Medicare spending, emphasis on "comparative effectiveness research") to control health spending. These rejoinders are self-serving and unconvincing.

Suppose the CBO estimate is correct. So? The $138 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits -- not finance new spending. Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless.

But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in "so that the first 10 years of (higher) revenue would be used to pay for only six years of spending (increases)," ex-CBO director Douglas Holtz-Eakin wrote in The New York Times. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the "doc fix" -- higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.

Proposals to control health spending face restrictions that virtually ensure failure. Consider the "Independent Payment Advisory Board" aimed at Medicare. "The Board is prohibited from submitting proposals that would ration care, increase revenues or change benefits, eligibility or Medicare beneficiary cost sharing," says a summary by the Henry J. Kaiser Family Foundation. What's left? Similarly, findings from "comparative effectiveness research" -- intended to identify ineffective care -- "may not be construed as mandates, guidelines or recommendations for payment, coverage or treatment." What's the point then?

So Obama is flirting with a future budget crisis. Moody's emphasizes two warning signs: rising debt and loss of confidence that government will deal with it. Obama fulfills both. The parallels with the recent financial crisis are striking. Bankers and rating agencies engaged in wishful thinking to rationalize self-interest. Obama does the same. No one can tell when or whether a crisis will come. There is no magic tipping point. But Obama is raising the chances.

Robert J. Samuelsonis a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Age of Obama
by Bill Frezza

Snatching victory from the jaws of defeat, after a tumultuous year of political theater, the Age of Obama has dawned.

With legislative success however tarnished by rancor and dissent, the hopes and dreams of generations of Progressives have been fulfilled. The trifecta of Social Security, Medicare, and the first installment of Universal Healthcare are now the law of the land.

Based on a common set of financial principles and an unshakable faith in the wisdom of government the productive power of the young, the healthy, the successful, and generations yet unborn are now fully lashed to the yoke of redistribution. The poor, the old, the infirm, the government employee, the union worker, the dropout, and the slothful have cause to rejoice as their party has delivered the goods.

Or so they think. Let's take a quick look at the numbers.

According to the most recent Social Security and Medicare trustees report, the unfunded liabilities of these New Deal and Great Society programs exceed $100 trillion dollars. Add the unfunded Medicaid mandates imposed on the states along with the pension liabilities of millions of federal, state, and local government employees and the total becomes almost impossible to comprehend.

Try this on for size. If you confiscated the entire Gross Domestic Product of the US for ten years you couldn't cover all these liabilities.

Confiscate the GDP? That's Communism! OK, how about confiscating half the GDP? Too late, that money is already spoken for.

Combined Federal, State, and Local government spending is now at 37.5% of GDP and heading north. The European Union, our Progressive model, has already passed the 50% mark.

Note that these confiscatory levels of taxation can't even cover this year's spending. None of the money already being diverted from the economy is being used to shore up the aforementioned liabilities. These not only remain but are swelled by annual deficits.

Get the picture? Obama just handed the American people an empty gift box. Good luck collecting.

FDR promised that Social Security would never lead to runaway spending. LBJ promised the same for Medicare and Medicaid. President Obama is promising that his Universal Healthcare program will not only pay for itself but will generate savings that can be used to reduce the deficit.

The American people cannot possibly be so stupid as to take these political promises at face value. Somehow supporters must imagine that all these bills can be paid for by "the rich" while 95% of Americans enjoy tax cuts and subsidies. As citizens are invited to stick their hands ever deeper into their neighbors' pockets, a majority of voters must believe they are going to get more than they have to give.

And why shouldn't they? It's worked so far hasn't it? Our progressive income tax system has reached the point where half the population pays no income tax at all. What do they care if tax rates have to go up? And today's retirees, like Bernie Madoff's early clients, have already collected many times more than they paid in to Social Security and Medicare. Their thanks? A parting gift of consuming 30% of the nation's healthcare budget in their final year of life.

FDR and LBJ died before anyone had to deliver on the promises they made. The problem for Obama is that his predecessor's bills are coming due just as he is piling on more.

Social security recently passed its high water mark. The program now and forevermore will be paying out more than it takes in. In order to write these checks, the Social Security Administration has to redeem the vast mountain of IOUs it received when former Congressmen plundered every last penny of the so called "trust fund." There is only one place today's Congress can go to redeem these IOUs, and that is to the general taxpayer.

Kill the rich and eat them, there are too few to cover all these bills. The Age of Obama will certainly bring us equality. We will all be equally broke.

Meanwhile one form of inequality continues to grow unchecked, unnoticed as the media devotes all its energy to chasing banker bonuses. Studies show that government workers now get $1.45 in pay and benefits for every $1 received by comparable workers in the private sector. This should come as no surprise. While private sector unions have largely bankrupted their employers, save those like General Motors that have been nationalized, public sector unions have no such limitations. Representing a solidly Progressive voting bloc, the swelling ranks of public employees can be counted on to pass their bills along to the rest of us as they demand ever larger chunks of a shrinking pie.

This tragedy of abject profligacy can end only one way. Watch the drama unfolding in the land where democracy was born. German charity might allow the Greeks to enjoy their Progressive lifestyles a bit longer but eventually the disease of runaway social democracy will bankrupt the rest of Europe too.

Who wants to bet whether the Chinese will continue financing us long enough to be drawn down this rat hole of self-inflicted fiscal immolation?

Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He currently posts a column every Monday at RealClearMarkets.com, a site devoted to market-related news, analysis and commentary. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.

Lower Prices, More Foreclosures Will Solve Housing
by Larry Kudlow

With everybody focused on Obamacare, and its new entitlement spending and taxing, the administration has tried to sneak in yet another bailout for housing. Yet again, Team Obama is rewarding reckless behavior, punishing the 90 percent of responsible homeowners who are making good on their mortgages, and setting up a greater moral hazard that will surely lead to an expansion of bailout nation.

I'm talking about an add-on to HAMP, the $75 billion Home Affordable Modification Program, which has been a dismal failure. In fact, the entire foreclosure-prevention effort -- including forgiveness of mortgage-loan principal -- has been a failure.

The Office of the Comptroller of the Currency reports that nearly 60 percent of modified mortgages re-default within a year. And now comes a new brilliant idea that if you live in your main residence, have a mortgage balance of less than $729,750, owe monthly mortgage payments that are not affordable (meaning greater than 31 percent of income), and you demonstrate a financial hardship, the government will subsidize you by offering TARP money to banks and other lenders to reduce your outstanding mortgage balance.

Former Bush economist Keith Hennessey highlights the outrage that Team Obama would actually subsidize people making up to $186,000 a year who have a mortgage balance of over $700,000. This isn't even a middle-class entitlement. It's an upper-middle-class entitlement. Actually, at $186,000, it's virtually a top-earner entitlement, according to Team Obama's definition of rich people eligible for tax hikes.

I mean, for a measly $14,000 more in income, the White House will jack up your top personal tax rate and your capital-gains tax rate. But now, for just less than $200,000, you get a brand new spiffy forgiveness plan for your mortgage.

It's a complete outrage.

I don't want you to pay for my mistakes. And I don't want to pay for yours. That's an oft-heard Tea Party complaint, and it's a good one. Why should the 90 percent of folks who make good financial decisions on their homes have to pay for the 10 percent who did not?

Or put it another way, just because a home loan is "underwater" -- meaning its value is lower than today's current market price -- why should a responsible person whine about it and walk away? Why not service this loan for the longer term and wait for prices to improve? That's called personal responsibility.

Bloomberg financial columnist Caroline Baum argues that lower home prices are the key to solving the housing problem. Popular blogger Barry Ritholtz says we need more foreclosures, not fewer, to solve housing. Both are correct.

Even in the foreclosure process, young families can come in and snap up cheap homes. This is a great boon to the new generation.

And take a look at places like California, Florida, and Las Vegas, where foreclosure activity has been high and prices have fallen the most. What you see is a sharp pickup in home sales, which is steadily clearing away the price-depressing inventory overhang of unsold homes. In other words, market forces work.

Bouncing from pillar to post, the White House has unsuccessfully tried mortgage modifications, foreclosure abatements, and tax credits. None of it has worked. But the price tag so far for these failed government interventions in the housing market is $75 billion and rising.

Applying TARP money to the housing problem -- originally meant for banks -- is an even greater outrage. TARP should be closed down, now that banks have repaid it, and turned back to taxpayers in the form of government debt reduction.

But the Obama White House rejects market forces. It rejects free-market price adjustments. As a result, it is creating a crazy subversion of normal incentives.

Obamacare -- with its unwillingness to put to work true free-market and consumer-choice competition to hold down health costs -- will turn out to be a failure. And so will Team Obama's clumsy and clunky attempts to substitute government subsidies for free-market home pricing. The failed government subsidy for housing is a leading indicator. Imagine, putting more and more middle- and upper-end income earners on the government dole.

As America's nanny state grows larger, its economy will grow weaker.

Lawrence Kudlow is an American supply-side economist and television personality. He is the host of CNBC's The Kudlow Report and co-host of The Call. He is also a syndicated columnist and was a former Reagan economic advisor. You can visit his blog, Kudlow's Money Politics.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Immigration: A Birthright? Maybe Not
by George Will

WASHINGTON -- A simple reform would drain some scalding steam from immigration arguments that may soon again be at a roiling boil. It would bring the interpretation of the 14th Amendment into conformity with what the authors of its text intended, and with common sense, thereby removing an incentive for illegal immigration.

A parent from a poor country, writes professor Lino Graglia of the University of Texas law school, "can hardly do more for a child than make him or her an American citizen, entitled to all the advantages of the American welfare state." Therefore, "It is difficult to imagine a more irrational and self-defeating legal system than one which makes unauthorized entry into this country a criminal offense and simultaneously provides perhaps the greatest possible inducement to illegal entry."

Writing in the Texas Review of Law and Politics, Graglia says this irrationality is rooted in a misunderstanding of the phrase "subject to the jurisdiction thereof." What was this intended or understood to mean by those who wrote it in 1866 and ratified it in 1868? The authors and ratifiers could not have intended birthright citizenship for illegal immigrants because in 1868 there were and never had been any illegal immigrants because no law ever had restricted immigration.

If those who wrote and ratified the 14th Amendment had imagined laws restricting immigration -- and had anticipated huge waves of illegal immigration -- is it reasonable to presume they would have wanted to provide the reward of citizenship to the children of the violators of those laws? Surely not.

The Civil Rights Act of 1866 begins with language from which the 14th Amendment's Citizenship Clause is derived: "All persons born in the United States, and not subject to any foreign power, excluding Indians not taxed, are hereby declared to be citizens of the United States." (Emphasis added.) The explicit exclusion of Indians from birthright citizenship was not repeated in the 14th Amendment because it was considered unnecessary. Although Indians were at least partially subject to U.S. jurisdiction, they owed allegiance to their tribes, not the United States. This reasoning -- divided allegiance -- applies equally to exclude the children of resident aliens, legal as well as illegal, from birthright citizenship. Indeed, today's regulations issued by the departments of Homeland Security and Justice stipulate:

"A person born in the United States to a foreign diplomatic officer accredited to the United States, as a matter of international law, is not subject to the jurisdiction of the United States. That person is not a United States citizen under the 14th Amendment."

Sen. Lyman Trumbull of Illinois was, Graglia writes, one of two "principal authors of the citizenship clauses in [the] 1866 act and the 14th Amendment." He said that "subject to the jurisdiction of the United States" meant subject to its "complete" jurisdiction, meaning "not owing allegiance to anybody else." Hence children whose Indian parents had tribal allegiances were excluded from birthright citizenship.

Appropriately, in 1884 the Supreme Court held that children born to Indian parents were not born "subject to" U.S. jurisdiction because, among other reasons, the person so born could not change his status by his "own will without the action or assent of the United States." And "no one can become a citizen of a nation without its consent." Graglia says this decision "seemed to establish" that U.S. citizenship is "a consensual relation, requiring the consent of the United States." So: "This would clearly settle the question of birthright citizenship for children of illegal aliens. There cannot be a more total or forceful denial of consent to a person's citizenship than to make the source of that person's presence in the nation illegal."

Congress has heard testimony estimating that more than two-thirds of all births in Los Angeles public hospitals, and more than half of all births in that city, and nearly 10 percent of all births in the nation in recent years, have been to illegal immigrant mothers. Graglia seems to establish that there is no constitutional impediment to Congress ending the granting of birthright citizenship to persons whose presence here is "not only without the government's consent but in violation of its law."

George Will is a long-time conservative-leaning news analyst for ABC since the early 1980s and was a founding member on the panel of ABC's This Week with David Brinkley in 1981, now titled This Week. Will also has a PhD in politics from Princeton University.

I hope you found the articles above interesting. Clearly, concerns about our out-of-control federal spending and the skyrocketing national debt are gaining momentum in the media. It remains to be seen if this national outcry will have any effect on Obama's spending plans. Actually, I don't honestly believe he and his liberal cronies even care what we think. But that is a topic for another time.

I will be back to our usual format next week. I hope everyone had a great Easter holiday. I sure did!

Very best regards,

Gary D. Halbert

On The Economy & The CBO's Credibility

Gary D. Halbert — Tue, 30 Mar 2010 20:02:00 GMT

IN THIS ISSUE:

Editor's Note: About Last Week's Letter
The Economy – What to Expect Going Forward
Stocks & Bonds – What Lies Ahead?
Speaking of “Faith”… What About the CBO?

Editor's Note: About Last Week's Letter

I felt really bad about sending out last week's E-Letter in which I predicted that we will face another serious financial crisis and perhaps another depression sometime in the next several years, especially when few mainstream economists envision such a dire future anytime soon. However, within a couple of hours of pushing the “send” button last Tuesday afternoon, I read a brand new poll with some very surprising results.

The latest poll by Fox News/Opinion Dynamics shows that 79% of registered voters believe that an economic collapse is still possible. 84% of Republicans, 80% of Independents and 71% of Democrats all agree that the worst may not be over. Only 18% still cling to the White House position that a collapse will not happen. 65% now believe that the National Debt is more of a threat than terrorism – wow! Only 35% think Obama has a plan to fix the economy, down from 42% last July. For Congress, the numbers are even worse. Only 24% think the Democrats have a clear plan to heal our economy, and only 16% think Republicans have a solution.

This poll was a shocker, not only to me but also the mainstream press. Obviously, there are a LOT of Americans that agree with me that Obama's trillion-dollar deficits and the skyrocketing national debt represent the biggest threat to our economic and financial futures.

The American people have already demonstrated that they were against the massive healthcare bill passed by Congress and signed into law by Obama last week. But it is very clear from this latest poll that millions of Americans want this runaway spending stopped at all levels. If Obama continues this out-of-control spending, despite the public's widespread concern, I predict he will be defeated in 2012.

In this week's letter, we will touch several bases. We begin with a look at the latest economic reports, which are mixed. We will take a look at the stock and bond markets and ponder whether the equity gains so far this year will continue. And finally, we will explore how the Congressional Budget Office calculates its cost estimates for the various government spending programs it “scores,” such as the latest healthcare reform legislation. I think you will be very surprised, and I doubt you'll put much faith in their estimates going forward.

It's a lot to cover, so let's jump right in.

The Economy – What to Expect Going Forward

Barring some negative surprise, we have seen the worst of the recession and the credit crisis, at least for a while. The Commerce Department released its third and final report on 4Q GDP last Friday, showing that the economy expanded at an annual rate of 5.6% in the final three months of 2009, down from the 5.9% earlier estimate. The downward revision was somewhat unexpected as the consensus was that growth remained at the 5.9% rate in the 4Q.

The greater question is how will the economy perform in 2010? We won't get our first estimate of 1Q growth until late April. In the meantime, we have to look at other economic reports. Most all of the sources I read and respect believe that the economy will grow in 2010 by much less than the 5.6% rate in the 4Q, which was largely due to inventory rebuilding.

Before going into the latest reports, I will tell you that there has not been much to give us a definitive view of what lies ahead, other than another few quarters of 5.6% GDP are not likely.

The widely followed Index of Leading Economic Indicators (LEI) rose less than expected in February, up only 0.1%. While the LEI has risen briskly over the last year, it now appears to be flattening out as shown in the chart below, suggesting a sluggish economy going forward.

The government's “Coincident Economic Index” (CEI) shown above is much more influenced by the level of unemployment, which remains very high, so its rise since bottoming last June has been very modest as would be expected.

Speaking of unemployment, the numbers continue to look discouraging. The official unemployment rate for February was unchanged at 9.7%. New weekly filings for unemployment benefits continue to run around 450,000. Remember that the official unemployment rate does not include those that have stopped looking for work or have been forced to accept part-time jobs. The real rate of total unemployment is approaching 20%.

In other reports, orders for durable goods increased 0.5% in February following a 3.9% gain in January. Industrial production rose a scant 0.1% in February following a 0.9% gain in January. The ISM manufacturing index fell to 56.5 in February from 58.4 in January. Retail sales rose 0.3% in February from +0.1% the month before.

Consumer confidence took a sharp drop in February after rising for the three previous months. Upon releasing the February confidence data, the Conference Board stated:

“Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years. Consumers' short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending.”

The University of Michigan Consumer Sentiment Index, another widely followed barometer of confidence, also fell in early March from 73.6 in February to 72.5. Remember that consumer spending accounts for apprx. 70% of GDP, so these confidence numbers suggest slow growth in the economy this year.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Late Note: the latest Consumer Confidence report released this morning showed that the Index improved somewhat in March. The accompanying language from the Conference Board stated:

“Consumer confidence, which had declined sharply in February, managed to recoup most of the loss in March. However, despite this month's increase, consumers continue to express concern about current business and labor market conditions. And, their outlook for the next six months is still rather pessimistic. Overall, consumer confidence levels have not changed significantly since last spring.”

On the housing front, there was across-the-board bad news last month. New home sales plunged for the fourth consecutive month to the lowest monthly rate ever recorded. New homes sold at a seasonally adjusted annual rate of 308,000 units in February, a 2.2% drop from an upwardly revised January pace of 315,000 units and 13% below the 354,000 sales for February 2009. It was the lowest sales level since the government began tracking these statistics in 1963.

The number of new homes for sale in February rose 1.3% from January to 236,000, a 9.2-month supply at the current pace. Existing homes sales also fell in February. The National Association of Realtors reported that sales of previously owned homes in February slumped for the third consecutive month to 5.02 million units. Housing starts fell 5.9% in February from January levels, and building permits declined as well last month.

Analysts point to the inclement weather in February as a reason for the big declines in all the housing numbers, and that factor can't be totally dismissed, but remember these numbers are all “seasonally adjusted.” So, unless we see a significant rebound in the March numbers, this is just one more indication that we're in for a sluggish rebound in the economy in 2010.

Stocks & Bonds – What Lies Ahead?

Despite the recession and the credit crisis, stocks unexpectedly bottomed a year ago and have staged an impressive rally. As measured by the S&P 500 Index, US equities have rebounded a surprising 73% since the lows just over a year ago. The S&P is up over 5% so far in 2010 as this is written.

Unfortunately, millions of American investors bailed out of the equity markets last year near the lows, and most have not gotten back in as suggested by the mountain of cash still on the sidelines. In fact, many retail investors continue to bail out of the stock market. According to Morningstar, investors pulled $3.7 billion out of US stock funds in February, the fifth month of outflows in the last six months. A March 25 survey by the American Association of Individual Investors showed 34.7% of respondents are bearish, which is more than the 32.4% who are bullish and up from a 23% bearish reading at the end of 2009.

The S&P 500 Index plunged 57% from the peak in late 2007 to the lows last March. That bear market followed the decline in the S&P 500 of 49% in 2000-2002. The good news is that the S&P 500 has rebounded 73% since last year's low.

After two major bear markets in the last decade, many of these investors have written off the equity markets forever – they will not be back. I could launch into a discussion on how the actively managed investment strategies I recommend serve to limit these kinds of massive losses, but I assume you've read these discussions before if you have read me for long.

The real question now is, will these kinds of stock market gains continue? We know that the Fed pumped a massive amount of liquidity into our monetary system during the height of the recession/credit crisis. Short-term interest rates were ratcheted down to near zero. Money had to go somewhere, and much of it went into the stock markets, both here and in the global equity markets. This, not surprisingly, drove prices up more than most analysts expected.

Now, expectations are becoming more realistic. The economy, after experiencing a big jump in the 4Q due largely to inventory rebuilding, is coming back to the reality that consumers are still retrenching – lowering spending and increasing savings. This trend will continue, for how long we don't know. So, we are not likely to see 5.6% GDP growth in the near future.

What does this mean for stock market returns? Simple – they are not likely to remotely equal the returns we have seen over the last year. Stock market returns, while they may, or may not, take a big hit just ahead, are likely to mirror the trend in the economy. I continue to recommend actively managed stock market strategies that have the flexibility to move out of the market, or hedge long positions, during bear markets and extended downward market corrections.

The bond market experienced a huge upward move (interest rates fell) in late 2008 and investors moved in droves to the safety of US Treasuries. However, as you can see in the chart below, long-term interest rates have risen since the downward spike in late 2008. Since about this time last year, bond prices have moved in a narrow trading range.

There is widespread agreement that Obama's trillion-dollar budget deficits will lead to higher inflation at some point in the future, which will be bearish for bonds. However, this could be several years down the road. As noted above, consumers are still deleveraging (ie – paying off debt and increasing savings). Given that this trend is likely to continue, and given that the economy is likely to slow down appreciably this year and next, the threat of a significant rise in inflation anytime soon is very low.

As a result, I would expect the bond market is likely to remain in a generally sideways pattern for some time to come, especially in regard to US Treasury bonds. I don't see much opportunity in T-bonds just ahead, unless you invest in them via one of the actively managed bond strategies I recommend.

Finally, it is most interesting that the current yield on some US Treasury debt is actually higher than that of several high-profile corporate bonds. According to a recent Bloomberg article, debt issued by Berkshire Hathaway, Procter & Gamble, Johnson & Johnson and other major US corporations traded at lower yields than Treasuries of similar maturity over the past couple of months. In other words, these corporate debts were deemed to be safer bets than the US government, a situation that Bloomberg called “exceedingly rare.”

Unfortunately, higher Treasury yields may become more common in the near future. By now I'm sure you've heard that the Treasury auctions held last week indicated a lower demand for Treasury debt, especially among foreign investors. This lower demand, in turn, led to higher yields to attract buyers. Treasury debt ended up being sold at prices below those of not only some corporate issuers, but also prices found in the secondary market for similar Treasury debt. Thus, last week's auctions could be an omen of things to come as interest rates rise to combat concerns about rising US budget deficits.

This is clearly another indication of the growing global distrust and anxiety over the current runaway spending on the part of our government. So much for the “full faith and credit” of the United States.

Speaking of “Faith”… What About the CBO?

One side benefit (if you can call it that) of the year-long healthcare bill debate has been that the public has been exposed to a variety of political maneuvers used to make legislation more palatable or even twist the arms of reluctant legislators. We've witnessed everything from outright bribes to tricky procedural maneuvers that few Americans knew even existed.

Even worse, it came to light that some of these kinds of tricks had been used in the past, apparently by both parties at times, to get their way on various pieces of legislation. In the effort to get the massive healthcare bill passed and to take over more than one-sixth of the US economy, the intense political maneuvering, the backroom sweetheart deals and bribes among the Democrats were over the top. President Obama and congressional leaders would stop at nothing to get this bill passed into law. Unfortunately, these tactics may become “business as usual” in Washington going forward.

Nowhere was the search for political “cover” more evident than in the cost estimates prepared by the Congressional Budget Office (CBO). Lawmakers made great efforts to convince the public that these CBO estimates are unbiased and very accurate projections of future costs. Unfortunately, these cost estimates are often little more than fantasy, as I will explain below.

Don't get me wrong, I don't think that the CBO is necessarily politically biased or in the camp of one party over another. Instead, I think the faith placed in CBO estimates is misplaced because of the huge limitations they encounter when producing these cost estimates. Here are just a few examples of the limitations faced by the CBO in doing their job, which most Americans are not aware of:

Assumptions – As in any projection of future events, the CBO must make a number of assumptions when scoring a piece of legislation or projecting future budget deficits. While the analysis involved in any particular assumption might be sound, future events rarely conform to the initial assumptions, especially when projecting 10 years into the future.

As one example, when determining future budget deficits 10 years into the future, the CBO assumes that the Bush tax cuts will sunset (end) at the end of this year as scheduled, even though President Obama has proposed that they remain in place for most families. Should Obama extend these tax cuts for families earning under $250,000 per year, then the deficit projections by the CBO will be too low for the years after 2010.

Another well-documented assumption in regard to healthcare was the fact that the 10-year projection period included 10 years of taxes and fees but only six years of benefits. Obama attempted to fix this by having the CBO project out another 10 years, but if the 10-year numbers are questionable, the 20-year numbers amount to little more than fantasy.

Actually, Congress has employed the strategy of immediate revenue but delayed benefits many times in the past. This was the case when Social Security was enacted in 1935, so this is nothing new with the current administration.

Suspended Reality – CBO projections must also assume present law, not expected changes or even recurring congressional actions. One good example that came out during the healthcare debate was the so-called “doc fix.” In 1997, Congress voted to reduce Medicare reimbursements to physicians. However, these cuts have never been implemented because each year, Congress has passed a “doc fix” that prevents the cuts from becoming effective.

A bill has been introduced to make the “doc fix” permanent but until that happens, the CBO will have to assume that these 1997 cost savings will be effective in future budget years. The same goes for the annual Alternative Minimum Tax (AMT) fix, which is handled by annual patches rather than a permanent fix.

Another altered state of reality exists in relation to tax revenues from various sources. A good recent example is the additional tax on investment income for high-income taxpayers in the healthcare bill. As we have seen at various times in the past with the ill-fated “luxury taxes” that have been imposed, high earners have the flexibility to alter their activities and greatly reduce expected gains from additional taxes. Just Google “Laffer Curve” to see what I'm talking about.

Legislative Stability – Closely related to the above discussion about suspended reality, the CBO assumes that the provisions of any bill they are scoring will stay static over the entire time window being projected. In other words, when scoring out the Senate healthcare bill, the CBO had to assume that only the provisions of that law would apply, and that these provisions would stay constant over the next 10 years.

This is far from a realistic assumption as major legislation is often changed in later years. In fact, many people believe that the tax on high-end “Cadillac” healthcare plans will never be enacted due to its strong opposition by unions. If this part of the healthcare bill is changed, then the savings assumed to come from this tax will never occur, greatly affecting the actual long-term costs of the legislation.

Again, it has not been my intent to cast a cloud over the non-partisan nature of the CBO. Instead, I think it's important for all voters to know that the CBO is subject to a rather rigid set of rules when projecting deficits or scoring legislation. Since Congress knows these limitations and can tweak legislative proposals to take advantage of them, we shouldn't base our opinions about proposed laws based on the CBO cost estimates alone.

I don't know about you, but I have much less respect for CBO projections now than in the past, not because they provided political cover for passage of the healthcare bill, but because any analysis they perform is subject to restrictions that cannot help but affect their accuracy. In addition, politicians have become adept at crafting bills that take advantage of the inherent limitations governing CBO projections. As long as elected officials from either party can game the system, then no CBO projection will be reliable, no matter how non-partisan they may be.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

It occurs to me that I have been warning about the precipitous rise in US debt for almost 30 years. Yet ever since the serious recession of 1981-1982, the US economy has surprised on the upside despite the continued rise in the national debt, and periodic recessions have been brief and relatively mild over this same period.

That is, until the subprime meltdown, the credit crisis and the severe recession of 2008-2009, which was the worst economic/financial debacle since the Great Depression. You would think that our leaders would have learned a thing or two from that gut-wrenching experience, and would be working hard to get our government on a firm financial footing.

But instead, President Bush ran the largest federal budget deficit in history (at that time) in his last year in office, a record $459 billion. President Obama saw fit to more than triple that amount with a massive $1.4 trillion deficit in 2009 and is on track to add more than $5 trillion to the national debt of $12.6 trillion in his first four years in office alone. His own projections show the national debt doubling by 2020. And keep in mind that several of his economic assumptions (such as no recessions in the next decade) are too optimistic.

Like sheep, we are marching in lockstep toward our financial and economic Armageddon. The larger our debt becomes, our options for a non-crisis solution diminish. As I warned last week, there will come a day when the foreigners who own over half of our national debt will decide that we no longer have the ability to make good on those debts. When that day comes, it's game-over for the US – and we may be much closer to it than we think, at least based on last week's Treasury debt auctions.

We had a very large response to my alarming E-Letter last week. Like the latest Fox News poll showing that almost 80% of Americans fear that another financial crisis may well lie ahead, many of you let me know that you indeed share my concerns about our nation's future. Seems I hit a nerve that is on the minds of millions of Americans.

By far the most common question I was asked was, “What do we do to protect ourselves and our assets?” I will be writing more about that in the weeks and months to come. In the meantime, you need to be thinking beyond Wall Street's conventional buy-and-hold mantra.

In closing, I very much appreciate your comments and suggestions – all of them – including the negative ones (with a few exceptions). Please remember that your comments make me think, so please keep them coming.

Very best regards,

Gary D. Halbert

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